It’s been a stormy summer for the Greek economy: What have we learned?

This has been a turbulent summer for Greece: marathon talks with creditors in June; a referendum rejecting further austerity measures in July; the subsequent acceptance of those measures leading the prime minister to resign in August; and finally yet another legislative election, Greece’s fourth since the eurozone crisis started in 2011. 

Much of this turmoil remains invisible to leisure visitors who continue to flock to the Greek coastline for the holidays. This summer, I went back to Greece with my family, for the first time since the euro crisis unfolded five years ago. At first glance, not much has changed in places that depend on tourism. Cafes and restaurants are as charming as ever. The locals keep congregating to them in the afternoon for the obligatory chat. The Internet is unreliable but people are not using it much anyway. There are slightly fewer visitors from Central Europe, but there is an upswing from countries closer-by, especially Serbia and Bulgaria.

But these snapshot impressions from the coastline are very different from the picture we get by looking at Greece’s disastrous economic results nationally. In 2015, output is expected to stagnate or contract again (as it has each year since 2008). This means that Greece’s economy in early 2016 will be 25 percent smaller than it was eight years ago. This is the greatest economic contraction experienced by any developed country in the world, since the Great Depression in the United States.

Though it came to many as a surprise, this new Greek tragedy exposed deep-rooted problems. On some core economic fundamentals, Greece actually looks more like a developing economic than an advanced one. For example, only 17 percent of properties and 6 percent of land in Greece have been properly mapped. Despite some improvement—notably in the business registration process—the environment for doing business remains dismal: resolving a commercial dispute before a Greek court still takes 1,580 days. This is on par with Afghanistan and Bangladesh and more than three years longer than it would take in France or Austria. The ports are congested: Greek products take on average 15 days to export—9 days longer than from neighboring, landlocked former Yugoslav Republic of Macedonia. Widespread corruption and tax evasion also persist.

The Greek crisis has rippled through Europe, including my own country, Germany, which has been at the center of the debate. Nobel laureates and many others have criticized the “bookkeeping” approach of German negotiators and Germany’s timid fiscal policies at a time when bold investments in infrastructure are needed to boost growth across the continent. The resulting zero inflation in Germany forced Southern Europe into deflation as they adjusted their economies, and demanded a host of unconventional measures from the ECB to fend-off falling prices in the whole eurozone.

Many books will be written about the euro crisis and the mistakes made by all players. Looking at the international experience with crisis and development, three issues stand out:

  1. Lack of focus on growth. There has been a grave misunderstanding of the sources and the symptoms of the crisis. Greece’s fiscal policy had been problematic, but its lack of competitiveness, “good governance,” and weak institutions are the fundamental challenges. In other words the driver of Greece’s whopping current account deficit (the largest, as percent of GDP, in the Western world) is not principally lax fiscal discipline. Instead it stems from an extremely weak basis for exports (mostly agricultural products and tourism, which depends on a short three-month season). The inability to attract investors into other areas of the economy remains the country’s Achilles heel.
  2. The role of banks. Functioning financial sectors are the lifeline of any economy, like the blood in our bodies. Countries with an underdeveloped financial sector suffer, which is also why there is such a big global push towards the “access to finance” agenda. Bank executives surely made many mistakes, but it is shortsighted to blame bankers’ greed for the crisis. People respond to incentives. It was a rational response for many individual deposit holders to move their money out of Greece as they lost trust in Greece’s economic recovery and its financial systems.
  3. Ownership of reforms. It is not only important what type of reforms are being carried out but also how and by whom. Reforms that are (or perceived to be) imposed from the outside are almost always less successful than those carried-out with domestic ownership. In the 1980s and 1990s, the IMF and the World Bank supported structural adjustment programs in many developing countries. The proposed reforms made a lot of sense economically, but often they were not implemented because governments did not “own” them.  

On a more general note, it is easy to forget Europe’s great achievements. I grew up in a divided Europe with borders all around us. My family vacations to Greece from our home base in Southern Germany involved 40 hours non-stop driving, lengthy delays at the borders, and complex dealings to convert currency along the way. Today it is a relatively cheap 90 minute flight, with no borders problems.

The author thanks Dirk Reinermann for valuable insights and inputs.