Category: Greece

Macroeconomic View of the Greek Economy in the Period 2003–2019

Greece currently stands as the 51st largest economy in the world and are well known for their rocky economic history. Since joining the European Union (EU) in 1981, Greece had a steadily rising GDP, reaching its peak in 2008 at 354.5 billion USD (World Bank, 2019). However, in 2009 the country’s economy took a turn for the worst; declaring that 13.9 percent of its GDP would be deficit which is well over the EU’s maximum of 3%. From then onwards Greece has found it hard to run its economy and was bailed out by the International Monetary Fund, the European Commission and the European Central Bank on the premise that they would enforce strict austerity measures. This paper seeks to explore how changes to GDP, unemployment and inflation, over the past 15 years have shaped Greece’s economy and provide policy suggestions in order to improve economic growth in the future despite the turmoil they have face.

Gross Domestic Product

The downturn in Greece’s economic growth can be attributed to the debt accumulated as a result of the Great Recession in collusion with the Greek government’s financial profligacy. In 2009, Greece violated its growth and stability pact budget deficit criterion of no more than 3% with the EU, with a deficit of 15.4 percent (New York Times, 2010). There has been a decline in economic growth per capita since 2008, beginning at -7.4 percent growth year on year in 2009, by 2013 the economy had contracted by 26 percent (Dimireva, 2017), therefore people had less money to spend as taxes were increased and pensions were cut according to austerity measures.

The Greek government made economic decisions in a bid to keep their voters happy, “both parties (PASOK and the New Democracy Party) lavished liberal welfare policies on their electorates, creating a bloated, inefficient, and protectionist economy” (Picardo, 2018). Greece is a welfare state that provides its people with a number of services and a strong example of their poor fiscal etiquette would be salary increases for workers in the public sector. Wages were increased yearly but not on the basis of productivity and performance. This allowed many to retire early, redacting the labor force whilst also reducing incentive for workers to be productive as they assumed that wages will increase regardless. Workers were also offered extra payments during December and Easter to assist with holiday expenses, which was a political decision. Despite government expenditure and transfer payments increasing, consumer expenditure and taxes did not. This caused the government to fall further into debt as they are exceeding the amount of money consumers are spending in the economy. Additionally, consumers most likely knew about the economic downturn and are aware of being encouraged to spend in the economy however fears of this becoming worse stunts consumers from spending therefore they keep it instead. This discourages economic growth as they were running into deficit that they could not breakeven with consumer expenditure.

Greece also has an unfortunate history with tax evasion, a third of Greeks who are self-employed are grossly under-reporting their income, this is evident as more than 100% of the reported income of the self-employed in Greece’s profession classes is going towards paying off consumer debts (Artavanis, Morse, Tsoutsoura 2012). This indicates that the oligarchs are avoiding their tax payments however the government’s budget is accounting for each person to meet their appropriate tax payments, tax evasion prevents the government from generating the expected revenues in the budget hence increasing the deficit.

The lack of productivity, excessive tax evasion and poor expenditure management resulted in the government resorting to extensive loans in order to keep afloat, increasing their level of public debt and in turn reducing the capacity at which their GDP could grow. This is because government expenditure increases proportionately to the amount of debt that is taken up, as the government has to service the new debt hence why GDP growth is affected. As the economy shrunk due to the lack of economic growth, so did tax revenue as the economy is what the government taxes, which sets the cycle up for the years to come.

Unemployment

Greece’s unemployment is at its lowest in the past 6 years at 17% in June 2019 however it is still the highest rate in the EU which in contrast has an average of 6.3%. Despite its improvement, we still see a large rate of unemployment, a large underlying cause of this is youth employment.

As of April 2019, the youth unemployment rate was 33%, which meant that close to half of those ages 15-25 are unable to find employment. In Greece the minimum wage is calculated differently for those under the age of 25, often the youth are paid less for equal labor than their older counterparts. When this wage is set above the market clearing rate, it separates workers into those who get a job and those who don’t, this is similar to the situation in Greece. Youth unemployment is also boosted by the large delay in the transition from education to work. Individuals who have studied with the intention of receiving higher wages are often stuck without work for long periods of time. Austerity measures have also made it so that it is cost efficient to fire workers that have the least skills or experience (Tubadji, 2012), alongside lower wages the youth are discouraged from joining the labor market.

The largest consequence of youth unemployment is the loss of labor to emigration. When jobs aren’t available in the market, those who are motivated and skilled have incentive to find substantially higher wages elsewhere therefore they leave the country. For Greece, this means that those who are skilled and able to work are leaving and their supply of skilled workers for the present time as well as the future is reduced, loss of labor means lower production of capital which means prices of goods increase and people are less likely to spend, overall, negatively impacting the economy.

Inflation

Inflation is defined as being an increase in the price level of goods and services within an economy, this is measured through the consumer price index (CPI). Countries have the capability to experience a negative form of inflation, referred to as deflation, as is the decrease in the price level of goods and services within an economy, still being measured through the CPI. Countries such as Greece have experienced 5 recorded years of deflation, with the largest being during 2015 with a deflation level of -1.7%, in contrast inflation sits at 0.2% as of April 2019. Greece is characterized by a weak inflation rate that is due to both international factors such as the euro/dollar exchange rate as well as the drop and all passes and domestics ones such as cuts in the value added tax (Alpha Bank, 2019).

Joining the eurozone gave Greece the illusion of being a safe place to invest, missing the factors that have the potential to influence inflation levels are the lack of foreign investment, interest rates on sovereign debt as well an absence of competition in the product market. Greece has thus far been unable to successfully attract significant foreign investments, which is crucial to bridge the ever-growing investment gap with Greek funds (PWC, 2017) This gap arose from being dependent on domestic capital which adversely impacts competitiveness and growth. Greece not only had loans from other countries but also the Troika, who initially demanded high interest rates on these loans.

Greece was also experiencing a high cost of living with average food prices exceeding its EU counterparts, which is unexpected. Tagaris and Wheatley (Reuters, 2012) wrote “if costs and prices were lower, exporters would be more competitive and people’s shrinking pay packets would stretch farther”, this would assist in the large decline of consumption. Due to the lack of competition in Greece’s markets, corporate monopolies have taken advantage of Greece’s situation and raised prices in order to profit.

Policy Recommendations

Greece has the potential to rise above their poor economic history and improve for the future. It can be suggested that in order to improve its economy, Greece should invest in education. An Adults Skills Survey conducted by the OECD shows that despite high education attainment populations have low skill levels. This calls for a need to build a “nation-level consensus on what tertiary education is for”, as well as improving the quality of education and how this is reflected in the labor market. So far Greece has failed to successfully promote employment in young graduates which has encouraged emigration and increased unemployment, deepening their economic disposition. Bringing awareness and support to the education sector may improve the state of Greek’s labor market and promote discouraged graduates to enter the job market. Improving education will set in motion an overall incentive to create more jobs whilst overall “strengthening firms’ incentives to invest and innovate” (OECD, 2018) which is vital to raise wages which then in turn motivates the unemployed.

Greece’s economy could also benefit by improving both their fiscal and monetary policies. Greece, now without the burden of the bailout program, could lower tax rates in order to promote investment and social spending (IMF, 2019). Efforts must be made to create a more competitive market in order for prices in the market to more closely reflect wages rather than being bloated by monopolies. Buckling down on corruption will help minimize Greece’s battle with tax evasion which will in-turn benefit business and strengthen the governments’ fiscal ruling.

Conclusion

Greece has faced many adversities to their economy over the past 15 years, although they have scraped through and show an overall sign of improvement there are still improvements to be made in order to stabilize the economy and enhance its growth.

References

1. https://www.weforum.org/agenda/2018/07/eu-unemployment-rate-falls-to-near-pre-recession-low/
2. https://www.imf.org/en/News/Articles/2019/03/11/na031119-greece-economy-improves-key-reforms-still-needed
3. https://www.oecd.org/economy/the-greek-economy-is-recovering-improving-debt-sustainability-tackling-poverty-and-boosting-investment-are-vital-to-sustaining-the-positive-momentum.htm
4. http://www.ekathimerini.com/243540/article/ekathimerini/business/alpha-bank-why-inflation-remains-anemic
5. https://www.pwc.com/gr/en/publications/greek-thought-leadership/investments-in-greece-recession-recovery.html
6. https://www.independent.co.uk/news/world/europe/how-to-fix-greece-a-seven-point-plan-for-economic-salvation-10144753.html

Factors Affecting the Running of a Multinational Corporation in Greece

A multinational corporation is defined as a company that operates in many countries (Skripak, 2013, p.87). Large companies are typically known to be multinational corporations. One example of a larger scale company well-known across the globe would be Amazon. Amazon is known for being an online marketplace which has mostly everything anyone could need, ranging from technology, to car parts, to decor. MNCs are popular due to the varying costs of labor and production, availability to resources, and cultural influence. Opening a multinational corporation introduces companies and countries to new cultures and ideas. This way, companies can get a new perspective they may not have thought of. Another perk of MNCs is to experiment in different countries and see where they are most successful.

Six different forces will be covered in this paper, ranging from natural forces to political forces. These are all different aspects of the country (Greece) that affect business dealings and play a part in the decision-making process of opening a MNC in any given country. The six types as mentioned previously are: cultural forces, economic forces, natural forces, demographic forces, political forces, and technological forces.

Cultural Forces in Greece

Greek culture is known to be open and inviting to strangers. As stated in this article funded by the European Commission (2013), the Greek word philoxenia can be defined as love of strangers. This leads to a heavy advantage in the business sector. Some countries have issues with companies from foreign countries coming in to set up shop, but Greece will welcome the new company with open arms. Philoxenia (European Commission, 2013) will allow for comprehensive business dealings between employees from the United States and employees from Greece. The love of strangers ideology also helps with introducing Americans to Greek culture, which will help them better understand their surroundings and be more comfortable in their new environment. Not only will this benefit relationships within the company, but also relationships with partners, suppliers, and anyone else the company comes in contact with.

Economic Forces in Greece

Greece’s economy thrives on the tourism and shipping industries (The Heritage Foundation, 2019). Greece’s unemployment rate is at 16.7%, which is an eight and a half year low (Trading Economics, 2019). This fairly high unemployment rate will also be a good factor in choosing Greece as a location for a MNC. According to an article in Time magazine, 30% of the Greek population are in poverty (Bremmer, 2019). Expanding there will give Greek people jobs and help fight the unemployment rate, which in turn will help the Greeks be even more inviting and open about the company opening a branch there. The high poverty rate will also be addressed and lowered by the opening of the MNC. High poverty and unemployment rates can cause citizens to be discouraged and afraid they will return to the economic recession they just crawled out of.

Natural Forces in Greece

Greece is prone to natural disasters. Some of which include wildfires, earthquakes, and floods. These things are obvious issues when owning a building in Greece. These things have the potential to completely destroy the building and even possibly harm or kill employees. A high level of natural disasters results in a high a high need for insurance for company property as well as insurance for the employees working there. A positive to the large number of natural disasters would be the country knows how to recover from them, and can recover quickly. Not many natural disasters happen in the United States, so if one were to happen, the company would most likely have a hard time coming back from it and knowing the next step in reopening operations.

Demographic Forces in Greece

Greek recently got out of a long economic hardship. In 2015, Greece attempted to get rid of its debt to the European Union by trading it for growth bonds (Lubben, 2015). The past economic problems in Greece raise red flags to begin business operations there. Although Greece is no longer having financial issues, there are still some worries regarding business dealings in the country. If the recession happens again, it will lead to the branch of the company to fail and most likely close up. This may cause the company to be discouraged about expanding to other countries again, and could cause potential loss in sales and customers. According to an article by Christian Bodewig and Wolfgang Fedler, 44% of 30-34-year-olds in Greece have received a degree from higher education (Bodewig, Fedler, 2019). This statistic doesn’t follow European standards which has an average rate of 40%.

Technological Forces in Greece

The information and communication technology market in Greece is doing better than it has in five years (Export.gov, 2019). This looks good for Greek’s economy. The better economy encourages companies to expand and get in Greece while the price is low and the economy is growing. Since many companies will be joining the Greek economy, competition will make operations more difficult. Greece is typically behind in the technological field, but has been lately integrating technology into typically manpowered jobs such as farming (Bodewig, et al., 2019). Integrating technology into the smaller jobs, like farming, will help slowly move it into the major business sector. Once the use of technology in business takes off, Greece’s economy will most likely start to benefit from it, and help get them far from their past economic struggles.

Political Forces in Greece

According to Time magazine previously mentioned, Prime Minister Kyriakos Mitsotakis will have a lot to do. Mitsotakis has a New Democracy plan that will greatly benefit the business sector (Bremmer, 2019). This plan will also help to keep Greece from repeating their past issues with their economy. This new leadership shows major potential for Greek moving forward. As the new prime minister works to better the unemployment and poverty rates adding new businesses would help him achieve this goal. Not only would opening a location in Greece be beneficial for Greek workers, but it would also give them a higher chance of obtaining a job in the United States as well. Offering jobs in both countries would help lower the poverty and unemployment rates greatly.

Conclusion

Greece has proven to be a great candidate for a MNC. While having some negative aspects, the positive ones outweigh and overcome them. The election of Prime Minister Mitsotakis will help push a growth in the business sector, not only for employees in Greece, but also employees in the United States. The small, certain integration of technology into farming will eventually spread into major corporations and businesses to help the economy grow more efficiently. Since Greece has made its way out of hard times, it has a promising future of not making the same mistakes twice and ensuring their country continues to move forward. The knowledge of recurring natural disasters will help the company prepare and adapt adequately to any unforeseeable challenges it may face from mother nature. Greece’s reputation for being open-hearted and kind to strangers will only benefit the company as a whole. Greece has been confirmed through its efforts to overcome and fight for a better future for itself and the Greek people.