How The Left Wing Government Affected the Greek Economy and Their Future
Wenhui Gao and Georgios Kotzamanis
Introduction
Policies Before and After Syriza:
Discretionary fiscal policies including tax raises and cut of wages, pensions and government spending were
always the conditions for signing fiscal stimulus agreements with EU and IMF after Greece being excluded for the
money markets due to the high spreads resulting from the inability of Greece to pay the outstanding bonds that
led to deterioration of the bond ratings even characterizing them junk (in April 2010 from Standard and Poor’s).
The situation shifted in 2014 when a primary surplus was announced, ratings increased, Greece participated in
the markets with yield below 6% and the first signs of recovery and growth appeared.
The announcement of elections at the end of 2014 combined with the lost first half of 2015, during which the
new Greek government was negotiating new conditions to receive financial aid, led to a new wave of recession
peaking with the capital controls in July. The deterioration of economy and the deficiency of cash forced the
Greek government to agree with European institutions to receive a bailout, the Third Economic Adjustment
Program for Greece known as Third Memorandum. This bailout required the Greek parliament to approve a new
austerity package.
We are going to refer to both before and after Syriza policies as well as illustrate this situation through 3
different economic indicators.
Theoretical Implications of Policies
Theoretically, the set of policies adopted by Syriza would
be Deficit Reducing and Economically Contractionary. We
would analyse from the Labour Market and GDP.
Theoretically, a sizable cut in pension schemes, a large
reduction in the Public Sector Jobs and reduction in
workers wages would undoubtedly worsen the
performance of the Labour Market, raising unemployment
rate. As the incentive to work has fallen, due to both the
cut in wages and tax on pension schemes.
2010-2014: 9 austerity packages had been signed in order for Greece to secure two bailout packages from EU and IMF. These
policies included:
•
New taxes (New property tax to be collected through the electricity bill) and rise in taxes (VAT from 19% to 21%)
•
3 cuts of workers' wages;
•
Public pension cuts on average between 5% and 15% through the removal of two seasonal bonuses;
•
an increase of the retirement age from 65 to 67;
•
Abolishment of 15,000 state jobs by 2014;
Syriza won on January 2015, based on the promise of changing these ‘’cruel’’ austerity measures.
After 6 months of no results, Greek government was forced to sign bailout program based on following policies as
preconditions:
•
New tax rise (Rise of tax of solidarity for incomes over €50.000, corporation tax rise from 26% to 29% for small
companies, VAT from 21% to 23% and many more )
•
Abolition of the VAT discount of 30% for the most touristic Greek islands, after 1 October 2015.
•
Rise of health contributions paid by pensioners (6% from 4% )
•
End to early retirement by 2022 and a retirement age increase to 67
•
Private education taxed at 23 percent.
•
Interest on expired debts to the state that are payable in 100 instalments rises from 3 percent to 5 percent on amounts
over 5,000 euros.
•
Greece’s shipping industry will also be subject to new tax rises.
-GDP trend is volatile since 2012
GDP Growth
-A clear divergence from trend around 2015
-Suspect the divergence to be correlated with the Left Wing
Government
-Find a control country to compare—Spain in order to rule out
the possibility of systematic factors.
Also, due to the aggressive measure adopted by the
government to tackle sovereign debt, there should be a
sizable improvement on the Government Deficit as Greece
is now reducing its spending while collecting far more
forms of taxes. With a improved budget position of the
economy, it should be easier for the Greek Government to
access to credit and enabling it to drag the economy out of
prolonged recession.
Labour Market
-Their GDP growth trend has strong correlation with each other,
correlation of 0.750(Pearson Correlation Coefficient)
-The correlation clearly breaks entering late 2014 when the
Prediction of Winner was revealed in late 2014 as they reverse
in direction and is not expected to converge soon. When
combined with GDP in 2015, the correlation has weakened to
0.4675(37.7% decrease)
Unemployment rate maintained a fairly
steady trend
No significant structural break has been
detected
Relative effect in comparison to
previous policy regime is minimal
26.5
26
25.5
25
24.5
24
23.5
Sep-14
Dec-14
Apr-15
Jul-15
Oct-15
Jan-16
Forecast Line remained smooth
Further strengthen our argument that
employment was not affected by the
change of regime
Exports &Imports
Forecasting
Government Debt Crisis
-It historically accounts for 30% of Greece’ GDP so
it is a fairly strong indicator
--Good measurement of the openness of the
economy
--Import and export is highly seasonal and cyclical
so we
decided to use the difference in difference method
to analyse the net effect.
Assuming constant cyclical changes in import and
export from 2013-2015, the decline of export and
import was assumed to be the same if all
conditions from2013 to 2015 were the same. we
used the DiD Model to calculate the net
differences between the Year of Syriza(2015) and
the year prior to that (2014).
The Trade Balance improved from 2014 to 2015.
However, it is not a result of improvement in
productivity or export growth as productivity was
stagnant throughout the period.
Therefore, the more dramatic improvement in
Trade Balance will be the direct result of a closer
economy as income maintained a fairly consistent
trend in that year
Another outstanding problem associated with this would be its high level of unsustainable debt. In terms of government
debt, it has accounted for 180% of GDP in 2015, far exceeding the acceptable 60-90% sustainability range. To make situation
worse, Tax has not been an efficient way of cutting debt due to its high level of unauthorised trading. Also, the austerity
action taken has yielded much of a result as Greece still mounts high debt compared to other EU countries.
The already heavily existent problem of black markets and tax
evasion was far worsened during austerity measures including
higher taxes. Syriza government promised decreased taxes and
expectations of such change were created. However after the
detrimental capital controls more taxes were implemented and
already increased taxes were furthered increased. As a result, its
government debt is not likely to slow down in the near future as
indicated by the forecast from TradingEconomics. This constraint
would limit the government’s ability to react to shocks and reduce
the flexibility of the economy which is made worsen due to the
expected cost of 600million dollars to manage the migrant crisis.
Tourism Forecast
Greece’s tourism receipt has been quiet
encouraging especially after the
strengthening relationship with Russia
and Turkey. Again, we wanted to
observe the change of Tourism Receipts
from 2015 to 2014.
As we can see, tourism receipts has
increased in almost every month in
comparison to 2014. After the
smoothing of the refugee crisis, this
number is expected to continue which is
beneficial to the Greek Economy.
Trade Forecast
Its main trading partners ‘economic growth has
been fairly strong and steady. We would only
look at its top 2 export destinations, Turkey at
10.8% and Italy at 7.5%,(In terms of percentage
of trade volume) for simplicity reasons.
Turkey’s Economic Growth has a definite
upward trend which is projected to continue
into the future. A higher Economic Growth in its
main trading partner is likely to draw more
export opportunities for Greece which can be
extremely beneficial to the economy. Moreover,
we calculated the MPM of Italy from 2010-2013
which is the period of fairly stable economy,
enabling us to omit outliers from previous
historical data, the numerical value of MPM is a
relatively significant 9.18%, such responsive
import will definitely benefit Greek Economy. In
2016 alone, Turkish Imports from Greece is likely
to promote a 0.175% GDP growth to Greece
(Assuming all quarterly projections are correct,
growth is being compounded, trading
composition of Turkey remains unchanged and
all tradable goods are viewed as homogenous)
Also, with oil price expected to reverse its slump
trend and regain momentum in late 2016. As
Greece’ top export is refined petroleum, a
stronger oil price would certainly improve its
current account position and further boost AD.
Blue Line indicates Greece
Dotted Line indicates Spain
Moreover, the current credit state does not
fare well for Greece, being downgraded to
CCC+ earlier this year, it would definitely face
more costs financing its operation which
would further hamper its growth. And this has
been the case and is well documented by the
Government Bond issued by the Greek
Government
Business and Consumer Confidence and access to credit.
Consumer Confidence has clearly dwindled after the set of policies, most notably the Capital Control.
With Capital control and shrinking consumer confidence, consumption growth would remain weak in
Greece.( below 0.5 percent in 2014 and 2015)
Also, with more restricted access to capital and credit, business is unwilling to take loans and update
their technology, which makes Greece’s future productivity stagnant, prolonging the period of slow
economic growth.
Conclusion
Based on our research, Syriza’s impact on the Greek Economy has not been as severe as general Greek Citizens felt. GDP did suffer strongly from his political regime. While unemployment did continue to deteriorate, it does so on nearly the same pace as it
was before. Government debt embarked on a more steady pace of growth. With oil price would eventually pick up, strong growth in its partner and more relaxed access to credit, we are optimistic about its future .