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The Euro's periphery: Greece compared with Spain, Italy, Portugal and Ireland



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The Euro's periphery: Greece compared with Spain, Italy,

Portugal and Ireland

Posted 2/07/2015 by Robert Dolamore

The global financial crisis (GFC) sparked a sovereign debt crisis in a number of Euro area

countries, most notably Greece, Spain, Italy, Portugal and Ireland. This flagpost uses data

from the International Monetary Fund’s (IMF’s) World Economic Outlook database to look at

the impact of the crisis on these Euro members and their public finances. The data shows

the Greek economy contracted by much more than the other Euro area periphery economies.

Despite this, Greece’s fiscal consolidation since the crisis began compares favourably with

that of Spain, Italy and Portugal. Whatever the ‘rights and wrongs’ of the current impasse,

Greece has undertaken significant fiscal retrenchment to try and turn things around.

Nevertheless, the outlook for Greece is bleak. Given the weakness of its economy and the

size of its public debt burden there are likely to be many more years ahead of painful

adjustment. This is true whether or not Greece remains a member of the Euro area.

The Greek economy contracted by more than a quarter in real terms between 2008 and

2013 (Figure 1). None of the other Euro area periphery economies experienced a shock of

this order of magnitude. Portugal experienced the next sharpest contraction of around

8.3 per cent.

Source: International Monetary Fund, World Economic Outlook Database: April 2015, accessed 30 June 2015.

The magnitude of this negative shock to the Greek economy would have put its public

finances under severe pressure. As the Greek economy contracted the amount of tax

collected would have fallen as corporate profits and taxpayers’ incomes fell. At the same

time, on the expenditure side, there would have been increased pressured for spending on

unemployment benefits and other social outlays. For example, the unemployment rate in

Greece increased by more than the other Euro area periphery economies, rising from 7.8 per

cent in 2008 to a peak of 27.5 per cent in 2013. Spain experienced the next largest increase

in its unemployment rate, which rose from 11.3 per cent in 2008 to a peak of 26.1 per cent

in 2013.

The IMF publishes a number of measures that provide a way of comparing Greece’s fiscal

consolidation since the crisis began to that of the other Euro periphery economies. One

measure is general government sector net borrowing/lending balance, which is a measure

of a country’s overall fiscal balance (Figure 2). The data shows Greece went into the crisis

running a larger budget deficit as a percent of GDP than the other Euro area periphery

economies. Greece’s budget deficit reached -15.2 per cent of GDP in 2009. The IMF

estimates that Greece's deficit was -2.7 per cent of GDP in 2014. This represents fiscal

consolidation over this five year period of around 12.5 per cent of GDP. Over this period

Greece’s fiscal consolidation was larger than that of Spain, Italy and Portugal.

Source: International Monetary Fund, World Economic Outlook Database: April 2015, accessed 30 June 2015.

The IMF also publishes estimates of the general government sector structural balance (a

deficit, in these countries) as a percentage of potential GDP. The structural balance excludes

the effects of the economic cycle and non-structural elements such as temporary financial

sector and asset price movements and one-off revenue and expenditure items. Potential

GDP is a measure of the level of output that can be achieved without any upside or downside

pressure on inflation.

This measure shows that Greece went into the crisis running a larger structural deficit as a

percentage of GDP than the other Euro area periphery economies (Figure 3) — and that the

size of Greece’s fiscal consolidation since 2009 has been larger than these other economies.

Given the size of the contraction in the Greek economy this would suggest Greece has made

a considerable effort to turn around its public finances. Nevertheless, with general

government sector net debt of around 174 per cent of GDP in 2014, Greece continues to

face a difficult period of adjustment ahead.

Source: International Monetary Fund, World Economic Outlook Database: April 2015, accessed 30 June 2015.