New Paper Concludes that Greece Will Need Better Macroeconomic Policies to Exit from Mass Unemployment

A new report from the Center for Economic and Policy Research (CEPR) finds that Greece will need a fiscal stimulus if it is to emerge from years of mass unemployment in the near future. The paper, "The Greek Economy: Which Way Forward?" by Mark Weisbrot, David Rosnick and Stephan Lefebvre notes that after six years of recession, Greece has completed one of the largest adjustments in the world, with import spending falling 36 percent and the government achieving the largest cyclically adjusted primary budget surplus in the eurozone.

"The adjustment is done, with the majority of the Greek people having paid a terrible and mostly unnecessary price for it," CEPR Co-Director and lead author of the paper Mark Weisbrot said. "Now there needs to be a program to restore employment, instead of the current program which promises mass unemployment for years to come."

Media reports and economic forecasts have been upbeat about the return to positive GDP growth in Greece in 2014, currently estimated at 0.6 percent. But the report cautions that "Greece's return to growth last year was not a result of any success attributable to the policies implemented since the economy went into crisis, but rather to the end of the fiscal consolidation." The cyclically adjusted budget surplus - which measures the government's fiscal tightening -- moved from 5.7 percent in 2013 to 6.0 percent of GDP in 2014, or just 0.3 percentage points. In the three years prior, the adjustment had been 3.2 percent of GDP (2012-13), 3.8 percent of GDP (2011-12), and 5 percent of GDP (2010-11). The paper states: "It should be obvious that this huge drop-off in fiscal tightening would be the main cause of the return to growth."

The paper describes the considerable economic and social costs of Greece's adjustment, with output down by about 26 percent and unemployment currently at 25.5 percent, with youth unemployment at 49.6 percent. "Nominal wages have fallen by 16 percent in the private sector ...and by 23.5 percent overall. The government has laid off about 19 percent of its work force." Yet the IMF forecasts more hardship in the years to come, projecting unemployment to be 15.8 percent in 2018 - a decade after the crisis began - and in 2019 for Greece to be more than 9 percent below its pre-crisis GDP of 12 years earlier.

Greece's current recovery is fragile, and mandated large primary budget surpluses and other austerity measures will continue to be a drag on economic growth, the report explains.

"There are policy measures that can lead Greece out of this dark period and into a sustained, robust recovery, but these are not the ones that the European authorities have imposed on Greece," Weisbrot said. "Rather, these would be options that have worked in other countries experiencing similar crises and recessions: most importantly, an economic stimulus to replace lost private sector demand."

Weisbrot noted that the European Central Bank could help Greece's recovery with its new quantitative easing program, by buying Greek sovereign bonds and keeping its interest rates low, as well as other measures to ensure financial stability.