The Greek economic crisis: causes and alternative policies

ABSTRACT

The Greek economic crisis is primarily structural and the result of an international economic impasse that developed in 2007, with devastating implications for the struggling peripheral economies of Europe. This article suggests that falling profitability led to the stagnation of profits, which in turn discouraged new investment, decreased production and increased unemployment. The resulting recessionary economic environment, in conjunction with the mounting public debt and the austerity policies imposed on the Greek economy by the so-called ‘troika’ of creditors in 2010, has decimated the Greek economy even further, causing one of the worst economic crises since the Second World War. The article also provides some broad guidelines for an alternative economic policy.

KEYWORDS:

• Crisis
• debt
• falling rate of profit
• Greek economy
• investment function
• unemployment rate

JEL CODES:

• B5
• E1
• O51

Acknowledgements

We are grateful to two anonymous referees and Lynne Chester, the co-editor of this journal, for their insightful and constructive comments. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹We refer particularly to the early monetarist approach of Friedman and that advocated by Lucas Jr and Sargent (Tsoulfidis 2010, pp. 326–327).

²The effect of new technologies was not reflected in the total factor productivity data, giving rise to Solow’s (1987, p. 36) oft-cited aphorism: ‘we see the computer age everywhere but in the productivity statistics’. This perhaps has to do with the time lag needed for new technologies to diffuse and spread their results throughout the entire economy (Dunn 2009, pp. 230–231, 248).

³For a discussion of the causes of the falling MEC and its connection with Marx’s average and incremental rate of profit, see Tsoulfidis (2010, Chs. 6 and 9).

⁴For a discussion of the two rates of profit (adjusted for the self-employed and not), see Tsoulfidis and Tsaliki (2014).

⁵See the Appendix for the data and the method used to estimate the capacity utilization and real interest rates.

⁶The third from the list of six Kaldorian (1961) stylized facts refers to the stationarity of both real interest (and the profit rate), so in this case the ADF test is in order. The usual ADF test showed that the level of the real interest rate rules out the hypothesis of a unit root at the 8.1 per cent level of significance and so we need not run non-linear tests of any kind. The level of CU contains no unit root at a 4 per cent level of significance through the simple ADF test, so the growth rate of CU could not be less stationary.

⁷For more on the classical approach to capital accumulation as well as the Keynesian theory of effective demand, see Alexiou et al. (2016).

⁸The unemployment rate is an unquestionably cyclical variable and as such the expectation is for the rate to be stationary for the same reason characterizing the investment and profit shares. In effect, we applied the methodology suggested by Kapetanios et al. (2003) and the results showed that we should rule out the case of unit root at the 1 per cent level of significance. Hence, we wish to emphasize that the straightforward application of the ADF test did not reject the unit root hypothesis at a very high significance level. This should be surprising because the unemployment rate rose from 8.2 per cent in 2007 to 27 per cent in 2013.

⁹After all, the categorization of commodities into departments is based on the character of their use value, and therefore there is, by and large, overlap between the two departments because they are aggregations of a large number of industries and some commodities are partly capital and partly consumer goods.

¹⁰For a discussion and an application of the Kaldorian model in the Greek economy, see Katrakilidis et al. (2013).