Rigidities and Macroeconomic Adjustment under Market Opening: Greece and 1992

The completion of the European Market envisaged after 1992 will change rapidly the external conditions faced by the Greek economy through liberalization of the current and capital accounts. It is not expected, however, to alter as fast the duality inherent in Greek productive structure which consists of change a large-scale, fix-price and a small-scale, flex-price sector. nor is there likely to be rapid change in the behaviour of the State vis-a-vis financing of its deficit through crowding out the private sector. The theoretical model developed in the paper integrates real and financial adjustment behaviour of the Greek economy under the assumptions that the overall level of investment is determined by available savings, and that the economy operates with excess capacity and unemployment. The model is shown to reproduce recent patterns of development in Greece, whereby increases in public expenditure, transfers and investment have maintained GDP, but with an appreciating real exchange rate. The developments envisaged after 1992 are shown to imply, in the short run, a real exchange rate depreciation and an indeterminate GDP change, despite the expected improvement in terms of trade. The analysis points out that in the long run, unless the share of the public sector in GDP disminishes, 1992 will imply lower growth and real wages.