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Can Greece be saved?: current account, fiscal imbalances and competitiveness

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  • Platon Monokroussos
  • Dimitrios Thomakos
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    Abstract

    Drawing on the existing literature on national saving and investment we attempt to identify and empirically analyze the main drivers of Greece’s current account position in recent decades and, especially, in the years following the euro adoption. Our results seem to provide broad-based support to the key findings of a number of earlier empirical studies on the determinants of Greece’s current account position. More specifically, the significant deterioration in the country’s current account position in recent years can be attributed to, among others: (i) accumulated loss of economic competitiveness against main trade-partner economies; (ii) pronounced fiscal policy relaxation following the euro adoption; (iii) the completion of domestic financial sector liberalization in the mid-90s and enhanced financial deepening post the country’s euro area entry. To assess the capacity of the new EU-IMF economic adjustment programme to stabilize Greece’s external position, we utilize our estimated econometric models to produce out-of-sample forecasts for the evolution of the current account in 2012-2016. Specifically, we examine a number of alternative scenarios encompassing varying degrees of policy-adjustment and success rates in implementing the agreed reforms. Assuming a broadly satisfactory pace of programme implementation, we forecast a steady improvement in the country’s current account position in the years ahead. This is deemed to be an important prerequisite for stabilizing and gradually starting to reduce Greece’s external debt, from what currently appear to be unsustainable levels.

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    File URL: http://eprints.lse.ac.uk/43915/
    File Function: Open access version.
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    Bibliographic Info

    Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 43915.

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    Length: 48 pages
    Date of creation: Jun 2012
    Date of revision:
    Handle: RePEc:ehl:lserod:43915

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    Related research

    Keywords: competitiveness; current account deficit; fiscal deficit; Greece; IMF.;

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    Cited by:
    1. Helen Caraveli & Efthymios G. Tsionas, 2012. "Economic restructuring, crises and the regions: the political economy of regional inequalities in Greece," LSE Research Online Documents on Economics 44882, London School of Economics and Political Science, LSE Library.
    2. Manussos Marangudakis & Kostas Rontos & Maria Xenitidou, 2013. "State Crisis and Civil Consciousness in Greece," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 77, Hellenic Observatory, LSE.

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