Emerging From Debt, Creating Jobs: Lessons From Greece

Behind the incessant headlines about Greek debt and the ramifications of a “Grexit” lies the stark reality of what this crisis means for regular Greek citizens. The most striking component of the Greek crisis is its impact on jobs. One out of four Greeks is unemployed – a figure matching the United States during the Great Depression. Youth unemployment stands at over 50 percent. Greek minds are focused on this human impact of a crisis often reported through the abstract lens of finance. Addressing the country’s employment challenge is as urgent as addressing financial contagion.

The ongoing crisis in Greece has its origin in three problems. The first historical cause is an economy that did not meet many of the preconditions for joining the European Union to begin with. The second cause was rampant mismanagement of the Greek economy – lax tax collection and crony capitalism that distorted labor markets. The final cause was the 2008 global financial crisis, which amplified the consequences of the first two.

Greece is not unique. Sovereign debt and its sustainability is becoming a widespread concern. Once the nearly exclusive concern of Sub-Saharan African countries, national debt is now a pervasive problem, not only in southern Europe but also in North American economies like Puerto Rico. This report maps the four likely scenarios Greece faces, but these could very well be the choices other countries face in the near future.

Considering the pathways out of debt that Greece faces, several policy lessons emerge:

1. Greece’s economic recovery is predicated on fixing its trade balance. Greece imports much more than it exports, currently running a trade deficit of US$ 27 billion. Imports – both private and governmental – are a major expenditure, standing at over 25 percent of the country’s Gross Domestic Product (GDP) in 2014. If Greece exits from the European Monetary Union, a new drachma will be far weaker than the euro and a weaker currency will make foreign imports exceedingly expensive. Greece will then have to put in place a strong import substitution policy – that is, replace foreign imports with domestic products. Some of these foreign goods are essential for its industries; heavy machinery is one of Greece’s largest imports. If Greece was to take external help in rebuilding its economy, it will most probably swap currencies rather than using its small foreign exchange reserve. If Greece does stay in the EMU, the EU will have to provide Greece relief in this direction.
2. Small and medium enterprises (SMEs) constitute an important part of the Greek economy, accounting for 72.1 percent of all revenues. In the event of a Grexit, Greece will need to leverage SMEs for further growth. Greece will have to promote SMEs through imaginative fiscal measures, which could include a lower tax rate relative to regular-sized businesses, for instance, also referred to as differential taxation. Small businesses also tend to be the engine for job growth. In the event Greece does stay in the EMU – with its gross debt reduced – the EU must support the Greek SME sector, including building the capacity of SMEs to expand production and exports.
3. Controlling the movement of money in and out of its borders may prove beneficial in rebuilding the Greek economy. Research stemming from the crisis in southern Europe shows that long-run capital controls – restricting the flow of money in or out of national borders – can reduce unemployment by up to 10 percentage points. This holds both in case of a Grexit or otherwise.

Beyond the political economy of debt in a currency union, the Greece experience also point to the challenges of reconstructing an economy hit by financial crisis. The challenge of carving an employment- generating pathway out of debt faces Greece today, but it will confront other economies tomorrow.