Readers Question: What policy strategy is good to reduce unemployment in Greece?
The Greek economy is experiencing grave problems, with record levels of unemployment. Unemployment in Greece is running at 27.5% – (end of 2013) This unemployment rate is even higher amongst young people.
The unemployment is primarily caused by the prolonged recession which has led to a substantial fall in output and decline in normal economic activity.
The Greek economy has also suffered from a lack of competitiveness in the Eurozone. Higher labour costs and rising production costs caused Greek exports to be relatively uncompetitive. But, in the Euro, there was no devaluation to restore competitiveness. This lack of competitiveness is a contributory factor to unemployment, and led to a current account deficit of close to 15% at the start of the crisis.
What can Greece do?
From a theoretical point of view, a country experiencing severe demand deficient unemployment, should seek to pursue policies to increase aggregate demand.
- Expansionary fiscal policy – higher government spending and / or lower taxes
- Expansionary monetary policy – lower interest rates, quantitative easing, printing money.
- Devaluation of exchange rate. – Make Greek exports relatively cheaper, boosting domestic demand
However, the difficulty is that in the real world, these three policies are all curtailed by membership of the Euro.
Greece is actually pursuing a very tight fiscal policy – cutting government spending in an attempt to reduce the budget deficit. These spending cuts are making the recession worse and increasing unemployment. But, in the Euro, they feel they have no choice because the have no other way of funding their deficits. One policy option would require the EU to give even bigger bailouts or wipe out Greek debt to enable them to stop austerity. However, this would require a degree of political willingness we are unlikely to see.
Monetary policy is not set by Greece, but the ECB. The ECB is considering the whole of the Eurozone and so is not setting monetary policy for what Greece needs. If Greece had a Central Bank, they could print money and pursue quantitative easing to try and reduce deflationary pressures and boost demand. But, this option is not currently available to them.
Several economists suggest that the ECB should be doing more to help the depressed Southern economies. They argue the ECB and Germany need to do more to boost demand in Europe and help those economies experiencing deflationary pressures. Higher growth and higher inflation in Germany / north of EU would help restore competitiveness without relying on extensive deflation in the south. But, the ECB and Germany are reluctant to do anything which might ‘risk’ inflation.
Devaluation of the exchange rate is not possible within the Eurozone. Therefore, leaving the Euro is a consideration. Leaving the Euro would enable loose monetary policy, and substantial devaluation. This could help increase aggregate demand in medium / long term. Therefore, it could be a solution to the mass unemployment.
However, leaving the Euro would cause massive disruption and possibility of capital flight. Many Greeks would wish to move their Euros out of Greece to protect against imminent devaluation. This could destabilise the economy and lead to even lower economic growth, unless sufficient capital controls could be introduced to keep capital in Greece. However, the advantage of leaving the Euro is that it would put the economy back into the hands of the Greeks, and avoid a similar repeat of this crisis in the future.
Supply side policies. The EU has called for supply side reform to help improve competitiveness and reduce unemployment. This can involve labour market reforms to increase labour market flexibility and reduce wage costs, encouraging firms to employ more workers. This policy may help a little, but, even the best supply side reforms will only make quite a small dent in the overall unemployment picture. The fundamental problem is lack of demand, supply side reforms will take a long time to have an effect on unemployment of 27%.
In some aspects the Greek economy is changing quite rapidly. In some areas, people are avoiding normal economic channels and resorting to an almost barter economy. New employment may spring up as people create completely different economic channels such as selling directly to shops rather than through intermediaries. This may help reduce unemployment, but I’m not sure what policy can help create these ‘unorthodox’ jobs.