A back of the envelope calculation of the Greek output gap: very large.

Tourism in Greece is did very well, in 2014. I’ve seen growth estimates of between 13 and 22%, let’s stick to this 17%. As tourism is Greece most important economic sector, this is massive.To an extent, this double digit growth was a recovery from the deep slump in 2013, caused by the Troika induced panic about the Greek monetary system. But numbers of tourists have reached record levels – part of the increase is genuine growth. However – even double digit growth of the main sector of the economy did not get Greece out of the economic doldrums. Employment went up with 74.000 people (October 2013-October 2014) while unemployment declined with 104.000 people (also because of a considerable decline of the total labour force) but the unemployment rate is still 24% rate, which (as people flow in and out of unemployment) means that as much as 40% of the entire labour force might be unemployed during a sizeable part of the year. And broad unemployment is even about 30%… Also deflation is gathering steam, despite this double digit growth. Which is very bad news for the creditors of Greece. But this also means that there still is an absolutely massive waste of resources – people are suffering for nothing. In economic parlance: there is a huge output gap in Greece. We can measure this gap. The IMF suggests that we should gauge output gaps indirectly, using a macro model which somehow compares actual GDP with a vague idea of ‘potential’ GDP. I don’t agree. A direct measurement is almost always better than an indirect measurement of an economic variable. A large part of the medium term (3 years) output gap can be gauged by just looking at (broad) unemployment, which in Greece is about 30%. Which (taking into account some increase in productivity) means that Greece has a medium term (five years) output gap of between 35 tot 45%+%. And there is no reason why the economy should not grow with 5 to 8% a year, remember that the Greek labour market, which its very high share of self-employed, is actually very flexible (though it would be nice if these self-employed changed into a genuine ‘Mittelstand’, with more equity financed fixed capital). At this moment, these idle resources are wasted. Maybe we don not want all this additional and largely free production. Perfect: the Greek work about the longest work weeks of the Eurozone which means that a shorter work week might be a good idea. But that’s up to the Greek. The point is that we’re leaving idle labour on the table. Bad for the Greek (malnourishment is increasing, health is deteriorating) and a large problem for the creditors. This problem can be solved. Legalize marijuana and give Cyprus and Crete (part of Greece) a 10 year monopoly on production. Invest massively in solar cells (at this moment, a large part of the costs of solar cells are installation costs). Introduce a 400,– a month European pension scheme for the 70+. There are not practical reasons why such solutions are not implemented. Malnourishment, stagnation and deteriorating health clearly is a choice, in Europe.

Aside – when we look at the ‘people available to work but not seeking‘ category of broad unemployment it shows that this level is pretty low in Greece, another indication of the effectivity of the Greek labour market (compare with Italy, Portugal, Latvia or Estonia!).