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

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!).

  1. February 1, 2015 at 11:08 am

    Useful estimate of the enormous Greek output gap. But the crucial remedy is not to invent a new export product like you suggest (“marihuana”), but to inject sufficient money into the economy. Since euros are scarce, one should introduce a parallel national currency, created ex nihilo by the Greek CB – this being a fiscal tool for the government. And doing this in the form of “mobile money” (no bills and coins, only mediated by mobile phone) has immense advantages, as discussed recently on this site.

    • merijnknibbe
      February 1, 2015 at 12:58 pm

      Agree! The problem of Greece was a very large deficit on the current account. It is at this moment a lack of *domestic* demand. One crucial difference between ‘internal devaluation’ (cutting domestic wages) and ‘external devaluation’ (lowering the exchange rate) is that in the last case *domestic* purchasing power of incomes does not decline. A haircut or rents do not get more expensive while nominal incomes are more or less stable. While in the first case domestic purchasing power also declines as nominal incomes decline – while it will take time for haircuts and rents and whatever to decline. Which means that ‘internal devaluation’ without a kind of new parallel currency (like the Swiss Wir-money? – it does not necessarily has to be government backed money, in my view) should never, never be a policy option.

  2. February 1, 2015 at 2:34 pm

    Whatever the source of discussion about new or modern money, I believe economists should back the metric system and value the currency as a kilocalorie unit. Money that doesn’t actually measure and doesn’t actually store value and is created by debt is something economists should fix, with assistance from ecologists.

  3. Hepion
    February 1, 2015 at 4:16 pm

    “Money is a tax credit” said Warren Mosler. All they would have to do is publish something that can be used in payment of taxes inside Greece and immediately it would have value. They could offer a job for anyone willing and able to work and let quantity adjust to demand. Full employment financed by issuing “tax credits”.

    When both “tax credits” and euro would have value, people would be free to exchange them to each other and some exchange rate would form automatically that would be best left to market forces to determine. Trying to fix the exchange rate would be inherently problematic because tying value of your currency to something external mimics the restrictions of gold standard.

  4. February 1, 2015 at 4:46 pm

    Agreed. A government-created parallel currency system would actually BE “tax credits”

  5. March 19, 2015 at 5:47 pm

    Great article. I linked to it in my longer piece on Opednews: http://www.opednews.com/articles/Will-Greece-or-the-EU-Blin-by-Scott-Baker-Assets_Austerity_Debt_Finance-150208-883.html and Global Economic Intersection (same article).

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