Home > Uncategorized > Will the Greek GDP decline soon set a new world record?

Will the Greek GDP decline soon set a new world record?

The foundation of the design of the Euro system is the idea of ‘financial discipline’. Democratic governments, according to this idea irresponsible by nature, had to be reigned in by rational private lenders active on a newly created international capital market (no, not just the banks, also and often more important our pension funds). Part of this design was a decline of international financial transfers in the EU while a central fiscal authority was absent, too. Again: by design! Financial markets had to do the job, away with these democratic governments!

Something unexpected happened, however. Up to 2008 governments were not reigned in by the FIRE sector, as interest rates in the periphery of the Euro Area declined much more than anticipated by economists while the private sector could, until 2008, borrow at lib and often became severely indebted. Which meant that after the Lehman moment, which made capital flows reverse, governments and the ECB somehow had to step in. The way this happened led in Greece to one of the largest peacetime declines in GDP in developed countries ever (graph).

Declines2

Graph slightly adapted from: source. Hat tip: Jesse Frederik.

As a result of the ELA decisions by the governing council of the ECB the Greek economy is nosediving again (rumours have it that Draghi was against these decisions). Anybody wanting to take a bet that, in one or two years, the decline of the Greek economy will be the largest decline of a developed economy – ever?

Aside: during a large part of 1945 The Netherlands consisted of a liberated part and an occupied part and the economic developments of the occupied part was quite different from developments in the liberated part. Germany consisted of different parts too, but in all these parts developments were totally dismal (though it is remarkable how fast many cities managed to restore water supply, rudimentary telephone services and the like

  1. July 7, 2015 at 11:22 am

    Reblogged this on alittleecon.

  2. esie
    July 7, 2015 at 8:24 pm

    You’re sure you didn’t forget Eastern Europe after the fall of the Iron Curtain or the Baltic states in 2008 ?

    • merijnknibbe
      July 8, 2015 at 8:37 am

      I didn’t check the data in the graph but the Baltics typically had declines of about 18/20%. the ‘developed’ world is the word used in the source, I should have stated: western countries and ‘western off shoots'(New Sealand, Australia, and the like). Though countries like Japan, south Korea, Singapore and Taiwan also never experienced anything which was even close to this, in peacetime.

  3. July 10, 2015 at 9:28 am

    Reblogged this on Employment Relations and commented:
    Thanks for sharing.

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