What argument for protection believes that new or emerging industries should be protected?

3.1 Single-industry studies

There are very few detailed evaluations of infant-industry protection. Some important papers that explicitly take into account learning effects include Baldwin and Krugman (1986, 1989), Hansen, Jensen, and Madsen (2003), Head (1994), Irwin (2000), and Luzio and Greenstein (1995). Baldwin and Krugman (1986) study protection to the semiconductor industry in Japan. They use a simulation model to show that the Japanese semiconductor industry in Japan could not have emerged as a global player without the protected domestic market. Protection was needed to achieve the kinds of economies of scale and learning effects that would allow the industry to move down its marginal cost curve and be competitive on world markets. However, Baldwin and Krugman (1986) also find that the costs to Japanese consumers outweighed the benefits, leading to net welfare losses for both Japan and the United States. Thus, although the semiconductor sector in Japan satisfied the Mill test, it did not satisfy the Bastable test.

Baldwin and Krugman (1989) estimate the impact on US and European welfare of Airbus's entry into the imperfectly competitive aircraft model. They show that subsidies to Airbus may have resulted in net welfare gains for Europe, primarily due to the high degree of imperfect competition (and monopoly rents) that characterized the industry. However, their simulation also makes clear that these results depend heavily on the assumed parameters, including the elasticity of demand. In any case, it is possible to evaluate that sector in such a way that the European subsidy to Airbus passes both the Mill and the Bastable test.

Head (1994) studies the effect of tariff protection on the emergence of the steel rail industry in the United States. This case fits the infant-industry protection view almost perfectly: the local industry was initially uncompetitive (1860s), but a few decades after the imposition of an import tariff the United States was the world leader in this market and the duty was repealed. Head concludes that “the domestic industry did ‘grow up’ and the duty was eventually removed. Hence, protection certainly did not cause stagnation and gross inefficiencies. Furthermore, the duty led to long-run reductions in domestic prices. While the savings to railroad builders were too small and came too late to yield a net gain to consumers, the overall effect on welfare appears to have been positive” (p. 163).

Hansen et al. (2003) examine the effect of production subsidies in Denmark for the production of electricity from wind power. They conclude that the subsidies elicited strong learning by doing in the industry, which achieved a dominant position in the world market. Moreover, according to their calculations, the direct and indirect (environmental) benefits outweighed the overall costs of the policy.

Irwin (2000) evaluates the effects of protection in the tinplate industry in the United States. The industry flourished after receiving tariff protection in 1890. Whereas there were no US producers at all prior to the imposition of the tariff, after the imposition of the tariff (at rates exceeding 70%) the industry became entirely self-sufficient. According to his counterfactual simulations, the tariff accelerated the industry's development by about 10 years, which would have developed anyway due to falling costs of iron ore. However, the costs to consumer surplus were so large that welfare declined as a consequence of protection. Irwin concludes that a lower tariff of around 50% could have improved welfare, but that the actual tariff imposed exceeded the optimal level and actually decreased welfare.

All the previous studies are for cases of protection or subsidies in developed countries. One single-industry study of infant-industry protection in a developing country is that of Luzio and Greenstein (1995), who study the effects of protection of the microcomputer industry in the 1980s in Brazil. They show that although there was rapid productivity growth in the protected industry, it never caught up with the also rapidly growing technological frontier. As a result, welfare declined by a significant amount (around 20% of domestic spending on microcomputers) and the policy was abandoned in the early 1990s.

More studies like these analyzing the welfare implications of infant-industry protection would be very useful. Yet even this brief review makes it clear that protection may lead to higher growth but result in net welfare losses. For tinplate, steel rail, wind power, semiconductors, and aircraft, protection allowed domestic producers to grow and eventually become world class producers. Yet for tinplate, semiconductors, microcomputers, and possibly aircraft, protection led to net welfare losses. These case studies suggest that designing policies that increase welfare is very difficult.

7 Conclusions

In the benchmark case of a competitive, small, open economy, free trade must raise aggregate national welfare, although some individual groups will lose unless compensation is actually paid. Relaxing the benchmark assumptions allows exceptions to the case for free trade: ‘optimal’ tariffs to manipulate world prices; ‘strategic’ tariffs or export subsidies when home firms engage in oligopolistic competition with foreign rivals; and infant industry protection to allow home firms benefit from learning by doing. Protection can also raise the growth rate, though it is less likely to raise welfare in a growing economy. All these possible arguments for protection are subject to many qualifications. Moreover, on closer examination, most economic arguments for protection turn out instead to be arguments against laissez-faire, and so must be qualified by the principle of targeting: corrective measures should be applied as close to the source of the ‘distortion’ as possible, suggesting that other forms of intervention (such as R&D or production subsidies) are preferable to trade protection in most cases. Overall, with due allowance for some ambiguity, both theoretical arguments and empirical evidence suggest a pragmatic case for free trade.

8.3.2 The Dynamic Gains from Globalization

One simple way the literature has thought about dynamics is to study the one-off long-run impact on income of a change in integration in general equilibrium. Computable general equilibrium models yield predictions on how a change in globalization of trade, labor, and capital markets can lead to a change in incomes and so forth. When trade barriers fall, nations specialize in goods in which they have a comparative advantage. Subject to several important assumptions, the Stolper-Samuelson factor price equalization theorem concludes that this will lead to wage convergence.

O’Rourke and Williamson (1999) summarize a large literature, which they mostly pioneered, and argue that both trade and migration were a force for convergence in the 19th century in the Atlantic economy. Trade forced wages up in low-wage, labor-abundant countries toward the level of labor-scarce nations. Capital flows offset these convergence forces when they flowed from labor and capital abundant regions (i.e. Britain) to labor-scarce but natural resource-abundant regions (e.g. Canada, the US, etc.). Labor flowing toward economies with high wages from low-wage regions acted as a force for convergence as predicted by such models. The bottom line of this research program is that globalization is likely to lead to convergence (O’Rourke et al. 1996). Convergence, however, is a disequilibrium phenomenon. According to standard models of trade, there is no reason for the growth rate of productivity to be higher in the long run in a more globalized world. What was witnessed in the 19th century was essentially the comparative statics result outlined in a one-shot general equilibrium model of the international economy.

A conceptual revolution in understanding growth emanated from new growth theory which promised something more in terms of the benefits from trade (Rivera-Batiz and Romer, 1991). The general view from new growth theory is that larger or more integrated markets enable entrepreneurs and inventors to more easily cover the fixed cost related to the development of a new idea.5 Open international markets also promote the sharing of income enhancing ideas raising incomes and providing further stimulus for new ideas. As explained by Jones and Romer (2009), the growth rate of ideas rises as integration rises, or more generally, the incentives to innovate improve. The theoretical literature thus suggests that the growth rate is a positive function of the size of the market. Romer (1996) argues that American economic development in the 19th century was founded on economies of scale, and that America’s size also helped increase the rate of advance of total factor productivity.

Another interesting avenue for dynamic gains is the possible interaction between institutions which facilitate innovation and productivity advance and the size of the market. Acemoglu et al. (2005) suggest that trade interacted with the political economy of European regions between 1500 and 1800. The urban merchant class, with an interest in strong property rights and low sovereign taxation, saw their fortunes and political influence strengthen as the Atlantic economy burgeoned between the 15th and the 18th century. In regions where absolutist monarchs ruled, like Spain, this did not occur. Here, exposure to the trade opportunities in the Americas and the broader Atlantic basin failed to foment institutions supporting commerce, trade, and urbanization.

Oppositely, outside of Europe in the 19th century, where societies came under the colonial domination of Europeans, weak institutional legacies often led to reduced incomes (Acemoglu et al. 2001). More specifically, in places where European settler mortality was high—due to endemic tropical diseases—Europeans looted and extracted resources but failed to invest in the establishment of strong property rights. These forces persist today long after de-colonization. Their evidence shows that places where settler mortality was higher have lower protection of property rights and hence, relatively poor economic performance in the last half century.

Galor (2004) and Mountford and Galor (2008) give further theoretical insight into the conditions under which globalization may fail to lead to modern economic growth and instead keep some nations locked into a Malthusian regime. The Malthusian regime in this work is characterized as a situation where long-run living standards grow only very slowly. The Malthusian regime dominates until sufficiently high labor productivity is reached which can take a long time. In the most basic framework (cf. Galor and Weil, 2000), larger populations lead eventually to sufficiently high income per capita to spark a demographic transition. This allows for lower fertility and higher standards of living with a high rate of productivity growth. Families eventually opt for greater quality of offspring rather than higher quantity when incomes reach a certain threshold since the rate of return from investing in such human capital is high and the opportunity costs of raising children rise with incomes.

In such models, international trade does not improve prospects for long-run growth in all regions. This is because some areas will not have a comparative advantage in skill intensive industry if they are resource-abundant or labor-abundant. If productivity growth depends on skill intensity in the previous period, then regions forced to specialize in low-skilled activity may remain mired in a Malthusian equilibrium. They persist in producing unskilled intensive or non-industrial goods due to their trade with higher income regions. In such regions, population growth eliminates any gains in per capita incomes due to productivity growth, these regions stay relatively poor and modern economic growth never appears. Trade does not stunt growth in all models of trade and growth, of course. A simple exploration by Eaton and Kortum (2001) of a Ricardian model of trade shows that productivity advance is invariant to barriers to trade. Larger markets incentivize innovation, but trade makes it more difficult to come up with an idea to compete with foreign technologies. Which effect dominates, if any, determines the long-run rate of growth of an economy.

Williamson (2011) asserts that trade led to de-industrialization in many regions from the 19th century. This often occurred where regions did not have the appropriate comparative advantage to specialize in industry. He highlights four reasons why a failure to industrialize might harm growth. First, industry often gives rise to urban agglomeration effects. Dense urban factor markets also bring efficiency gains. The demand for high-skill technical staff and services that facilitate industry brings productivity gains too. Finally, knowledge transfer is facilitated in urban industry. Williamson also notes that places that specialize in non-industrial pursuits have often fallen victim to the Dutch Disease due to an overvalued real exchange rate. Commodity specialization also brings high export price volatility and hence lower investment. In a similar vein, Ross (2005) and Bulte et al. (2011) note that resources are often associated with political instability, low investment, and low growth. Resources create rents and enhance the ability of a country to borrow on international markets. In situations where authoritarian regimes claim property rights over all resources, borrowing or the ability to export commodities on world markets for quick cash can lead to “hit-and-run” or looting strategies. The impact is often low investment in the wider economy, political instability, and low growth. Ross (2005) examines conflict where local insurgents battle incumbents for the chance to control natural resource rents borrowing on the collateral of resource rents via “booty futures” to fund such activity. This type of conflict provides a drag on economic growth.

A proper historical treatment of the idea that trade limits economic growth would also model both supply and demand forces shaping human capital accumulation and account for the institutional and market forces allowing for movement into high-skilled products. Many nations specialized in non-industrial goods such as Canada, New Zealand, and Australia and managed to maintain high incomes and high growth rates. Today, countries in East Asia and elsewhere are promoting labor-intensive manufacturing and experiencing rising living standards although this process took a long time to appear.

International capital flows should also allow capital scarce countries to raise their standards of living and converge. Many observers believed that the historically unprecedented outflows of European capital during the 19th century were often associated with better infrastructure and allowed for capital accumulation in the private sector. Gourinchas and Jeanne (2006) calibrate a neo-classical growth model and find that growth rises slightly in the short run from such infusions. Large impacts on living standards and growth can only arise in such a model when capital flows are associated with deeper institutional and social changes. These forces allow for a higher long-run level of income per capita and hence add to the potential for longer transition dynamics. Also, it is worth noting that in the neo-classical model of growth, a permanent rise in the rate of capital inflow would be akin to a rise in the saving rate. This would lead to temporarily higher growth rates and higher incomes in the long run but no permanent effect on growth rates.

Further work by Rancière et al. (2008) is suggestive that countries that proceed apace with financial liberalization grow more quickly as entrepreneurs leverage an expansion in the capital stock. This generates a higher probability of a financial crisis, but, overall, stronger growth dominates in the long-run compared to nations that do not liberalize. In such a case, a country will have large negative skewness of credit growth and be more susceptible to systemic crises. This would not necessarily result in a more variable growth path for incomes, but would be associated with higher average growth rates. We now turn to a discussion of the historical record on the relationship between globalization and growth.

Challenge of autonomous markets for bank FX risks management

Demand for foreign exchange usually surpasses official supply at any point in time in developing economies. As would be expected under such circumstances, the parallel (autonomous) markets strive to fill the gap. Continuing inability of supplies of foreign exchange from official sources to satisfy demand renders the parallel markets attractive to private suppliers who patronize them. Curiously, supply of foreign exchange from official sources on occasion finds its way into the parallel markets. The incentive, doing so, is to take advantage of arbitrage opportunity that the wide gap between official and parallel market exchange rates offers. This exacerbates foreign exchange round tripping. The macroeconomic implication of this situation is foreign exchange leakages which could be detrimental in a country’s foreign exchange management process. This problem heightens market speculations and is typical in countries enforcing foreign exchange regulation. Often concerns about possibilities of policy changes fuels the speculations.

Ojo (1990) studied Nigeria’s foreign exchange management and drew conclusions that support exchange rate deregulation. He found that Nigeria’s exchange rate policy—departing from dependence on market forces—caused overvaluation of the naira exchange rate. The policy, according to him, was counterproductive—and did not make for effective foreign exchange management. It undermined export incentives—largely because prices of goods and services in naira were uncompetitive. This was the reason Nigeria’s traditional exports collapsed. Second, the policy encouraged high rate of consumption of imports. Foreign exchange stock came under pressure as demand surged to meet import needs. Concomitantly, import trade became fraught with sundry frauds. Overdependence of manufacturing on imported inputs didn’t help matters. The cheapness of the imported inputs sustained the overdependence. The argument for infant industry protection was invoked to levy high tariffs on imported finished products. The boost the policy gave to parallel foreign exchange markets and capital flight was yet another black spot. This was the inevitable outcome of the scarcity and rationing of available foreign exchange resources.

Chhibber (1991) researched effects of exchange rate devaluation on Ghanaian and Zimbabwean economies, with correlative findings. His study confirmed mixed effects of exchange rate devaluation on the economy. He drew three conclusions, accordingly, based on the findings. First, domestic prices were sensitive to changes in exchange rates. This corroborated a direct relationship between cost-push inflation and exchange rate devaluation. The effect of changes in exchange rate on cost-push inflation tended to be high whether or not the proportion of imports in GDP was small. This was the case if imports that could not be manufactured locally were indispensable to the production process. Second, in situations where domestic capacity to produce import substitution goods was considerable, cost-push effect of changes in exchange rates on domestic prices tended to be small. With price controls and subsidies—if and when introduced—the observed effect was further reduced. Some countries like Algeria, according to him, adopted complete price controls and domestic prices were not affected by changes in exchange rate. The implication was that domestic inflation correlated strongly with changes in price controls—the former being a function of the latter. Often the use of subsidies to shield domestic prices from the full impact of exchange rate changes backfires. The outcome, in most cases, will be fiscal deficits the financing of which has inflationary implication for the economy. Third, domestic monetary and fiscal policies affected the responsiveness of domestic inflation to exchange rate devaluation. For example, printing money to finance deficits induced inflation—and the larger the amount of deficit financed in this way the higher the concomitant inflation. In the case of Ghana, improved fiscal deficit was observed because the outcome of devaluation was higher receipts of foreign aid in domestic currency and reduced exchange subsidies to importers.

The size of parallel markets determines the degree by which official devaluation will affect prices. Once the misalignment of the exchange rate has gone very far, consumer and producer prices already reflect the parallel market exchange rate—the official devaluation is just the formalization of the status quo (ibid). The foregoing depicts the setting in which banks in developing economies strive—contending with intractable risks—to satisfy foreign exchange demands of customers. The banks sometimes make profit from transactions in the parallel markets, though. Yet the underlying uncertainties in the existence of dual exchange rates could be quite distracting. Bank managements easily become engrossed in foreign exchange risk events at the detriment of contending business issues.

1.4 The three different periods of debt-to-GDP ratio

The first remarkable period of the rise of Greece’s debt, proportional to its GDP, was in the 1980s. This is a period of a constant rise. Starting from 22.5% of GDP in 1980, when most European states had higher levels, it reached a level of 100.3% in 1993. During this period, the private sector in some utilities owned by the Greek state (in electricity, telecommunications, water, sewage, and others) was rather underdeveloped.

During the 1980s, the Greek state was spending significant amounts on wages, funding public companies, and other public expenses. It provided significant loans to state-owned companies, while it increased pensions both in numbers and as a total, and to provide income in various minorities, especially of low- and middle-income classes, not necessarily belonging to the groups of the socially excluded, distressed, and the least privileged (Kazakos, 2001; Xafa, 2017; Papadopoulos, 2016; Romaios, 2012). In 1982, a political decision was taken to increase the minimum salaries and wages by 40%, in a single day (Kazakos, 2001). This decision reflected the more general willingness of the socialist government that held power at the time, after joining the European Communities, in 1981, to support lower income citizens and cope with the negative effects on the society from the rising competition from abroad. A range of studies refer to the more than doubling of employees in the public sector during the 1980s (see Papadopoulos, 2016). Romaios (2012: 349) refers to a 32% increase in their numbers from 1980 to the end of the first political period of the new socialist government (in 1985). He also refers to a state-provider, who did not exercise the necessary controls in the productiveness, the effectiveness of employees, and in the development policies pursued. Several observers appear to agree (including Romaios, 2012; Kazakos, 2001; Papadopoulos, 2016) that it is in this period that the country enters a vicious circle.

A significant reason why such increases in minimum wages occurred is because of high levels of inflation during the late 1970s and the 1980s. While in the 1970s, when two petroleum shocks occurred, average inflation was at 12%; in the 1980s it rose at levels just below 20% (Papadopoulos, 2016). A successful effort was made to reduce it from 24.9% in 1980 to 20.5% in 1983. Substantial income losses caused by inflation were compensated by an automatic adjustment of salaries to inflation, while, as Dracatos (1988) explains, two-thirds of price rises were transferred into the current account deficit that was significantly widened. Furthermore, in the early 1980s and after Greece had joined the European Communities, prices started to increase in tradable goods, followed by a rise in wages and salaries (Dracatos, 1988). Most likely price rises were transferred from tradables to nontradables, putting in operation a certain Balassa–Samuelson effect (something that has been observed in several other cases of states joining the EU).

The 1980s witnessed also a strong rise in consumption and the rate of consumption (Dracatos, 1988). With the benefit of hindsight, one can now better realize that the Greek economy entered into a path of consumption-based development as a way to compensate for substantial losses of income and the price rises that had started in the 1970s and continued during the 1980s. Facing the challenges of deindustrialization, organizational restructuring, and global competition, the socialist government placed at the epicenter of its policies the target of full employment, sacrificing other macroeconomic targets and fiscal stability and viability.

In 1983, the Greek drachma was devaluated by 15.5%, to compensate for losses in competitiveness. At the time, the role of the public sector in boosting exports was considered indispensable (Kazakos et al., 2016). Several institutions were created towards this direction: a general agency to support exports, an institution to guarantee exports, and a new organization for standardization and packaging. Import protection measures for certain industries were also decided (Kazakos et al., 2016). The existing deficit and the fall in the flows of net private funds made the borrowing of the state necessary (Kazakos et al., 2016).

At the same period of time, the interest rates of all credit institutions were very high and their levels had not allowed investment and the promotion of production. As Dracatos (1988) pointed out, the role of credit policy in activating production was insufficient and could not tackle a problem of liquidity, already present in 1982.

In February 1982, the Greek state submitted a memorandum with its positions with regards to its relation with the European Communities, in order to cope with several of its economic problems. The memorandum, while it acknowledged Greece’s long-term structural and macroeconomic imbalances and problems, also diagnosed the strength of competition received by the European Communities and the state’s difficulty to cope with it at the time, given the extremely limited transfer of funds through the common European budget7 (Kazakos, 2001).

Evidence of Greece’s difficulty as an early member-state to cope with competition from the EC is found in the extended analysis provided by Giannitsis (1988). By reference to the 1981–86 period, Giannitsis (1988) has identified shifts of market shares, the fall of competitiveness, and the associated lowering in growth rates. He suggested the incapacity of the traditional industrial pole of Greek manufacturing, which developed after the War, to cope with competition from its EC partners. This part was distinguished from another part undergoing transformation. He found limited integration of the Greek manufacturing in international markets and the sustaining of protection (even if lowered). Giannitsis (1988: 422) also referred to a certain negative positioning of the Commission against all those elements that would have been crucial tools for a development-oriented manufacturing policy. He mentioned the rejection of infant industry protection, “the silent rejection of financing of large manufacturing investments in the context of the Memorandum, the appeal to the European Court and the coercion in adjustment in all industries of state subsidy, of capital movement, of the protection of underdeveloped manufacturing activities (agricultural machines, cars, pharmaceuticals, etc.), and especially, the imposition of the Single Market in 1992, even with few opportunities of deviation” (Giannitsis, 1988: 422),8 which all formed partial actions of “a broader perception, whose central target was the maintaining of a status quo and of the intra-European division of labor in the participation in benefits from manufacturing specialization, and the power balances between European ‘North’ and ‘South’” (Giannitsis, 1988: 422).

In 1985, as soon as the Greek socialist government took power for the second time (a four-year electoral circle), it envisaged seriously the prospect of implementing a stability program to reverse the trend observed through the current account imbalances. This stability program was finally decided and, as an exchange, the Greek government borrowed a loan by the Community, of US$1750 million. The alternative offered by Community authorities to the Greek government would have been to address the International Monetary Fund (Kazakos, 2001). The Greek government had also decided not to request funds from international markets, because the timing was critical and the borrowing interest rates would have been much higher than the loan of the Community. The program of the Greek government targeted the immediate improvement of the competitiveness of the Greek economy, the slow-down of inflation, and the empowerment and modernization of productive structures (Kazakos, 2001). An instant 15% depreciation of the Greek drachma helped the immediate implementation of the program and the promotion of a policy of strong currency (“strong drachma”). The state decided not to sacrifice but keep public investments intact (Kazakos, 2001).

Two additional conditions had favored the choice of this policy (to get a loan by the E.C.). Firstly, the Community allowed Greece not to abolish certain privileges (such as export supports and the monopoly in petroleum). And secondly, “the dramatic fall in petrol prices that contributed in the improvement of the balance of payments and the fall of international interest rates that reduced the burden of the state’s budget from payments of interests” for existing accumulated debts (Kazakos, 2001: 381).

Despite these conditions, the program lasted only for two years. Kazakos (2001) attributes this short duration to the following reasons: (i) the main burden of the program was carried by salaried employees, and especially some categories out of them; (ii) a problem of credibility: the policies that had to be implemented after the stability program were far from pre-electoral promesses and the expectations created in the electoral body. The latter was given the promises of “even better days”9 (Kazakos, 2001: 381–382). The Greek prime minister, a highly recognized economist, was clear enough and insisted in informing the Greek citizens that the economy required such a policy shift, to stand on its two feet rather than on “glassware feet”10; (iii) the program was single-sided and did not have a developmental orientation. Thus, while it reduced real wages by 13.4% within two years, it left the sources of fiscal deficits intact and had not touched upon the problem of cutting public spending (ibid: 387). As an “involuntary byproduct”, it led to the creation of a policy of “strong drachma”. The Commission had calculated that the drachma appreciated by 27% from 1988 to 1996 (ibid: 387).11 Arsenis (2016) suggests that policies for strong drachma have been rather unsuccessful.

Xafa (2017) explains that a substantial rise on the debt-to-GDP ratio from 1992 to 1993, came as a result of the government’s decision to record the unrecorded past debts of the agricultural cooperations and businesses, of the Greek Agricultural Bank (ATE), of the Greek Bank of Industrial Development (“ETBA”) that had owned several businesses, and of other state-owned banks, as well as of the guaranteed and nonguaranteed debts of state-owned businesses and organizations during the 1980s. The Greek Organization for the Restructuring of Businesses (“OAE”) was launched in 1981, as an outcome of the two petroleum shocks, of deindustrialization and the rising international competition. Its target was the restructuring of key-player firms and of the Greek industry. This target has not been achieved and the accumulated debt of 43 enterprises that amounted to 172 billion drachmas was finally tripled before the Greek government decided to privatize these firms, in 1990 (Xafa, 2017). In 1992, the Greek government issued state bonds to pay all unrecorded loans, which increased public debt by 21.6% of GDP (Xafa, 2017). The abrupt rise of debt-to-GDP ratio at the time was also due to Greece’s decision to join the currency union, which presupposed the neutrality of the Greek central bank from the state. The state had to assume the debt burden of three major accounts of the Greek central bank: its loans for petroleum imports, its exchange rate differences, and the financing of deficits. These were accumulated over the decades in the accounts of the Greek central bank and their size was at 3.1 billion drachmas, representing at the time 22.3% of Greece’s GDP. At the time, the Greek state used IMF support to organize this part of the debt by issuing international bonds. Xafa (2017) points out that the result of this regulation was that the public debt rose from 87.8% in 1992 to 110.1% in 1993.

It is noteworthy that a decade before the Treaty of Maastricht, the Greek state had fulfilled the 60% debt-to-GDP ratio (that was established as a necessary precondition for joining the common currency union, after the Treaty of Maastricht, in 1993). However during a period of several consecutive years, both before and after it joined the common currency, Greece had failed to fulfill this particular criterion. This is indicative of the tendency formed in the Greek economy during its EC membership.

A separate period of debt-to-GDP ratio is the one that starts from 1993 and reaches up to 2008, just before the advent of the crisis. This is an extended time period, during which the debt-to-GDP ratio stabilized at levels approximately a little higher than 100%. One should make a significant distinction between the first phase of this period, when all amounts are calculated in Greek Drachmas and the second period, after 2001, when the Euro replaces the Drachma. In terms of EU Cohesion policy programming, this period comprises also two separate policy programming periods of the Greek state, the first lasting from 1994 to 1999 and the second lasting from 2000 up to 2006 (see chapters 2 and 3).

The most important aspect of this period is that while the debt, measured as a percentage of GDP, remains rather stable, it continues to rise significantly in nominal terms. Fig. 1.7 shows the annual levels of Greece’s GDP consolidated gross debt. While it was at €100.8 billion in 1995, it grew at €136.5 billion in 1999 and at €163 billion in 2001. The biggest part of the gross consolidated debt of the Greek state was accumulated after 2001. From 2001 to 2008, the debt rises from €163 billion to an unprecedented at the time (for the whole history of the Greek state) amount of €264.8 billion. Within this short period, the debt rises by almost €101.8 billion and more than doubles in comparison to 1998, mostly produced after its entry into the Eurozone. This, one can argue, is a principal reason why markets reacted, as it appeared that Greece was envisaging some sort of discrepancy or malfunctioning in operation. €51.1 billion of debt was accumulated from 2000 to 2004, in the early phase of the 2000–7 policy programming period and €65.5 billion in the 2004–8 period. If measured from 2004 to 2009, a period that includes 2009, the year of change of government, the debt increases—again—by €101.8 billion.

Fig. 1.8 breaks down GDP to its components, namely final consumption expenditure, gross capital formation, and net exports of goods and services. It thus helps to make a closer inspection of the aforementioned rising trend of the GDP for the 2001–9 period. It appears from Fig. 1.8 that this rising trend of GDP is associated mostly with a rising trend in final consumption expenditure (since 1996) rather than with the rising trend of the gross capital formation. The latter is less evident in comparison to the former, which is much steeper. Furthermore, it is obvious that with respect to the third component of GDP, the net exports of goods and services (exports minus imports of goods and services) are negative and their trend deteriorates until the year of the crisis and the advent of IMF adjustment policies. In other words, the Greek economy is characterized by a strong rise of consumption in comparison to a more limited capacity to form fixed capital. The outcome is such that more imports than exports of goods and services take place.

Fig. 1.9 unveils the structure of the final consumption expenditure. It makes evident that it is not only the consumption of households that is much higher, proportional to the general government’s consumption (and of course that of the nonprofit institutions serving households—NPISH) but also that there is a substantial rising trend in the consumption of households that could be characterized as a major growth component. It is worth mentioning that the proportional allocation of consumption does not significantly change after 2009. Thus, one can reach a significant conclusion that the formation of fixed capital in Greece had not sufficed to push exports and the country’s development (expressed through the rise of its GDP in the pre-entry period of the Eurozone and after it has joined) was due mostly to consumption. It is this precise growth pattern that is associated with rising levels of debt.12

In the year 2008 and thereafter, the debt continues to rise, but that part of its rise can be attributed to the outburst of the crisis, apart from the reasons producing the aforementioned evident and significant rising trend.

One cannot give a reliable prediction as to whether the rising trend would have continued in the event that the crisis had not appeared. But the two, the rising trend and the crisis advent, could be seen as two—instead of a unique—separate causes, bringing the same outcome (after 2008).

Straight after 2008, the rise of the consolidated debt is so sharp that reaches €356.3 billion in 2011.

As seen in Fig. 1.10, the change on annual consolidated gross debt was €14.8 billion in 2001 (from 2000 to 2001), €17.8 billion in 2004, and €14.7 billion in 2005.

The change in the General Government’s consolidated debt was reduced in the period after 2004, as soon as the government changed (Fig. 1.10).13 This trend of falling central government consolidated debt is similar to that observed in the 1996–98 period, during the first phase of that period. If seen together, they reveal political efforts to stabilize fiscally the economy. In 2004, the year when the Olympic Games were held in Athens, the change was at €17.8 billion, an extra of €7.7 billion since 2003 (when the change was at €10.1 billion).

Figs. 1.7 and 1.10 show that in all years but for 2012 (when the PSI - Private Sector Involvement- was imposed), the Greek debt was increasing in net terms, either at a high or low rate. This is not evidenced in the trend of the debt per GDP. The reason obviously is that the denominator of the fraction increases too.

The third and last period starts with the advent of the global crisis in 2009 and continues until today.

As discussed, as soon as the global crisis bursts, a second reason is added to the growing trend of the crisis. However, both reasons culminate in achieving the same result, the reproduction of the same trend. This is seen in the following evidence. From 2001 to 2008 (the year just before the advent of the crisis), the annual average growth rate of Greece’s consolidated debt is at 7.5% (Table 1.3). In the second column of Table 1.3, the same average growth rate (7.5%) is projected first at the officially recorded figure of debt for the year 2008, then for the result reached for 2009, then for the result reached for 2010 and so on. In the last column, this average growth is projected only upon the actual figures of consolidated debt recorded each year after 2008, up to 2011.14

Table 1.3. Projection of the growth trend of annual government gross consolidated debt for the period 2008–11

Source: Data on gross capital consolidated gross debt—excessive deficit procedure based on ESA 2010, (UDGG), AMECO.

Table 1.3 shows that if we impose the same average growth trend on the actual debt level each year (in the last column), the debt would have reached similar levels by 2011 with those finally (officially) recorded. Furthermore, by isolating and using this 2001–8 growth trend only (second column) and by starting after 2008, the hypothetical levels of consolidated debt reached in year 2012 are almost similar to those that have been reached in reality (those in the first column). This outcome for the year 2011 is reached despite the fact that a number of active IMF policies were pursued. Out of this projection, one can reach the conclusion that the IMF policies had not succeeded in withdrawing the macroeconomic imbalance and the rising trend of Greece’s debt up to that point in the early 2010–11 period.15

Fig. 1.11 illustrates the total revenue, total expenditure, and net lending of the general government from 1995 to 2016. The general government comprises the central government, the local government, and the social security funds. Both total expenditure and total revenues rise. The increase in net borrowing is owed in the growth of total expenditure above the levels of total revenue, especially after 2002 and after 2007. If the political choice/willingness was such that total revenues had exceeded total expenditure, net borrowing would have been reduced.

In comparison to other Eurozone partners, Greece’s net borrowing as percentage of its GDP starts deteriorating after 1995, when the country’s efforts to join the Eurozone intensify and during its early participation at the Eurozone (2001–9) (Fig. 1.12).

The credit rating of the Greek economy, as provided by several credit rating companies, does not follow the same or respective distinction made for the three periods of time. In various measurements used by different credit rating companies (Fig. 1.13), Greece’s credit rating reached its peak in the 1998–2008 period, as soon as the country improved its macroeconomic figures and especially after it had joined the Eurozone, reaching levels as high as Aa2. It then substantially fell from 2008 to 2011, as soon as the Greek crisis burst, reaching levels of credit rating of actual very limited significance (at Ca or C).16