Helena Horská Eurozone, Greece, and Sovereign Debt Crisis Sep 19,2016 GREECE: IS THERE ANY HARMLESS SOLUTION? Helena Horská Eurozone, Greece, and Sovereign Debt Crisis Sep 19,2016

Most indebted developed countries WHY ONLY GREECE? Most indebted developed countries Rating (S&P) % GDP Japan A+ 228 Greece B- 171 Italy BBB- 136 Portugal BB+ 129 Belgium AA 107 Source: Bloomberg Greek Illness Unprecedented fiscal indiscipline Huge Tax Gap Lost of competitiveness High presence of the state in the economy Clientelism, corruption, wide-spread shadow economy Outdated economic structures … Source: DG ECFIN AMECO estimate, Macrobond chapter 09/12/2018

The current stage of opinions THE FIRST-BEST SOLUTION EVER: NO EURO IN GREECE THE SECOND-BEST SOLUTION: ??? TO PICK UP THE LEAST HARMFUL SOLUTION chapter 09/12/2018

Selected Milestones “Greece: The party is over.” (Charles Wyplosz, December 14, 2009) 2009 1st bailout 2010 “Greece must now begin an orderly default, voluntarily exit the Eurozone and return to the drachma.”(N. Roubini, 2011) 2011 2nd bailout 2012 Snap elections 2015 Greece introduced ATM withdrawal restrictions and capital controls Greece defaults on the IMF – first developed country on “arrears list” (joins Somalia, Zimbabwe and Sudan) Greek bailout referendum: NO 3rd bailout Snap elections 2016 Grexit overshadowed by Brexit chapter 09/12/2018

… and how much devaluated? After Greferendum… … debate on parallel vs. own currency intensified Parallel currency IOU’s? Own currency new drachma? … and how much devaluated? 30% ? 50% ? Source: Macrobond chapter 09/12/2018

The second-best solutions Deflationary policies Internal devaluation Exchange rate devaluation Fiscal austerity (tax hikes, expenditure cuts) Huge output losses Production cost cuts Improvement in competitiveness Increase labor and capital productivity Ensure public finance sustainability Export boost Trade balance improvement …but empirical evidence not very persuasive Export of goods and services (% GDP) Albania 27,1 OECD members 28,4 Greece 30,1 Italy 30,2 Euro Area 44,6 Germany 46,9 Bulgaria 66,5 Czech Republic 84,5 Central Europe and Baltics 61 Source: World Bank, 2015 Source: Macrobond chapter 09/12/2018

Politics is a magic key chapter 09/12/2018

Thank you for your attention! Any question? What’s your opinion? Email: helena.horska@rb.cz chapter 09/12/2018

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