I was looking at Greece's unemployment rates historically last night and found something interesting. The Greek economy seemed to hit a pothole in 1981 from which it never extricated itself. Between 1980 and 1982, unemployment tripled, and has stayed that way as a base since then. (I say 1981 because the rate didn't return to where it was, it increased.) Now, there were recessions in the US in 1980 and 1982, and Greece is a tourism-based economy. So a short-term increase in the rate can be explained in that way. However, that doesn't explain that the rate didn't go down in the 1980s. Why? Any suggestions as to the reason? It seems to me that that reason may provide more insights to the current situation than simply that the Greeks lived beyond their means. Something changed in their means.

Alex Castaldo writes:

According to Greek analyst Nick Tsafos, one reason for the low growth rate that started in 1981 was monetary mismanagement.

From 1953 to 1973 the 'third drachma' like most currencies was tied to the dollar; the exchange rate was 30 GRD per USD. This was the period that Greece experienced its best economic performance.

After the mid 70's the currency floated. It was (in round numbers) 58 in June 1981, 148 at the end of 1985, 157 at the end of 1989, 240 at the end of 1994, 328 at the end of 1999 and 325 in 2002. (In 2002 the Euro was introduced).

In other words from 1981 to 2001 the GRD was a 'soft currency' that allowed the Greek government to finance itself easily at the cost of higher inflation and currency depreciation. It could create government jobs, pay generous retirement benefits and get away with it by issuing more drachma. And the Greek politicians were masters at this kind of thing, buying support with monetarily financed expenditures.

The inflation ended in 2002 with the introduction of an externally managed currency, the Euro. For a time everything seemed wonderful. But old habits die hard and the politicians kept up their old ways of solving problems. Government debt increased but interest rates were very low, so it did not seem to matter. But the debt this time was hard debt, that inflation and devaluation would not erase…

Now for a rhetorical question: if Greece abandons the Euro and introduces the new drachma, how do you think the new currency will be managed? The past history is not encouraging.


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