Did the Euro Harm the Greek Economy?

Abstract

Beginning in 1992, Greece’s economy was at least partially managed consistent with European Union (EU) membership. Greece joined the EU on January 1, 2001, adopting the Euro at a conversion rate of 340.75 Drachmas per Euro.From 1995-2000, Greece had 3.2% average GDP growth, 5.5% consumer inflation, a 10.5% unemployment rate, and a government deficit of 4.5% of GDP. After 11 years of EU membership, Greece’s 2012 GDP growth rate is minus 6.4%, its consumer inflation rate is 1.0%, its unemployment rate is 25.4%, and its government deficit is 7.6% of GDP. Some economists suggest that Greece, as did Argentina, should default on its debt.This paper reviews two competing theories for Greece’s economic decline: (1) Greece was disadvantaged by EU membership, by switching to the Euro, and by subsequent austerity measures; or (2) Greece accumulated excessive debt, creating an economic bubble.I examine these theories by defining the conditional exchange rate for the Drachma as the rate that would have prevailed if Greece had not adopted the Euro. Under a Drachma regime, I assume that Greek policymakers would have attempted to keep an investment-grade credit rating. I account for economic adjustment, and calculate values of the following Greek economic variables for 1990-2012: the conditional exchange rate of the Drachma, the debt-to-GDP ratio, the growth rate of real GDP, prevailing interest rates, and other relevant macroeconomic variables.