Fiscal Austerity and Export Performance: The Case of Greece

Abstract

Financial integration and common monetary policy, along with improved prospects for the EMUmember countries, instigated a flow of funds from north to south, causing a positive aggregate demand shock in those countries that absorbed the funds. The result was a surge in imports and prices of non-tradable and tradable goods, effective exchange rate appreciation and external imbalances. Greece was one of the southern countries that experienced a significant decline in competitiveness. The resulting large and persistent current account deficits contributed to the accumulation of a sizeable external debt. The financial crisis that erupted in 2008 resulted in the macroeconomic imbalances of the Greek economy, the downgrading of Greek sovereign debt and the consequent debt and economic crises. The recommendation of European Central Bank (ECB), European Commission (EC) and International Monetary Fund (IMF) for the restructuring of the Greek economy and an improvement in competitiveness was “internal devaluation” through fiscal austerity and structural reforms. These recommendations were designed to restore the lost competitiveness of the tradable sector, reallocate resources to the production of exportable goods, raise exports, eliminate the current account deficit and reduce external debt. However, the performance of Greek exports has been worse than expected. Among other factors, some economists argue that the unprecedented fiscal contraction imposed by Greece’s creditors has been an obstacle to export growth. The purpose of this paper is to evaluate the impact of fiscal austerity on exports by investigating possible reasons for the poor export performance. To begin with, Greek exporters have not really cut prices much. One could argue that exporters took advantage of lower wages and raised profit margins rather than cutting prices to capture market share. Another explanation could be that the cost of production has not declined proportionally to labor costs. Exporters incurred higher business taxes and the cost of Int Adv Econ Res (2015) 21:121–122 DOI 10.1007/s11294-014-9501-0