No. 64. THE EFFECTS OF THE ACCESSION OF GREECE TO THE EMU: INITIAL ESTIMATES AND FUTURE PROSPECTS

M. Arghyrou. 2006. | ISBN: 960-341-065-9

 

This study provides an estimate of some the macroeconomic effects caused by the accession of Greece to the EMU; and assesses their implications with respect to the future prospects of the Greek economy. More specifically, we examine:

(a) The effect caused by EMU accession on the Greek price level
(b) The compatibility of the single monetary policy with the domestic requirements of the Greek economy
(c) The effect of EMU accession on Greek competitiveness and the current account

 

We obtain a number of novel and interesting findings, the main of which are the following:
First, Greece was not fully prepared to join the EMU in January 2001.
Second, and as a result, the currently implemented single monetary policy is seriously out of step with the domestic requirements of the Greek economy.
Third, and as a consequence, the participation of Greece to the EMU has so far come at a significant economic cost for the country. This has primarily taken the form of high inflation (caused not by the adoption of the Euro per se but to previously existing internal imbalances); and a significant increase in the deficit of the current account.

We conclude that the macroeconomic policy mix implemented by Greece during 1990-2003 has been of limited potential; that its continuation implies risks for the Greek economy; and that in the present economic circumstances, the prospect of relatively high inflation rates combined with low economic growth is not an unlikely eventuality in relation to the medium-term future of the Greek economy. Our findings suggest that the EU members (old and new) who have not yet joined the Euro may be better off by staying outside the single currency until they have achieved a higher degree of real convergence than the one achieved by Greece in the 1990s.

Given the loss of national monetary independence implied by the accession of Greece to the single currency, and also taking into consideration the present domestic and foreign macroeconomic circumstances, this study makes two proposals in relation to Greek macroeconomic policy within the EMU:

First, to avoid economic stagnation or recession in the short-run, a gradual, rather than too abrupt, reduction in the Greek budget deficit.
Second, to promote sustainable economic growth and real convergence in the long-run, the active implementation of a number of far-reaching structural reforms.