Greece - Overview of economy
The Greek economy grew significantly after World War II, but declined in the 1970s due to poor economic policies implemented by the government. As a result, Greece has spent much of the latter part of the 20th century and the early 21st century trying to rebuild and strengthen the economy. Thus, Greece is one of the least economically developed member countries in the European Union (EU).
While the Greek government encourages free enterprise and a capitalistic system, in some areas it still operates as a socialist country. For instance, in 2001 the government still controlled many sectors of the economy through state-owned banks and industries, and its public sector accounted for approximately half of Greece's gross domestic product (GDP). Limited natural resources, high debt payments, and a low level of industrialization have proved problematic for the Greek economy and have prevented high economic growth in the 1990s. Certain economic sectors are stronger and more established than others, such as shipping and tourism, which are growing and have shown promise since the 1990s.
The Greek government took measures in the late 1980s and 1990s to reduce the number of state-owned businesses and to revitalize the economy through a plan of privatization . This policy has received support from the Greek people and political parties of both the left and right. Despite the government's efforts, a drop in investment and the use of economic stabilization policies caused a slump in the Greek economy during the 1990s. In 2001, the Greek government fully encouraged foreign investment, particularly in its infrastructure projects such as highways and the Athens Metro subway system.
Soon after joining the European Union (EU), Greece became the recipient of many subsidies from the EU to bolster its struggling agricultural sector and to build public works projects. However, even with the European Union's financial assistance, Greece's agricultural and industrial sectors are still struggling with low productivity levels, and Greece remains behind many of its fellow EU members.
In the late 1990s, the government reformed its economic policy to be eligible to join the EU's single currency (the euro), which it became part of in January 2001. Measures included cutting Greece's budget deficit to below 2 percent of GDP and strengthening its monetary policy . As a result, inflation fell below 4 percent by the end of 1998—the lowest rate in 26 years—and averaged only 2.6 percent in 1999. Major challenges, including further economic restructuring and the unemployment reduction, still lie ahead.
The modern Greek economy began in the late 19th century with the adoption of social and industrial legislation, protective tariffs , and the creation of industrial enterprises. At the turn of the 20th century, industry was concentrated on food processing, shipbuilding, and the manufacturing of textile and simple consumer products. It is worth noting that, having been under direct control of the Ottoman Empire for over 400 years, Greece remained economically isolated from many of the major European intellectual movements, such as the Renaissance and the Enlightenment, as well as the beginnings of the Industrial Revolution. Therefore Greece has had to work hard to catch up to its European neighbors in industry and development.
By the late 1960s, Greece achieved high rates of economic growth due to large foreign investments. However, by the mid-1970s, Greece experienced declines in its GDP growth rate and the ratio of investment to GDP, which caused labor costs and oil prices to rise. When Greece joined the European community in 1981, protective economic barriers were removed. Hoping to get back on track financially, the Greek government pursued aggressive economic policies, which resulted in high inflation and caused debt payment problems. To stop rising public sector deficits, the government borrowed money heavily. In 1985, supported by a US$1.7 billion European Currency Unit (ECU) loan from the EU, the government began a 2-year "stabilization" program with moderate success. Inefficiency in the public sector and excessive government spending caused the government to borrow even more money. By 1992 government debt exceeded 100 percent of Greece's GDP. Greece became dependent on foreign borrowing to pay for its deficits, and by the end of 1998, public sector external debt was at US$32 billion, with overall government debt at US$119 billion (105.5 percent of its GDP).
By January 2001 Greece had successfully reduced its budget deficit, controlled inflation and interest rates, and stabilized exchange rates to gain entrance into the European Monetary Union. Greece met the economic requirements to be eligible to join the program of a single currency unit (the euro) in the EU and to have the economy governed by the European Central Bank's focused monetary policy. The Greek government now faces the challenge of structural reform and to ensure that its economic policies continue to enhance economic growth and increase Greece's standard of living.
One of the recent successes of Greece's economic policies has been the reduction of inflation rates . For more than 20 years, inflation remained in double digits, but a successful plan of fiscal consolidation, wage restraint, and strong drachma policies has lowered inflation, which fell to 2.0 percent by mid-1999. However, high interest rates remain troublesome despite cuts in treasury bills and bank rates for savings and loans institutions. Pursuing a strong fiscal policy , combined with public-sector borrowing and the lowering of interest rates, has been challenging for Greece. Headway was made in 1997-99 and rates are progressively declining in line with inflation.