Greece in the Eurozone: Lessons from a Decade of Experience

Abstract

This study examines Greece’s experience as a member of the Eurozone over the period 2002 to 2011. We do not find evidence of incremental benefits for Greece from joining the Eurozone in terms of higher growth in Gross Domestic Product, improved balance of payments, higher levels of public and private investments, higher levels of employment, and lower inflation relative to the prior ten years. In evaluating the Greek experience within the Eurozone, we derive the following fundamental policy lessons that apply both to similar small peripheral EU countries that plan to enter the Eurozone, or any other economic union, and to the Eurozone itself, in terms of facilitating their integration in a large monetary union. First, countries with inefficient public systems must re-engineer and restructure the decision making process in the public sector before they become members of an economic union. Second, countries must generate a friendly environment towards business and provide a) a simple and stable tax system, b) an effective and efficient justice system, and c) a high quality educational system. Third, countries with governments following populist fiscal policies financed by excessive borrowing are likely to lose their competitiveness which in turn lowers the living standards of their people. Fourth, the admission requirements to an economic union must be strict and they must be enforced. Sixth, capital market investors must always differentiate default risk within the country-members of a monetary union.