“Back from the Brink: How to End Greece’s Seemingly Interminable Crisis”
Before the global financial crisis erupted in 2007, countries in the European periphery (PIIGS: Portugal, Ireland, Italy, Greece and Spain) were enjoy- ing stable growth, relatively low fiscal deficits, and near-zero credit spreads. The financial crisis ended debt-financed consumer booms and burst hous- ing bubbles resulting from the sharp decline in interest rates in the run-up to Economic and Monetary Union (EMU) in 1999. The Greek rollercoaster is especially noticeable as the country suffered a sharp reversal of ‘the good times’, which were based on external borrowing and real wage increases far above productivity growth (Figure 1). In the run-up to the crisis, Greece’s real effective exchange rate appreciated strongly, contributing to a growing cur- rent account deficit that reached 15% of GDP in 2008 (Figure 2). During the ‘golden years’ 1999-2007, Greece’s per capita income rose by a cumulative total of 33.6%, much faster than the rest of the Euro area periphery bar Ireland, although productivity growth lagged behind (Figure 3).