By Alexander Apostolides on December 22, 2011

What Great Depression? Greece is suffering the greatest economic recession in its history.

One of the reasons I have been so upset with the powers that be in Europe is the fact that publicly there is great emphasis that they are trying to prevent a great depression, while their actions seem to mathematically send us into that direction. A crisis needs flexibility, and yet all the EU 26 (- UK) are proposing is more and more rigidity and bureaucratisation.

Greece can be seen as a test bed for their proposals since it has been under supervision since 2010. While new bureaucrats appointed with the Blessings of Brussels, such as the new head of ELSTAT, Mr. Andreas Georgiou, is being prosecuted for correctly calculating the Greek sovereign debt, it good to see what the IMF/EU measures did to the Greek Economy.

Below are comparisons with the Great Depression, which led to the downfall of the Venizellos government and the erosion of democracy in Greece. In that case Greece defaulted on its debts and left the gold standard, the global fixed exchange rate mechanism that was in its final death rows then. In yellow are the years for which the indicators are negative.

The Great Depression did not destroy Industrial output as convincingly as the current economic situation in Greece. This is tragic as manufacturing is a high productivity business, and a reduction of manufacturing usually leads to a focus on services which need high human capital and long hours of work. This is very bad news for manufacturing workers who might not have the human capital to find work in any service sector, and especially for those manufacturing cities that are far away from Athens and Thessaloniki.

In terms of GDP the recession is now the longest on record for Greece. In 1932 such a cumulative fall of income of 6.5% led to massive strikes, agricultural uprisings, and revolts, leading to the dissolution of order and democracy. Yet in this decade, a cumulative fall of income of -12.5% does not seem to lead to dangerous calls for revolution. The striking difference is how in the modern case the recession is both deep but also very prolonged, which morale sapping effects both for the business climate (acting as a stop to domestic and foreign investment inflows) and to the skilled section of the Greek workforce, who is seeking for better employment within the European market as things are not picking up.

Why was there a recovery in 1932-1933? Greece left the fixed exchange rate that existed between it and the major advanced states of Europe. This created chaos in the finances of the Greek state, forcing it to default on its loans and to look inward for development. This greatly aided the budding domestic industry which now had a captive market  the Greek people who now had no option but to buy domestic products as foreign products disappeared form themselves due to Balance of payments issues. Now exiting the Euro is not very simple; it is far more integrated and hence distributive than just a fixed exchange mechanism and you cannot exclude people from the outside economy in order to initiate a domestic recovery driven through industrialisation.

What happened to inflation when Greece exited the then gold standard? Inflation very quickly eroded part of the benefits of the recovery. In fact many of the big family names in Greece made their money in this period, as there was a redistribution of income away from wage earners and towards the owners of means of production.

The lessons from the Great depression are not simple, and more detailed analysis is needed before one can suggest concrete policy suggestions. But two things stand out:
1) This is the greatest economic recession modern Greece has ever seen with no recovery in sight.
2) An exit from the Euro will create problems such as inflation and a reduction of choice of local consumers, and though a reduction of the consumer surplus, there will be a redistribution of wealth from the wage earners to those who own and sell products.

A pdf version with cleaner tables can be found here.

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