ECONOMY

Chile has an advanced macroeconomic and financial policy regime in place. This is rule-based and combines a floating exchange rate, inflation targeting, an overall government budget rule, and effective regulation and supervision of banks and capital markets. As a result, macroeconomic performance has generally been quite satisfactory. A dominant economic role is assigned to markets and the private sector, complemented by active government regulation and policies aimed at limiting noncompetitive market conditions, extending social protection, and reducing poverty and income concentration. Economic legislation and regulations provide a level playing field for domestic and foreign competitors, barriers to international trade and capital flows are negligible, and international competitiveness, adjusted for labor productivity, is relatively high.
These policies have enabled a relatively high (but now declining) level of growth, and poverty rates have fallen substantially in the last several decades. However, major structural weaknesses can be observed that preclude higher growth rates and a faster poverty reduction. These include excessive regulation in labor markets (alongside generally weak trade unions), a lack of efficiency in government and state enterprises, excessive restrictions on firm entry and exit, very low-quality primary and public education, and the inability to effectively control rising crime rates.

At the onset of the global economic crisis in 2008, Finland’s economy was in a good position. However, owing to the recession, public finances fell into deficit, and in 2009 the economy contracted by 7.6%. In the coming years, it will be a challenge of economic policy to work out and implement a post-recession exit strategy, in which measures that support growth are combined with general government adjustment measures; however, the impact of the recession on public finances has been so considerable that it will take a number of years to recover. Also, the aging of Finland’s population sets restrictions for economic growth and at the same time poses a challenge for the sustainability of public finances, especially as it comes to financing pensions.
A stability program was endorsed by the government in February 2010, which presented Finland’s economic policy objectives and projected implementations up to 2013. Whereas the general decline in the economy now seems to have leveled off and a gradual growth in GDP is expected, the recession will leave an enduring mark on the balance of general government finances and its debt ratio. The general government deficit is expected to deepen in 2010 to 3.6% of GDP: the debt-to-GDP ratio will rise to over 56% by 2013. Finland’s medium-term target for general government is set in the program at a structural surplus of 0.5% of GDP; however, this objective will not be achieved without new and significant additional measures.

Public finances are rock solid, the state budget effectively running a massive and durable surplus as a result of vast petroleum revenues from the North Sea. Norway has long enjoyed strong economic growth and near full employment. The country weathered the recent world economic crisis with only modest adverse effects. Petroleum revenues are managed in a way that is internationally seen as exemplary, being used nationally with prudence and otherwise invested internationally through a sovereign fund in equity, bonds and, as of recently, property. The Norwegian krone is strong and has strengthened during recent international turmoil.
The state wields an exceptionally strong influence in the economy. About 40% of the equity on the Oslo stock exchange is in state ownership and another 30% under foreign ownership, whereby the remaining indigenous private capital sector is relatively small. Economic policy is generally considered to be fair and transparent. Regulatory arrangements are generally seen to be sound, although the Oslo stock exchange is volatile, and has been plagued with rumors of insider dealing.
This economy has its strength in the public sector, particularly for employment, and in petroleum and petroleum-related industries. It is a high-cost economy, both in terms of wages and taxes, and international competitiveness does suffer in industries outside of the petroleum sector.
Although the country has managed its petroleum wealth responsibly, the economy is strongly petroleum-dependent and entrenched at a high-cost level. There is a tendency to substitute public sector service employment for employment in non-petroleum production industries. With the high level of savings invested abroad and a continued strong demand for labor from public sector service production, there is concern that the country will become ever more dependent on imports for the maintenance of a high standard of living and to meet expectations for rising standards in public services. The cost-side of a petroleum-dominated economy, it is argued, is an economy which is not strong in entrepreneurship, which is weak in conventional industries, which has essentially only one leg to stand on, and which has less long-term strength than might be suggested by favorable current indicators.

The economic policies that successive governments have followed, both Liberal and Labor, have involved extensive microeconomic reform and have provided a strong base for economic growth during the past 15 years. While growth was adversely impacted by the global economic downturn in late 2008, the economy still grew by 1.2% during the 2008 – 2009 financial year, the highest growth rate of any OECD country. The January 2010 unemployment rate of 5.3% was lower than that of any major advanced economy, with the exception of Japan, and remained below 6% throughout the global financial crisis. High commodity prices have been an important contributor to this economic performance, not least because they helped place the Australian government in a strong fiscal position at the onset of the economic downturn, allowing a sizeable fiscal expansion without creating excessive government debt. Nonetheless, policy settings have clearly contributed to Australia’s economic performance, which includes not squandering the opportunities created by the resources boom.

The review period spans much of the new Labor government’s first term in office after 11 years of Liberal-National government. However, notwithstanding considerable rhetoric to the contrary, economic policy changes other than the large fiscal stimulus in 2008 and 2009 have been far from drastic. The policy “architecture” has remained essentially unchanged, as have the core principles and practices of tax, welfare, enterprise and competition policy. The notable exception is labor market policy, where the most significant area of policy reform has been in industrial relations. Indeed, the election commitment of the Labor Party to abolish the unpopular “Work Choices” system introduced by the Howard government in 2006 was instrumental in bringing about the change of government in 2007.

Recent policy concerned with improving economic outcomes has also focused on improving the education system, addressing the challenge of an aging population, tackling environmental issues and increasing the supply of skilled labor. Education policy has been a specific focus of successive governments, and the Labor government elected in 2007 has been no exception. Since 2008 the government has increased funding for preschool education, introduced measures to ensure more transparency in the reporting of results and greater accountability of schools to parents, encouraged higher participation rates in higher education and increased funding for Indigenous education and special needs groups. The major problem with all of these measures has been the availability of funding, and a related problem has been entrenched opposition to many of the measures from teachers’ unions.

A significant barrier to an integrated economic policy is the federal structure of government, and the duplication of many services and regulatory functions between the federal government and the governments of the six states and territories. The federal system of government has proved a particular barrier in achieving effective management of water resources, and federalism has also proved a barrier in achieving cooperation across the jurisdictions in order to achieve reform of many of the social services, most notably health. The roots of the problem lie in the lack of any revenue-raising powers among the states, who are dependent on the goods and services tax revenue, which was introduced by the Liberal government in 2000.

Canada has implemented market-oriented economic policies that have enhanced the country’s competitiveness and attractiveness as a location to do business. Yet these policies appear not to have had a positive impact on productivity growth, which has been very weak (Sharpe, 2009). There are still areas where Canada’s economic framework is not as conducive as it might be to productivity growth. The most egregious of these is the continued presence of marketing boards, which have the right to control output through production quotas. Interprovincial barriers to trade and labor mobility, and the lack of a national securities regulator are other weaknesses in Canada’s regulatory framework from a competitiveness perspective.

Prior to the global financial crisis, the Danish economy experienced a boom period. Unemployment reached record lows, there was a current account surplus and the public budget was in the black. However, there were also clear signs of an overheating economy. For a number of years, wage increases had exceeded competitive levels while productivity growth fell below competitors’ levels. Therefore wage competitiveness had systematically deteriorated. Structural problems were growing but concealed by the country’s favorable current account balance. However, this was to a large extent caused by net exports of energy (oil and gas) and positive developments in the shipping industry, while industrial exports were falling. There are also arguments that public budget surpluses were not as large as they should have been, given the strength of automatic budget responses.
The global financial crisis significantly affected the Danish economy. GDP decreased by almost 1% in 2008, and 5% in 2009. Although positive growth is forecasted for the coming years, growth rates are modest (1% to 1.5% of GDP) and hence the recovery is only expected to come slowly. Registered unemployment has more than doubled (from less than 2% to close to 5%), but this conceals a much larger drop in employment. Roughly, the decrease in employment is twice the increase in unemployment. The difference is explained partly by the return of foreign workers to their home countries, general retirement and rising unemployment numbers that are harder to track, as the registered unemployment rate only includes unemployed entitled to benefits or social assistance. However, there is a significant number of people who are not eligible for unemployment benefits or social assistance (means tested on a family basis).
Public finances have changed dramatically and for 2009 the deficit is about 5.5% of GDP, while deficits are projected in the coming years. It is a concern that Denmark violates the 3% budget norm outlined in the Stability and Growth Pact, and that it accordingly is entering the excessive deficit procedure. The Danish convergence program, published in February 2010, attracted much attention since it gave the first official account of the “state of public finances” after the financial crisis. It was assessed that significant budget improvements were needed to ensure both that the 3% budget norm would be met in 2013 and to ensure fiscal sustainability. This assessment has framed policy discussions over the need for consolidation of public finances. While fiscal policy was turned in an expansionary direction at the onset of the crisis, it is now turning in the opposite direction.

Hungary has been an attractive location for foreign investment ever since the early 1990s. However, the country has suffered from severe macroeconomic imbalances several times. At the end of 2008, the Hungarian economy was at the brink of yet another currency crisis. The Gyurcsány and Bajnai governments succeeded in fending off this danger by accomplishing a far-reaching fiscal adjustment. However, the pre-occupation with crisis management also meant that a number of structural problems, including a strong gap between the international and the domestic sector of the economy, could not be addressed. Moreover, the widely anticipated change in government in April 2010 made all changes preliminary.

The Netherlands numbers among the top six SGI countries in terms of the highest per capita GDP ($39,225, whereas the statistical mean of the 31 countries is $32,761).

However, the Dutch economy is shrinking. The CPB expects a contraction of 4.75% for 2009. Projections of 0% growth for 2010 are not encouraging. Unemployment in 2010 is expected to reach 8%, which is double the figure of unemployment in 2008. The number of jobs lost will be the highest since World War II. However, the unemployment rate in the Netherlands will still be among the lowest – if not the lowest – of the 31 SGI countries. The loss of jobs will affect youth and lower-educated citizens most. The purchasing power increased by 1.75% in 2009, but is expected to decrease by 0.25% in 2010.

New Zealand is widely known for its very significant structural policy reforms introduced in the 1980s and 1990s. These reforms have had a positive impact and these policy settings, despite their unpopularity at the time, have remained largely intact. Yet New Zealand is also often cited as a country for which free-market reforms have not yielded the improvements in productivity, economic growth and living standards that were anticipated and promised by reformers. The OECD sees part of the explanation in that in some areas of the country, earlier progress has eroded in recent years. Particular concerns surround new regulation, not always well-designed and sometimes driven by a mix of objectives, which supports a view that the earlier focus on productivity growth has been lost. Other views are more forgiving and explain the poorer-than-expected growth relating more to New Zealand’s small size and remoteness, and to labor market and structural issues.

The trajectory of economic development over the past decade in Sweden has been very positive. Sweden chose not to join the euro zone but its economy has consistently fared better than the euro zone countries in terms of key parameters such as inflation rate, unemployment and budgetary balance. Both the previous and the current governments can be described as financially conservative; reform is influenced by a constant close look at the economy and a fear of building up budgetary deficits.
In 2006, the center-right government inherited a flourishing economy and pursued two economic goals. First, the government launched further measures to increase employment. The main pillar of this strategy is the gradual introduction of an earned-income tax credit scheme. Second, the center-right government pursued further privatization measures of the large public sector in Sweden. And the government announced its intention to reassess the core welfare programs, to provide more choice in welfare services (education, health services etc.) and to reduce the number of persons permanently on welfare support.
The main economic problem in Sweden is how to combine economic change with economic growth and generous welfare programs. The corner stone of the Swedish model is the capability to tax Swedish firms and citizens in order to maintain fiscal solidity in an encompassing welfare state.
Since 2008, the center-right government implemented far-reaching crisis packages in order to dampen the impact of the global financial crisis. Immediate policies targeted stabilizing the Swedish financial system with an openness towards volatile East-European financial systems. In a second step, the government introduced discretionary fiscal stimuli in order to stabilize domestic demand and employment. However, the government implemented fiscal crisis policies rather slowly. As a consequence, the budgetary deficits increased slightly. The government forecasts a rapid return to balanced budgets and fiscal consolidation. This will depend on the development of the international economy and the development of open unemployment in Sweden, which has increased significantly since 2008.

The Swiss economic policy regime combines various elements, including the following.
(1) It is a very liberal and depoliticized regime with regard to regulation of the labor market, in particular to hiring and firing. The rules in this area are very close to those of the United States.
(2) It used to be a very liberal and politicized regime with regard to the in- and outflow of foreign labor.
(3) The economic policy regime is based on the integration of employers and trade unions into the policy-making process, with employers having the largest amount of influence (“liberal corporatism”) and trade unions serving as junior partners. For trade unions, this corporatism has made sense, since it resulted in a regime of full employment (at least for Swiss citizens), high wages and generous private social policy on the firm level. In addition, the public social policy has been expanded in terms of programs and – in particular –expenditure levels.
(4) Switzerland used to maintain a very protectionist policy regime, allowing for cartels and the exclusion of competition. The main beneficiaries were farmers, who were protected from world market competition by high tariffs, as well as small and medium-sized businesses and service providers producing for the domestic market. In addition to high tariffs and strict non-tariff barriers to foreign competitors, business was protected by the acceptance of high tariffs from abroad. Furthermore, collusive pricing was tolerated, and competition between providers/producers limited by the variance in cantonal regulations. This latter aspect made it very difficult for businesses to make competitive offers and win bids outside their home cantons.
(5) It is an economy open to the world market, with domestic rules that facilitate the internationally competitive nature of large enterprises such as chemical producers and banks.
(6) It is an economy policy regime based on low taxes both for labor and capital, and relatively low tax wedges. In return, this liberal state does not intervene massively into the business cycle. Rather, it used to pursue a prudent and basically pro-cyclical fiscal policy. In times of major economic problems – such as in 2008 and 2009 – fiscal packages have been implemented. However, due to institutional and political reasons, these fiscal packages have typically been very limited in size.
(7) The economic policy regime always placed particular emphasis on a prudent fiscal policy (low deficits and debts) and on price stability. Prudent fiscal policy resulted from institutional factors, in particular the fiscal weakness of the federal state compared to the cantons, rules on limitations of excessive deficits and debts (for example, a so-called debt brake or “Schuldenbremse”), and the effects of direct democracy. Citizens were usually reluctant to accept any policy changes which led to increases in taxation. These institutional factors were further reinforced by the distribution of political power, in particular a weak left, and a strong party (the Free Democrats, which are in this respect liberal) supporting a constrained-tax state. Price stability was left to the independent National Bank, which is tasked with a primary goal of price stability, and has the tools of monetary and interest rate policy at its disposal.
This policy regime, which was both liberal and protectionist, has come under pressure due to various changes:
(1) Deindustrialization and a marked shift to a service economy has meant a change in qualifications for labor. The industrial sector offered a large number of jobs with low skill requirements. These jobs were staffed to a disproportional extent by foreign labor. Due to the rules of the work permit systems, many foreign workers gained access to unlimited work permits between the mid-1970s and the mid-1990s. Given their low skills, there is not enough demand for these employees in the modern high-skills service sector. Hence, the unemployment curve has shifted upwards, and is characterized by high unemployment among the foreign workers.
At the same time, employers recruit increasingly highly skilled labor for the service sector. It is true that Switzerland has depended on the inflow of highly skilled employees for the last century, but this process has further intensified during the last 15 years. One implication has been a pronounced increase in social tension. Historically, the highly educated Swiss middle classes have been very much in favor of a pro-foreigner policy, as long as these foreigners did not offer major competition for this social sector’s jobs and housing opportunities. With the increasing inflow of highly skirled German labor, this tolerance has changed, as one can see in recent developments. For example, significant populist opposition to the hire of professors from Germany at the universities of Zurich and Berne was led both by right- and left-wing politicians. Hence, one of the pillars of Swiss economic success will arguably be politically less sustainable than in the past. This creates problems, since Switzerland has long acted as a free rider on the education expenditures of neighboring countries, by employing foreign workers that have been trained in their home countries.
(2) Globalization has led to the increasing importance of international organizations such as the WTO. Given its reliance on sectors such as chemical or machine production, banking and tourism, Switzerland has had no option but to accept the liberalization of trade and services. Otherwise the retaliation by other nations would be economically extremely expensive. However, this has implied that sectors once strongly shielded by protectionist policies have become liberalized. Agriculture offers a major case in point. Through this liberalization from outside, the previous fit between protected domestic industries and a world-market-oriented industry – the core of Switzerland’s post-war economic success story – became strained.
(3) Switzerland has not solved the question of whether it should belong to the European Union or not in a sustainable way. The provisional solutions have been bilateral agreements between the European Union and Switzerland, which have major implications for further liberalization of the service and agriculture sectors. In addition, immigration policy has changed substantially. Switzerland has abstained from any further recruitment of foreign labor from non-EU countries (for which there is little demand anyway), and has liberalized the immigration regime with EU countries. Essentially, this has meant free movement of labor between Switzerland and the European Union, intensifying the new problems and cleavages associated with the recruiting of highly skilled employees from abroad.
(4) Switzerland was a laggard in the development of the welfare state, though it caught up in the post-war period. Today it is a mature and generous liberal-conservative welfare state. In times of demographic change, this welfare state is only sustainable through high rates of economic growth. However, the protectionist elements of the policy regime inhibit strong growth. Therefore, the benefits offered by the welfare state are endangered, prompting opposition by trade unions and the political left.

Given the emergence by the end of 2008 of one of the worst recessions in recent history, the Austrian economy is in comparatively good shape. In the third quarter of 2009, the economy started to grow again. Most indicators suggest that the Austrian economy is undergoing a slow but sustainable rejuvenation since the deep crisis of 2008-2009.
This is only partly the result of Austrian economic policy, as the country has only limited room to maneuver within the context of an increasingly globalized economy. However, some recent decisions made at the Austrian and European levels point to profound political reforms being made in financial and real-economic structures, which is a positive development. The need to rebalance public budgets on the other hand leads to important cuts in public spending. If realized contemporaneously – especially with regard to other European nations – and too quickly, these cuts carry the inherent danger of stalling economic recovery.
Economic policy in Austria is determined by different actors. On the government’s side, different ministries usually controlled by different parties responsible for different agendas have to coordinate different political approaches (e.g., between (Austro-) Keynesianism and a more market-oriented approach). In addition, although the social partners (i.e., organized labor and business) have lost some of their power in recent decades, they are still important players in labor and social policy affairs. The need to establish a consensus therefore continues.

The recent years have been characterized by a series of reforms which have aimed at preparing the pension system for demographic change, improving the tax system’s global competitiveness and consolidating the budget. The priorities of the reform program have been adequate given the external constraints: that is, taxes have been lowered particularly in areas where taxpayers are highly mobile (as in the case of multinational companies).
The GDP decline in Germany following the global financial crisis was clearly above the OECD average due to Germany’s marked export orientation. Therefore, the German economy’s export dependency is sometimes criticized as too one-sided. However, the labor market performed remarkably well during the crisis, and the bulk of new jobs were created not in the export-oriented sectors, but rather in the service sector.
What is also remarkable is that the improvement in Germany’s economic performance has not been achieved solely by political intervention, but also by highly responsible industrial relations. Trade unions and employers’ associations have paved the way for a high degree of flexibility in wage settlements, working-time arrangements and other issues. Thus, the competitive situation of each single sector and company is now much better reflected in its specific working conditions, compared to the high degree of uniformity that prevailed in former times. Stable unit labor costs have also enhanced the competitiveness of German exporters.
Beyond these structural successes, the government has also acted quite determinedly in order to steer the economy through the economic crisis. The first stimulus package, launched in November 2008, amounted to €3.9 billion in 2009 (0.2% of 2008 GDP) and €7.1 billion in 2010. The most important elements of the package were a temporary reintroduction of declining-balance depreciation for certain types of investment goods and an increase in public investments. The second stimulus package, launched in January 2009, was significantly larger, amounting to €54.3 billion to be spent in 2009 and 2010. Its measures comprised, inter alia, infrastructure improvements, incentives to buy new vehicles through the car scrappage scheme, a loan and guarantee program for companies, and other measures including subsidies for R&D investments by small and medium-sized businesses (SMEs). The third stimulus package, passed in December 2009, envisaged measures worth €8.9 billion, including increases in the standard child allowance and in child benefits, a reduction in the inheritance tax, a revision of recent tax reforms to ease burdens on medium-sized businesses, and the lowering of VAT for hoteliers. Although all three packages provoked controversial debate, their basic constitution was welcomed by mainstream economic advisors such as the Council of Economic Advisors.
Recent simulations by the OECD suggest that the measures contained in the first and second stimulus packages boosted GDP by around 0.5% in 2009 and a further 0.2% in 2010. Beyond these policies the expansion of subsidies for reduced-hour working programs (Kurzarbeit) had major stabilizing effects due to its positive impact on employment stability and consumer confidence.
Since the beginning of the crisis, the country’s budget deficit and gross public debt have risen substantially, although deficit levels contrast very favorably to deficits as much as twice as large in countries including the United Kingdom and the United States, and also to the relatively much higher deficits in France.
However, major challenges remain to be addressed in the coming years. Labor market reform remains an issue. Budgetary policy must lower structural deficits. Furthermore, the underlying causes of the banking sector problems need to be addressed in a more coordinated manner. In addition, Germany has continuing weaknesses in research, development and education; the unfavorable climate for the employment of women; and an overly restrictive immigration law for non-European Economic Area citizens.

Luxembourg’s prosperity is based on the multinational companies that have established themselves in the country. Contrary to the caricatured image of the country drawn by competitors, the reasons for this cannot be reduced simply to banking secrecy and low taxes. Luxembourg has a competitive business environment, a strategic location in the heart in Europe, a knowledge-based innovative economy, a stable business climate and skilled workforce and, in addition to purely economic aspects, a welcoming society and low crime rates. (1)
All economic actors are aware of these details, and it is the underlying reason and very explanation of the consensual Luxembourg model embodied in the Tripartite Coordination Committee. Apart from the shortfalls and slowness in administration matters, the overall result is successful, as measured by GDP per capita or the many competitiveness rankings where Luxembourg continues to hold top positions. The Competitiveness Observatory within the Ministry of Economy and Foreign Trade keeps track of these rankings, which are used as arguments during business development and prospecting missions. At these occasions, officials like to emphasize Goldman Sachs’s “Growth Environment Scores” where Luxembourg was ranked number one among 170 competitors in 2005. (2)
The business community prefers the Global Competitiveness Index (GCI) of the World Economic Forum, which ranks Luxembourg at 21 out of 133 (GCI 2009-2010) and identifies the most problematic factors for doing business in the country: restrictive labor regulations; an inadequately educated workforce; difficult access to financing; an inefficient government bureaucracy; and an inadequate supply of infrastructure. (3)
April 2010 faced the breakdown of concertation within the framework of the Tripartite conference. This body failed to agree on any of the adjustment measures proposed by the government. Trade unions and employees’ associations have pushed alternate strategies to address the economic crisis. The government has not yet been able to provide a strategy that could be agreed by all social partners.

The Polish economy has recently shown strong economic performance, being the OECD country with the highest growth in GDP for 2009. While this record has partly reflected the country’s lower dependence on external developments and the remaining exchange rate flexibility, Poland has also benefited from a relatively coherent economic policy. The Tusk government succeeded in making Poland even more attractive to foreign investors, and stimulated the economy through an expansive fiscal policy and much needed public investments in preparation of the 2012 European football championship. However, progress with labor market policy, health care reform, pension reform, and research and innovation policy has been limited, and the government failed to commit itself credibly to medium-term fiscal adjustment.

Economic policy since 2002 has focused on getting public finances under control, and on staying within the euro zone’s 3% budget-deficit ceiling. This was seen as the first step before fostering growth. The PSD-CDS center-right coalitions that governed from 2002 to 2005 were able to stay within the 3% ceiling in 2002 and 2003, but were unable to sustain this performance as budget deficits spiraled out of control in 2004 and 2005, with deficits of 3.3% and 6.1% percent respectively. The ensuing Sócrates government (2005 – 2009) retained budgetary consolidation as a key priority, and its austerity measures proved effective until 2007. Budgetary control appeared to coincide with signs (albeit tentative ones) of economic recovery, with growth in 2007 hitting its highest level since 2001 (even if, at 1.9%, it remained below the EU-15 average) and unemployment stabilizing, leading the government to declare that the crisis was over.
However, Portugal’s timid signs of recovery were unable to withstand the global financial and economic crisis in 2008. The economy took a big hit, with a marginally negative GDP growth rate in 2008 (-0.04%) and further recession in 2009 (GDP growth of -2.7%, although this decline was less drastic than the EU-15 average of -4.3%). The impact was particularly salient on public finances (see Budgetary Policy below).
Inevitably this situation accentuated pressure on Portugal, with the country’s debt downgraded by rating agencies in January 2010 (following similar downgrades affecting Spain). The Portuguese government’s response came in the shape of the budget for 2010, announced in late January and approved in March; and particularly in its draft Stability and Growth Program (SGP) for the 2010 – 2013 period. These measures are likely to resolve the budget deficit issue, although further measures were being considered in late April 2010. However, there seems to be little response to the issue of Portugal’s low growth potential. Economic studies point to declining levels of growth in potential GDP in the new millennium, from approximately 3% in 2000 to close to zero by 2008, a pattern caused by falling levels of investment and productivity in the Portuguese economy.

President Lee Myung-bak was elected as an “economic” or “CEO president,” which was a stark difference from previous elections in which economic policies played little role. According to OECD data, South Korea showed one of the OECD group’s strongest recoveries from the 2008 global recession, laying the foundation for solid subsequent growth even if cuts are made in government spending.
At the core of Lee’s economic revitalization policy was his so-called Korea 747 plan – to ensure 7% economic growth during his term, to raise Korea’s per capita income to $40,000 and make Korea the world’s seventh-largest economy. Moreover, a major strategic change under the Lee administration has been to foster innovation in the “green economy.” Thus, the government is supporting innovations in fields it considers green, such as river restoration, solar energy, LED lighting, electric vehicles and nuclear power.
Lee’s economic policies can be described as business friendly, with a focus on large companies and economic stimulus through construction projects. The government has also stimulated exports by allowing a dramatic devaluation of the Korean currency against the dollar, totaling almost 40% between early 2008 and early 2009. Ten years after the Asian financial crisis, in 2008 global financial crisis and the dramatic devaluation of the Korean won almost led to a new debt crisis. But while the government was initially hesitant, it quickly followed the lead of international attempts to provide liquidity to the financial system, implementing a large stimulus package of 6.1% of GDP in 2008, the largest such stimulus in the OECD.
Most certainly, the government will retain its expansionary economic policy stance for the time being, as it seeks to support the recovery. With respect to macroeconomic policy, inflation and job growth are likely to be targets of renewed focus, while the currency’s competitiveness could get relatively less priority due to concerns about its inflationary implications.
The government has done little to arrest real-estate speculation or high real-estate prices, both of which remain sources of substantial concern in Korea. The focus on an export-oriented and construction-driven recovery might also be risky. This strategy makes Korea vulnerable to protectionist backlashes, and prevents an adjustment of the country’s oversized construction sector. To counter these threats, the Korean government has increased efforts to sign trade agreements, particularly with the European Union and the United States.

The period leading up to the financial crisis of 2007 had been characterized by steady growth and generally positive economic developments, for which Chancellor of the Exchequer Gordon Brown claimed significant credit following the Labour’s Party rise to power in 1997. The economic policy framework put in place by Brown (and to some degree already by the preceding Conservative government) emphasized fiscal prudence and granted independence in the conduct of monetary policy to the Bank of England.
Given the comparatively high degree of deindustrialization and correspondingly low level of manufacturing output, economic policy put much emphasis on creating favorable conditions for the financial services industry in which the United Kingdom (and more specifically the City of London) is one of the world’s leaders. A regime of “light touch” regulation contributed to the sector’s growth, to the point at which it eventually accounted for around 8% of UK output and contributed very positively to the country’s balance of payments, in addition to employing more than 1 million people.
Combined with an increasingly lax fiscal policy after the Labour Party won its second term in 2001, the result was superficially strong economic development which was in fact built upon the disregarded risks of a housing price bubble, high levels of indebtedness and a reliance on the financial sector’s corporate tax receipts.
The financial market crisis beginning in 2007 has therefore hit the United Kingdom particularly hard. While the state’s reaction was quick (if not always consistent, especially in the area of monetary policy), the country continues to experience severe problems in a number of areas. Unemployment has increased substantially, though by less than initially feared, and the fiscal deficit has shot into double-digit figures. With hindsight, the economic policy framework of the last decade or so now has to be assessed far more critically than was commonly the case in the heyday of the British economic upswing, before the eruption of crisis.

Like many other countries, the UK was taken by surprise by the suddenness of the systemic crisis in the banking sector following the collapse of Lehman Brothers in September 2008. The direct consequences included several reversals of previous policy rules and stances, including the early decision to inject equity capital into two of the largest banks most at risk of failure (after another smaller bank, Northern Rock, had been denied support from the Bank of England on moral hazard grounds, ultimately forcing it to be nationalized); the elaboration of guarantee programs and massive liquidity injections by the Bank of England; and an extensive program of “quantitative easing” designed to ease monetary conditions. The corollary was a rapid deterioration in the county’s public finances, although it is important to note that the low levels of public debt with which the UK entered the crisis gave greater room for maneuver than was the case for many other countries.
On the other hand, the loss of tax revenue from financial sector and the costs of the bailouts meant that the UK could not afford as much of a discretionary fiscal stimulus as in other countries, although specific measures were taken, such as a temporary lowering of the VAT rate. The UK was slow to show signs of recovery, with a return to growth only in the last quarter of 2009, but the emergency measures can be credited with stabilizing what was a more acute systemic threat than in many other countries. It is also noteworthy that the British crisis management model was emulated by others, even though in all cases there was an (understandable) element of learning by doing, given that economic policy was confronted by challenges that had not been seen for decades.

In spring 2008, the Bush administration implemented a modest stimulus program, based on tax credits, and then undertook measures to bail out financial institutions to stem the financial panic. The major plank involved was the Troubled Asset Relief Program, which was to ring-fence toxic assets or to re-capitalize banks. The Obama administration continued the bail-out policy, and coupled this with a stress test for banks. In addition, the Obama administration in the spring of 2009 passed a comprehensive fiscal stimulus package, which consisted of government spending and tax cuts. In unprecedented industrial policy action, it also restructured major parts of the auto industry and became shareholder in General Motors and Chrysler. The stimulus program did not stop the downturn, but helped cushion against an even more severe slump. It largely helped to avert worse outcomes. According to Congressional Budget Office (CBO) estimates, the stimulus program helped stabilize the economy and boosted output by between 1.5% and 3.5%. As spending in state governments was contractionary, an even greater package would have been justified. Since the summer of 2009, growth has picked up, but there have been signs of weakness. Growth was at 3.7% on an annual basis in the first quarter of 2010, but slowed to 2.4% in the second quarter, prompting fears of an impending stall in the recovery.
While the ultimate success of the stimulus package will be debated for years, there are many indications that the general structure of the plan was constructive. The stimulus plan clearly needed to be large because the economic problem was enormous. A diversified plan was required because it was not clear exactly what would work. And finally, it had to be prolonged, because estimates showed the economy to remain weak for several years. The Obama administration acted quickly and boldly in combating the economic downturn with a fiscal stimulus, sending a message that it would actively use policy to get the economy on the right track. The administration deserves credit for getting the economic priorities right and for stimulus design.

Responsibilities for economic, regulatory and industrial policy are divided among the federal, regional (federate entities) and local authorities. This creates a complex, administrative maze of rules that reduce the clarity and coherence of Belgian government policy. This problem is particularly acute in the electricity or telecommunication sectors, for instance, where business rules are different in Flanders, Brussels and Wallonia. Likewise, environmental and employment policies are different in each region and are seldom coordinated, which creates competition (rather than cooperation) between regions. For environmental and employment issues, the federal government essentially retains the capacity to control income taxation but not active labor market policies. Fine-tuning at the local level also means that regulations can be unstable over time, with additional actors intervening, such as local authorities and supra-local or provincial agencies (intercommunales). For years the government has attempted to simplify administrative procedures to ease the path to business creation and simplify citizens’ lives when dealing with government administration, with very little success. Core and wage inflation has been above German levels for the last 10 years, which implies that Belgium is progressively losing competitiveness with respect to its main trading partner. There is thus room for a lot of improvement. Yet, in spite of these problems, Belgium performs well, displays a GDP per capita that is above one of its main neighbors, and has managed to retain its attractiveness thanks to relatively low tax rates on corporate profits and non-labor income.

In the past, economic growth in the Czech Republic largely depended on inward investment by multinational companies exporting motor vehicles and consumer electronics to the rest of the European Union. Attractions included a geographical location in Central Europe, a good transport and communication infrastructure and a disciplined labor force willing to accept wages below the western European level. Detailed coordination of aspects of economic policy was relatively unimportant to the success of this process. In view of the substantially lower labor costs, the details of tax policy could do little to alter the attractiveness of the Czech Republic. Wage and employment protection policies also made little difference to firms that planned long-term investment. The domestic financial system was also of little relevance for firms financed from outside.

However, inward investors have experienced general shortages of labor (largely compensated for by using immigrant workers hired through recruitment agencies), and of skilled labor in particular. This reflected the absence of an adequate training system and deficiencies in education. It presented a constraint on bringing higher-level activities such as research and development into the Czech Republic. Service-sector activities have been attracted but face a severe constraint associated with the shortage of people with adequate language skills. Official responses have included paying subsidies to incoming companies (even after they have decided to invest), although this contributes little to overcoming the fundamental problems with the labor force. Pay for an employee with language skills in an incoming company is frequently higher than pay for a qualified teacher, suggesting that labor shortages in this area are likely to persist.

The principal policy debates in the Czech Republic have not been relevant to the key issue of moving the Czech economy to a higher level of competitiveness by establishing a more skilled and more innovative labor force. The emphasis on creating a low-tax and low-regulation economy threatens to restrict resources for education and training. In the period leading up to the May 2010 parliamentary elections, the case for a growth-oriented strategy based on investing in new technology and a more skilled labor force received no more than rhetorical support.

The government’s general strategy is to support the future-oriented development of the country’s economy through regulatory policy. After the collapse, this will most likely be done by strengthening the Financial Supervisory Authority (FME), whose role as the supervisory authority in the years before the collapse has been highly criticized. This will, without doubt, also lead to the further strengthening of the capacity and efficiency of the national Competition Authority. The clear-cut assignment of tasks to institutions was decreased in the late 1990’s by the closure of the National Economic Institute (Þjóðhagsstofnun). The separation of the Financial Supervisory Authority and the Central Bank of Iceland may have had the same effect, but merging these two bodies again is already under discussion in the wake of the 2008 collapse.
Following the 2008 financial collapse, Iceland’s economic policy has conformed to an economic reconstruction program supported by the International Monetary Fund (IMF) and the Nordic countries, whose financial contribution to the program is essential to its implementation. The stand-by program supported by the IMF is well designed, combining stringent temporary capital controls to prevent the króna from depreciating further with continued monetary restraint and fiscal adjustment equivalent to about 15% of GDP during 2010 – 2015, taking the form both of public expenditure cuts and tax increases. Implementation of the program has been delayed due to political squabbling in Iceland, thereby delaying the gradual relaxation of the capital controls. Originally, the IMF envisaged that economic growth in Iceland would resume two years or so after the crash. Now it seems clear that recovery will take longer. Because of the depreciation of the króna, a situation expected to last for some time, it will take several years for Iceland’s national per capita income to regain parity with the rest of the Nordic region.
By applying for EU membership in 2009, the government has signaled its intention to abide by European standards and to strengthen Iceland’s institutional setup, including regulatory policy. After the collapse of 2008, the State Prosecutor’s Office and the Financial Supervisory Authority (FME), which failed so abysmally to reign in the banks before the crash, have been strengthened. This will probably also lead to the further strengthening of the capacity and efficiency of the national Competition Authority. This constitutes a significant reversal with respect to previous practice. When the National Economic Institute, a decades-old institution set up to offer impartial economic counsel to the government, was no longer found obliging enough a few years ago, it was disbanded on the grounds that the recently privatized banks’ unfailingly optimistic economic departments, among others, could fill the gap. When the Competition Authority a few years ago raided the offices of oil companies, which were later found guilty of illegal price collusion, the Authority was summarily abolished and then reincarnated under new, more compliant management.

In general, Japanese governments have been able to create an economic policy framework providing certainty to businesses, supporting the corporate sector in creating one of the world´s most competitive economies. This basic trust in the economic policy landscape is also evidenced by the fact that long-term interest rates for Japanese government bonds have remained low, despite the aftermath of the Lehman collapse that affected Japan as well as other countries, and despite the ever-mounting public debt.

These general remarks notwithstanding, LDP-led governments until late 2009, and afterward the new DPJ-led government, have all been challenged by the fact that the export-led expansion of the Japanese economy which started around 2002 came to an end in late 2007, well before the Lehman collapse in September 2008. This fact called for a recalibration of government policies to support the domestic economy. The LDP governments during the reporting period offered an unconvincing response. Both promised to support the domestic economy by giving assistance to disadvantaged regions or social groups. How to finance these endeavors while avoiding a misallocation of resources, such as providing support for small, uncompetitive businesses in the countryside, has been left unsolved.

The parties forming the Fico government had in the past been critical of the “liberal” policies of the previous administration. During the 2006 election campaign, Fico promised to strengthen the state and introduce social measures to soften the impact of structural economic change. After taking over, however, the Fico government refrained from major policy reversals. For one thing, its room for maneuvering was limited by the structural reforms of the previous government and EU membership. For another, the government did not want to put the strong performance of the Slovak economy at risk. The economic crisis, which hit the Slovak economy rather strongly, revealed the weaknesses of the Slovak economy, especially its high dependence on foreign investors and a limited number of economic sectors. The Fico government failed to address these problems.

After his election, President Nicolas Sarkozy promoted a number of radical and immediate policy changes across the board. Recommendations were sourced from a special commission made of national and international experts headed by Jacques Attali, a former advisor of François Mitterrand. This was a serious attempt to introduce long-awaited reforms potentially capable of fostering France’s international competitiveness. The targets were correct, but the reform process was negatively affected by several issues, including a lack of political pedagogy, a lack of prioritization, an unequal distribution of costs and benefits and a somewhat superficial, or badly designed, set of reforms.
Many reforms have been adopted but the magnitude and depth of change has been rather modest, not least due to the global economic crisis. Far from diminishing, the role of the state in the economy has increased; public debt and unemployment have reached highs while the country’s trade balance and its industrial basis have deteriorated. Reforms were urgently needed, but the way they were implemented and the timing overall has largely compromised their potential beneficial effects. The presidential impetus was initially decisive and has permitted the government to adopt many reforms, but the general lack of priorities has blurred the perspective of, while Sarkozy’s governing style has rebuffed, a growing part of the population. Too many reforms have become synonymous with irritation and punishment, a feeling which obviously does not contribute to reform success.

The economic policy of the government in the period under review was guided mainly by the need to respond to problems generated by the global financial crisis. The government has concentrated its activity on several goals: assuring the ability of the banking sector to survive the shock, providing credit to the market and guaranteeing the sustainability of the large existing public debt. Both goals have been achieved; no bank default has taken place, and the state’s conditions for access to international credit in order to refinance its debt have not worsened. To attain these goals, the government has in general tried to keep the expansion of public spending under control, and has provided only limited stimulus to the economy (mainly targeted at the car industry and at domestic appliances during 2009). It has also expanded the amount of resources devoted to sustaining employment levels through the use of salary integration programs (cassa integrazione). Overall, these policies have succeeded in containing the worst effects of the crisis, but the economic policies have not introduced any significant innovations that might make the economy more competitive.
Generally, Italian economic policy is not exactly strategic or forward-directed. Only in the two years of the Prodi II government were incentives introduced that gave a stimulus not only to the consumption but also to new businesses such as green energy and high technology. Italy’s economy, as well as the government serving during the review period, are still benefitting from these provisions, but also from an opening of Italy’s markets to more competition. This too helped to attract foreign companies to Italy. However, the arrival and presence of foreign investors is not so much the result of wise economic or regulatory policy, but is rather attributable to the bad quality and the low level of competition of the country’s essential and general services, which has left big gaps to be filled by foreign companies (e.g., the German company Lufthansa Italia, German energy supplier e.on, the German insurance Allianz, and others).

On the positive side, the general quality of macroeconomic management in Mexico is good. There is a considerable wealth of technical expertise in the finance ministry and the central bank. The authorities were severely tested by the onset of recession in 2008. Mexico was vulnerable because of its close relationship with the United States, its declining oil production and its vulnerability to swine flu. Drug-related crime helped further mute the tourist industry. Nevertheless, the authorities retained effective control of the economic situation, and the economy is now recovering. Also positive is the fact that the authorities have a clear understanding of the necessity of making the Mexican economy more efficient. What holds things back is a mixture of inertia and the historical weakness of the Mexican state. The cost of doing business in Mexico remains relatively high by OECD standards. The authorities are aware of the problem, and have attempted reform in various enterprise-related sectors such as the attempt to attract foreign investment (ProMexico was set up in 2007 to do precisely this), and by enacting a more adequate system of taxation. Competition policy has become somewhat more effective since the passage of a new law in 2006, and the creation of a new state agency, Cofeco, to enforce it. In April 2010, Calderón announced a plan to tighten competition policy further. Unfortunately, organized crime and the related legal insecurity have acted as barriers to investment in the regions most affected. Moreover, illegal money laundering from drug-related activities has channeled huge financial resources into the formal economy, thereby blurring the frontiers between illegal and legal economic activities.

In the 2009/2010 rankings of the World Economic Forum on Global Competitiveness, Spain fell to 33rd place in the world with respect to economic competitiveness, from a rank of 29th the previous year. The government has taken a threefold approach in tackling the economic crisis: Firstly, short-term relief for families and companies was implemented through the so-called Plan E (the Spanish Economy and Employment Stimulation Plan). In addition to support for families, companies and the banking system and some employment measures, Plan E also features specific reforms aimed at modernizing the economy in key sectors such as transport, energy and telecommunications. Second, this modernization supplements a more ambitious approach toward structural reform of the Spanish growth model, in the form of the draft law for a sustainable economy (introduced in March 2010). This proposal focuses on three key dimensions: economic (through an improvement of productivity and competitiveness), investment in social capital and environmental sustainability. Finally, sharp spending cuts have recently been announced, aimed at reducing public expenditure by about €50,000 million in the course of three years (the so-called austerity program).
It is widely believed that the housing bust was only the tip of the iceberg in terms of problems with the national economy, since Spain has long suffered from excessive private consumption as well as high levels of personal debt. The government has been criticized for making a belated, insufficient, patchwork and even incoherent response to the economy’s underlying lack of competitiveness. However, if stopping the public deficit from growing seems now unavoidable, the resulting lack of resources might prove a serious hindrance to those structural reforms that require money (although it may also open a window of opportunity for unpopular structural reforms needed in the labor market, pension system and banking sector).

The 2007 – 2008 financial crisis rippled across the world, and Turkey proved no exception. The crisis had four major effects on the Turkish economy. First, slowdowns in the economies of Turkey’s export markets have meant sharp drops in Turkish exports. Second, developments in world capital markets have reduced capital inflows into Turkey, depriving the economy of its primary growth engine. Third, consumers and firms lost confidence in economic activity, and fears of recession triggered worries about the course of future events. Finally, the easing in oil prices has alleviated the pressure on the current account deficit.
While exports increased 33.7% year-over-year in the period between September 2007 and August 2008, exports decreased by 21.3% during the subsequent year-long period ending in August 2009. In the period between August 2007 and July 2008, $55.6 billion in external capital flowed into Turkey, while a net $2.3 billion in foreign capital flowed out of Turkey during the following 12 months ending in July 2009. On the other hand, the decrease in the price of oil alleviated the pressure on the current account. As a result of these developments, GDP declined substantially. While GDP had increased by 4.3% on a year-over-year (y-o-y) basis between the third quarter of 2007 and the second quarter of 2008, it declined by 6.5% y-o-y during the subsequent 12-month period ending in the second quarter of 2009. The decline in quarterly GDP on a y-o-y basis amounted to 14.5% during the first quarter of 2009. Thus, the global crisis resulted in a very deep recession in Turkey. On the other hand, the current account deficit, which between September 2007 and August 2008 had reached the unsustainable level of $49 billion or 6.6% of 2008 GDP, declined to $14 billion or 2.3% of GDP along with the decline in Turkish GDP.
In Turkey, the central bank decreased the benchmark interest rates considerably, and increased the reserve money. Since the money multiplier was not affected by the crisis in Turkey, the money supply measured by M1, M2 and M3 increased considerably. Nevertheless, the effects of monetary policy remained negligible, as lower rates did not necessarily encourage Turkey’s banks to lend, or firms and consumers to borrow. The credit supply started to grow only during the last quarter of 2009. As the effectiveness of monetary policy in increasing real GDP is questionable, the country tried to complement monetary policy measures with fiscal policy measures. The country increased public expenditures and reduced taxes. But here they faced another constraint. Policymakers realized that measures associated with increasing public consumption, public investment, transfer payments and reducing taxes have to take into consideration the constraints on fiscal sustainability. As a result, they refrained from increasing public expenditures and decreasing taxes to the extent required to mitigate the adverse effects of the global crisis. Instead they choose to benefit from the radical economic policy measures introduced by the rest of the world. And indeed, the introduction of massive and unorthodox monetary and fiscal policy measures elsewhere had their expected effects. By the fourth quarter of 2009 the world economy started to stabilize.
As the economic situation improved in the rest of the world, the Turkish economy started to recover during the last quarter of 2009. Exports started to increase and foreign capital started again to flow into the country. Capital outflow, which had amounted to $6.4 billion during the last quarter of 2008 and $3.4 billion during the first quarter of 2009, turned into capital inflow amounting to $3.9 billion during the second quarter of 2009, $2 billion during the third quarter of 2009, $7 billion during the last quarter of 2009, and $8.7 billion during the first quarter of 2010.
The growth rate for the last quarter of 2009 was 6% and the estimated growth rate for the first quarter of 2010 ranks between 10% and 12%. At the turn of the year, only China’s economy was growing faster than that of Turkey.

During 2008 and 2009, the Irish economy suffered its worst setback in more than 60 years. The impact of the world recession that began early in 2008 was particularly severe in Ireland, and blame for some of this disproportional impact has to be laid at the door of Irish economic policymakers.
The world financial crisis was bound to have a severe impact in Ireland, which is a small open economy, is deeply integrated into global trade and is heavily dependent on its International Financial Services Center for employment and tax revenue. However, the global recession revealed weaknesses in Irish economic policy that aggravated the impact of the inevitable downturn and plunged the country into a crisis from which it has yet to emerge.
The dimension of the current economic crisis is frightening:
• Irish GDP (in real terms) declined by 13% between the end of 2007 and the end of 2009.
• The construction industry shrunk by more than half, and is still contracting.
• The unemployment rate rose from 4.5% to over 13.5%.
• Net immigration to the country was reversed.
• The state of public finances deteriorated sharply. The fiscal deficit reached 12% of GDP in 2009.
• Finally, the banking system is in a “zombie” state, and is dependent on state guarantees to save it from insolvency. A “bad bank” (the National Asset Management Agency, NAMA) has been created to take over the banking system’s nonperforming assets.

NAMA was established in 2009, taking over the first tranche of impaired loans in April 2010. The size of the operation is staggering. The assets involved had a book value in the region of €90 billion, the equivalent of more than 40% of Irish GDP. They are to be purchased by NAMA at a discount estimated to be 47%. This is still above their “long-term economic value.” NAMA’s business plan is based on the projection or hope that the assets underlying the loans it is acquiring will appreciate over the next seven to 10 years, resulting in a long-term profit for taxpayers, who are liable for the securities being issued to the banks in exchange for the impaired assets. Over this period, NAMA will be the world’s largest property management company.
In addition to the taxpayer’s exposure to the risk that NAMA’s business plan falls through, another substantial burden is being placed on taxpayers associated with the need to inject public funds into the banks, as part of the recapitalization required to allow them to meet solvency requirements and begin to function as normal banks. The total amount that will be required is not yet known, but it will be substantial. There is much debate as to whether it might instead have been less costly in the long run for the government to have nationalized banks that were of systemic importance to the economy, rather than to have taken the route of recapitalization.
In assessing the quality of economic policy-making, the most salient event was the near-collapse of the Irish banking system in September 2008. The system was saved by a government guarantee scheme that exposes the Irish taxpayer to an unknown, but very large, liability in order to protect bank depositors. These events proved that the “principles-based” or “light touch” banking regulatory framework in place during the credit boom that contributed to the crash of 2008 was totally inadequate. Shortly before the storm broke, the Irish public was assured that Irish banks were extremely well capitalized. The regulator failed to uncover major irregularities in one of the larger banks. These issues are now the subject of police investigation, but though officials of one of the rogue banks now in public ownership have been held for questioning by the police, none of the protagonists in this affair yet face criminal charges.

As has been evident since the autumn of 2009, when an acute fiscal crisis erupted in Greece, economic policy in 2008 – 2010 was not able to provide a reliable economic environment in Greece. Even though the high annual economic growth rates of the 2000s (4% in 2004 – 2007) improved the country’s competitiveness, and made Greece a more attractive economic location than it was in the 1990s, the Greek economy’s basic structural deficiencies saw no change. Economic growth was not followed by a more equitable distribution of income. The fact that in 2007, GDP per capita stood at $28,423, making Greece the 21st richest country in the world (according to OECD data), does not tell the whole story. In the period under review, the poverty rate remained at 20%, and economic inequalities were not curbed. In addition, Greece was the least competitive among all OECD countries.
The budget deficit amounted to 13.6% of GDP in 2009 and public debt soared to 115% of GDP by the end of that year. Inflation reached approximately 4% in 2008, decreased to 1.2% in 2009, but rose again to about 3% in the early months of 2010, in the wake of the crisis.
Throughout the period in question, the Greek economy continued to suffer from relatively low international competitiveness. Levels of inward foreign direct investment (FDI) are low; the openness of the economy is constrained by various barriers to market entry (as evidenced by the World Bank’s Ease of Doing Business reports); and heavy, inefficient state regulation of the domestic product markets sustain higher costs. A new debate emerged in 2009 about the benefits of opening up the so-called closed professions in order to create more competitive pricing. The new government is expected to introduce reforms on this issue as a result of the EU/IMF loans it has received.
The stability of the macroeconomic policy framework has been repeatedly called into question by doubts as to the credibility of the fiscal data supplied by the government. EUROSTAT revealed that it had questioned the validity of the Greek data five times in the 2005 – 2009 period. The credibility of the data could not be relied upon, it indicated.
The consequence was that international financial markets became alarmed as to the ability of the Greek government to cover its high levels of debt maturing in 2010 and onwards, given that public debt was set to rise to 120% of GDP that year, and was forecast to rise to 140% thereafter. An unprecedented fiscal crisis arose for Greece and the euro zone, prompting an EU/IMF bailout. Thus, the stability of the domestic economic setting was shattered, accompanied by major political and social unrest.
The crisis brought Greece to the brink of defaulting on high levels of maturing debt. This eventuality still cannot be ruled out over the next three years, but the aid package provided by the euro zone countries and the IMF, as well as the new measures announced for those euro zone states in fiscal difficulty, hold out the change of preventing such default.
The Greek economy is largely based on services such as tourism, construction and public sector services (including transportation, education, health, and utilities supplied by public bodies and state-owned enterprises). Roughly three-fourths of the Greek workforce is employed in the tertiary sector. The economy is heavily dependent on imports of energy (oil) as well as imported capital and consumer goods, to the point that in 2009 the total value of exports was just one-third the total value of imports (the value of imports was $61.47 billion, and that of exports only $18.64 billion). Unemployment hovered around 9% in 2009, but had already surpassed the 11% mark by April 2010.