Article used: https://www.wsj.

com/articles/greek-bailout-ends-but-underlying-

problems-remain-1534874419

The Greek Depression and its austerity measures

The Greek Depression, often known as The Crisis in Eurozone has always

been one of the longest depressions in recent decades. The crisis was mainly caused

by uncontrolled government spending which resulted in a high and unsustainable

sovereign debt. When the sovereign debt bubble finally burst, it was then discovered

that the Greece government had been underreporting its liabilities for years (Barber,

2010). Being a member of Eurozone, Greece received multiple bailout packages from

European Commission, European Central Bank (ECB) and International Monetary

Fund (IMF) to meet its debt obligations and finance its operating expenses. The bailout

received totalled to a sum of approximately € 290 billion (Council on Foreign Relations,

2018). Although the bailout has come to an end in Summer 2018, the Greek economy

remains unstable and Greece continues to struggle standing on its own feet.

In the article, the author mentioned that Greece Government has lowered its

minimum wage rate from €876.6 per month in 2012 to €683.8 per month in 2018

(Wage and year, 2018). This was one of the austerity measures taken by the Greece

Government to gain competitiveness for its export market. As Greece is part of the

eurozone, it adopted the Euro as their sole currency which effectively stripped off their

flexibility in devaluing their currency to gain competitiveness. Hence, the alternative

way out will be lowering its cost of production by cutting wages. However, this policy

has badly affected the household income of the Greek household. This led to many

Greeks favouring the option of migrating elsewhere to earn a better wage. According

to a report by Labrianidis and Pratsinakis in 2014, 1 in 18 Greek Families had one

family member migrated during the crisis (Labrianidis and Pratsinakis, 2014). With

‘Free Movement of Persons’ under the Treaty of Maastricht in 1992

(Europarl.europa.eu, 2018), Greece citizen can work or stay in any member countries

of the European Union. However, some chose to remain unemployed and live on the

unemployment allowances provided as they felt the wage received does not reflect

the work done.

To have a thorough view on how the ‘Free Movement of Persons’ benefited

Greece Citizens in this context, we can plot a two country model specifically designed

for labour market. To begin with, we assume ‘Free Movement of Persons’ doesn’t exist.

In other words, the labour market for Greece and Germany are deemed to be separate

initially. In the diagram below, the x-axis shows the wages productivity of each labour

market while the y-axis represents the number of workers in workforce. For example,

from A to B1 is the number of workers in Greece while C to B2 is the number of workers

in Germany.

As mentioned earlier, the minimum wage rate for Greece is €683.8 per month,

as for Germany, the minimum wage rate is €1498.0 per month (Wage and fixed, 2018).

Thus, we can presume that the wage rate in Greece is relatively lower than Germany

for the same marginal productivity of labours by labelling wage rate in Greece as WGr

while wage rate in Germany denoted by WGe. Marginal productivity of labours

represents the amount by which output increases with each additional worker. In the

diagram below, the marginal productivity of labours for both markets are downward

sloping as more workers are being employed while the capital remains unchanged.
 When ‘Free Movement of People’ was introduced by the European Union,

Greece workers can now move to labour market that offers higher wages such as

Germany. As Greece workers flow in to Germany’s labour market, the surge in supply

of labours puts a downward pressure on Germany wage rate from WGe to Common

Market. This movement will harm the Germany Workers as the wage rate will fall while

capital owners in Germany will gain from this movement as they can employ workers

at a lower cost. While Greece workers flee to Germany, the workers whom chose to

stay in Greece will be better off while Greece face shortage of labour. As capital

owners in Greece must increase the wage rate from WGr to Common Market in order

to retain workers. Ceteris paribus, this movement of labours will go on until the wage

rate is equalised at the Common Market rate.

DIAGRAM 1

Cutting wages is only one among many austerity measures taken by the

Greek government to tackle economic downturn. Greece government has also

resorted to increased various taxes, reduced public sector expenses and spending to

improve the government’s cashflow in order to finance its bailout loans. As

mentioned earlier, Greece being in a custom union has lost its monetary tool to

European Central Bank (ECB) to implement its set of monetary policy that is best

suited for the European Union as a whole. Thus, Greece government can only

improve its economic condition through fiscal policy. Although it has been 8 years

since the austerity measures were introduced, there is still a long way to go for

Greece to be able to stand on its own feet while being under strict supervision on

spending and reforms by the European Stability Mechanism (Aljazeera, 2018).

 References

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