During the seventies in Greece there was a rapid economic growth that was fueled by a sustained development of internal demand. However, following the second oil shock and the slowdown in growth in the rest of the world, the situation has changed radically.
Indeed, the 1980-83 period was characterized by stagnating income, inflation rates of over 20% and high current account deficits. The unemployment rate increased rapidly from less than 2% in 1979 to nearly 8% in 1983. 1981 also saw a sharp increase in the government deficit, reaching 11% of GDP. Also in the following years the fiscal policy was strongly expansive and was used to support consumption through the provision of subsidies, to increase employment through hiring in the public sector and to cover the losses of numerous public enterprises. During this period, monetary policy was also accommodative and interest rates were negative in real terms, discouraging saving.
In the two-year period 1984-85 there was an acceleration of economic growth which remained at around 3%. This recovery was triggered by the rapid development of foreign demand, but subsequently the economy was driven by domestic demand, stimulated by the expansionary financial policies adopted in view of the general elections of June 1985. In particular, the fiscal deficit widened rapidly to following an expansion of public spending, reaching 14.5% of GDP. The strong economic expansion has also led to a sharp deterioration in the current account deficit.
In October 1985, a two-year consolidation program was adopted which aimed at reducing the external deficit and lowering the rate of inflation. The main measures adopted in this regard were: a) a depreciation of the exchange rate of 15% and the obligation to establish a semi-annual non-interest-bearing deposit equal, depending on the case, to 40 or 80% of the value of some products imports deemed non-essential; b) a modification of the wage indexation system, which provided for the exclusion of the effects deriving from the increase in import prices and the adjustment of wages on the basis of planned inflation rather than that recorded in previous months; c) spending reductions and fiscal tightening to significantly reduce the public deficit; d) restrictive monetary policies. The program received financial support from the EEC which granted Greece a loan of ECU 1.75 billion.
Some positive results were achieved in 1986: the government deficit fell from 14.5 to 12.6% of GDP and the current account deficit was halved, thanks in part to the sharp drop in the price of oil. These results consolidated during 1987, when inflation also fell.
However, the stabilization program has had a negative impact on economic growth. In this regard, the modification of the indexation system has caused a reduction in real wages which has favored an increase in international competitiveness but also a contraction in domestic demand. However, the program managed to restore confidence to economic operators, favoring a resumption of investments in 1988 which, together with a more expansive fiscal policy, favored a recovery in production.
In 1989 there was a worsening of the economic situation, caused by expansionary financial and wage policies. Indeed, the public deficit has risen to around 18% of GDP. These policies have caused a sharp increase in the current account deficit and in the rate of inflation. In 1990 there was a further worsening of the general economic situation: while GDP remained practically constant compared to the previous year, the inflation rate returned to the levels of the first half of the 1980s, mainly due to strong increases. labor costs, various administered prices and indirect taxes. All this had consequences on the current balance, which deteriorated further.
1991 saw only slight improvements in the main economic indicators (with the exception of the unemployment rate which increased further). Restrictive monetary policies have been implemented to control the money supply, while fiscal policy has produced lower than expected results with regard to the government deficit and the fight against tax evasion.