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Geography matters: The impact of austerity and the path to recovery

By Vassilis Monastiriotis

After fifteen years of fast growth and, by Greek standards, monumental achievements (from EMU accession in 2001 to winning the UEFA Championship in 2004), Greece has found itself at the aftermath of the global financial crisis of 2008/09 again at the epicentre of global attention. But this time the publicity is unintended and for all the wrong reasons. Following notoriously poor management of its public finances, that culminated in the revelation in the Fall of 2009 of chronic misreporting and under-stating of its fiscal figures, the country became subject to increasing market pressures that raised its government bond spreads to unmanageable levels and led it, in the space of only a few months, to ask for a rescue package (effectively, a bail-out) by its Eurozone partners. Indeed, in May 2010 Greece was signing a Memorandum of Understanding with the EU-IMF-ECB ‘troika’, setting the conditions for a €110bn loan that would help the country meet its financial obligations to 2012. The Memorandum imposed a series of conditions for fiscal and regulatory measures aiming at consolidating the public finances and introducing structural reforms to rationalise economic governance and raise competitiveness.

What happened next is by now well known. The Greek government was slow to realize the magnitude of the problem and (owing to the Eurozone’s own institutional and political constraints) pursued half-heartedly a set of austerity measures which eventually became all the more pervasive pushing the economy into an ever deepening recession. Uncertainty about the true intentions of the Eurozone kept fuelling market speculation making the Greek debt ever more unserviceable and requiring ever harsher budgetary measures. In this climate, and with the socio-political situation in turmoil, structural reforms have been slow, often mis-targeted and almost always poorly communicated; while in the space of two years Greek GDP fell cumulatively by over 10% and the Greek public debt rose by an astonishing 60% (and rising). What will be the ultimate implications of this for Greece is still unknown (although it seems increasingly obvious now that an exit from the Eurozone is becoming inevitable). But at least now the criticality of the situation for the national economy is well appreciated.

Much less appreciated, however, if at all, are the spatial implications of austerity. Greece is a country of vast geographical divisions. Its GDP data do not fully reflect this – but in many respects Greece’s economic geography has the characteristics of a developing country. Out of 11 million residents, around four million live in one single city (the capital, Athens) accounting for almost 50% of national GDP. Outside this, with the exception of two or three semi-urbanised regions, some 25% of the population is still involved in agricultural activities, producing just 5% of national GVA, while nationally manufacturing accounts for only 13% of GVA. Two in five working-age Greeks are inactive. Of the rest, one in ten is (was: now unemployment has climbed to 16%) unemployed and one in three is self-employed (typically small-shop owners in family businesses). More than a quarter is employed in the public sector (including state-owned utilities and enterprises), leaving salaried employment dismally at less than 30%. Industrial production is also heavily concentrated in or around the capital, which also accounts for 85% of all FDI in the country. The economic landscape is thus extremely skewed. Human, physical, financial and political capital are all concentrated in a single urban agglomeration and almost all other areas have singular and deep dependencies: the south Aegean islands on tourism, Western Macedonia on (state-owned) energy production, Eastern Macedonia on public transfers, the North Aegean and Western Greece on public sector employment, and most of the remaining areas on agriculture.

In this landscape, the austerity measures of 2010/11 have remarkably uneven spatial implications. In a paper published recently in the Cambridge Journal of Regions, Economy and Society, I have examined this unevenness generated by the vast compositional differences that exist across the Greek economic space. The collapse of public investment, which was originally to fall by 7% but has now more than halved (and became even more concentrated) affected much more dearly the north-western and north-eastern regions of Western Macedonia, Ipeiros and the North Aegean. The retraction of state benefits (transfers to households) has affected deeply the region of Eastern Macedonia and Thrace (in the north-east; and to a lesser extent Crete in the south). The pervasive cuts in public sector pay (already by 14% of average pay, with more cuts being currently implemented) and employment affect disproportionately those regions that are most dependent on the public sector: the northern (east and west) regions mentioned above, as well as two regions in the western periphery (Western Greece and the Ionian). Similarly, the vast increase in taxation (VAT rates rose to 23%, the non-taxable income threshold fell by 40% and a series of flat-rate levies were introduced) affects more strongly the regions with high concentrations of low household incomes: the same regions as above (including also the Peloponnese).

It is of course no accident that these effects concentrate in the least dynamic and more backward regions of the country. The measures have been applied horizontally and are largely counter-distributive. It follows that the more vulnerable regions and those that are more dependent on transfers from the centre are to be affected more dearly. But this is not the end of the story. The uneven geography of the effects of austerity creates cumulative pressures to the ailing regions that – if policy is not reversed – may also compromise the ability of these regions to recover. In a country with already weak equilibration mechanisms (migration, capital mobility, price adjustments) and in an environment of illiquidity and disinvestment, even if the recession is to lead to falling relative prices and costs in the backward regions, this will not generate sufficient capital flows to recover local demand. Instead, new investments (if present) will tend to concentrate in the least vulnerable areas (i.e., the capital), as ‘prudent’ investors will move away from risk diversification (investing in a portfolio of localities) towards concentration to areas where demand is still vibrant (in relative terms). A Harris-Todaro type urban migration movement may follow, where the new cohorts of unemployed in the periphery will be attracted by the higher employment opportunities accruing from urban density (in a Marshallian sense) thus reinforcing the collapse of local demand in the periphery. Relative concentration will then follow its cumulative causation path (of a Kaldorian type), with productivity growth remaining stronger in the centre thus attracting more capital and more skilled migration there. Diversified regions and regions with relatively more vibrant external demand (exports, tourism) will be in a better position to weather these effects. In the Greek context, these are the regions of the capital (Athens/Attica) and the South Aegean – exactly the ones that are least affected by the austerity measures.

Of course, this is a scenario rooted in a largely Keynesian theoretical understanding. In practice, equilibrium forces do find their ways – and reality is rarely as simple as theory. The pervasiveness of the austerity measures in Greece and the social tensions that they create are already pushing some away from the centre and towards the less urbanised periphery – where family ties and low housing costs create opportunities for survival that are not on offer in the centre. But as the path to austerity continues, even these survival tactics may prove ephemeral. In the absence of spatially designed policies, that will understand the nature of spatial imbalances and address them in a systematic way, it is almost perverse to expect that market forces alone will produce equilibria that will be economically optimal, let alone spatially balanced and socially desirable: market concentration will intensify the underutilisation of resources in the periphery and will lead to more dependence.

In this context, policies for balanced economic development are not some kind of luxury; they become a necessity. An exit from the crisis requires investing large and investing in economic diversity: not throwing money blindly into the economy, but investing to create the functional-spatial complementarities that can recover domestic demand and reconstitute productive capacities and profit opportunities for private investment. The negotiations between Greece and its Eurozone partners in July 2011 opened a path to this, by introducing the idea of a new “Marshall Plan” for Greece, involving some targeted ‘strategic investments’ from countries like Germany and the early release of funds allocated to Greece through the EU Structural Funds. Whereas fiscal consolidation and structural reforms still are – and must remain – very much at the centre of the policy agenda, what is needed now is the translation of these ideas into practice, with targeted investments that will have a clear strategy and spatial character. Investments that will allocate resources where capacities are underutilised and becoming thinner; investments that will increase the diversity of the Greek economy and raise its resilience. Without a well-thought spatial design, any new measures, even of a Keynesian character, will only have a limited effect as they will maintain the spatial and other imbalances that characterise the Greek economy and will make a recovery more difficult and less sustainable.

Vassilis Monastiriotis is Senior Lecturer in the Political Economy of Southeast Europe at the European Institute, London School of Economics. His research encompasses the areas of applied economics, political economy and economic geography and focuses on issues of economic policy, economic development and growth, regional disparities, local labour markets and labour market regulation. He is affiliated to the Hellenic Observatory and the Spatial Economics Research Centre (both at LSE) and has published in a variety of economics and regional science journals. You can read his paper ‘Making geographical sense of the Greek austerity measures: compositional effects and long-run implications’, published in the Cambridge Journal of Regions, Economy and Society, in full and for free here. You may also be interested in this OUPblog post by Julie MacLeavy.

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