When the European single currency project was mooted in the late 1980s, it was expected to make a large and positive contribution to economic growth. The 1988 Cecchini Report, prepared under the auspices of the European Commission, estimated that ½% of GDP would be saved by the elimination of conversion costs, while a full 5% of GDP would be gained by the decline in risk and uncertainty. This was part of the case for the single currency in the negotiations that led to the 1992 Maastricht Treaty. Over the following decade most members of the European Union decided to adopt the new single currency. Even Greece, which had struggled to meet the convergence criteria (on inflation rates, budgetary positions and so on), was deemed in 2000 to have qualified for the single currency. It entered the Eurozone on 1st January 2001.
Now the prospect is for Greece’s exit from the Eurozone at some point in the next few weeks or months, after less than 12 years of membership. The point of this week’s note is to consider whether Eurozone membership has been worthwhile. The centrepiece of the note is a comparison of Greek and Turkish national output since 1980. Greece was part of the Ottoman Empire until the 1820s, and rivalry and tension between Greece and Turkey are part of both nations’ way of live. The message is simple enough. In the 1970s Greece was significantly richer (in terms of income per head) than Turkey. But over the last 30 years Turkey has enjoyed consistently higher economic growth than Greece and the growth differential has – if anything – widened with time. Greek income per head remains higher than Turkey’s, but Turkey has large inequalities between regions. Nowadays Istanbul and much of western Turkey enjoy living standards similar to those in Greece. Despite being outside the EU and keeping its own national currency, Turkey has enjoyed much faster economic growth than Greece, and is widely expected to continue to do so.
Greece & Turkey: long-standing economic and political rivals
Greece secured its independence from the Ottoman Empire after a war of independence between 1821 and 1827, and ever since Greece and Turkey have been best enemies. For most of the 19th and 20th centuries Greece had a smaller population that Turkey (or of the Turkish component of the Ottoman Empire, until that empire was dissolved after the First World War), but was appreciably richer in terms of income per head. Greeks regarded their nation as part of the advanced Christian West, while Turkey’s geo-political and geo-cultural status was more insecure. Bluntly, Greeks (and most Europeans) considered Turkey to be inferior. Turkey’s relative geo-political ambiguity has been reflected in the European Union’s attitude towards it. Greece joined the European Community in 1981, whereas Turkey has been kept outside on one pretext or other. It is still not a member and is unlike to become one in the foreseeable future.
At EC accession, Greece’s income per capita – expressed in purchasing power parity terms, in current international dollars – was about three times that in Turkey. (The Greek figure was $9,087 and the Turkish $3,078. The concept of “purchasing power parity” is a little complicated, but – in essence – it adjusts the actual figures [at current prices and exchange rates] for the different prices of non-traded services. The figures here are taken from the latest International Monetary Fund database, with the phrase “current international dollars” meaning that the numbers are expressed at the contemporary price level in the American currency.) But during the 1980s Turkish growth appeared to be higher than Greece’s, but Turkey has been afflicted for decades by severe macroeconomic instability. After a particularly harsh downturn in Turkey in the early years of the 21st century, in 2002 Greek income per capita was still more than 2 ½ times the Turkish level.
Turkish growth has outpaced Greek in the single currency period
The introduction of the euro was accompanied by much fanfare about the implied gains in economic efficiency. Output and income per head, and hence living standards, were all supposed to receive an extra boost compared with the rest of the world. Greece did not achieve Eurozone membership until two years after most other countries, but in the early years of the single currency project it seemed to be a fully-fledged member. Given the rapid inflation and strained public finances of Turkey at the same time, most observers would have expected Greece at least to match Turkey (in terms of the growth in income per head) over the next decade or two. The Cecchini report of 1988 – sponsored by the European Commission – had argued that the introduction of the single currency ought to deliver substantial efficiency gains, amounting to 5 ½% of GDP, and that surely ought to bias the growth outcome somewhat in Greece’s favour.
But that is not at all what has happened. Turkey has had faster growth of population and particularly of population of working age, and that has been a major factor working in its favour. Nevertheless, even in terms of output per capita it has delivered faster growth than Greece. When both population and income per capita are combined, the contrast between Greece and Turkey is dramatic. In 1980 Turkey’s GDP was less than 50% higher than Greece’s; today it is more than three times larger. Further, if the IMF
estimates of last September are correct, by 2016 the multiple of Turkey’s GDP to Greece’s will be roughly four times. (And it is worth saying that the IMF estimates of last September now look too optimistic about Greece, while the Turkish economy has continued to expand in early 2012. I am not saying Turkey is problem-free.)
So what did Athens get from signing up to the euro?
In the early years of the Eurozone Greece – like other countries on its periphery – benefited from their new-found financial respectability. Greek banks were able to borrow heavily from the global inter-bank market, help to finance a boom in construction and allowing a sizeable current account deficit to be incurred. Greece appeared to be enjoying impressive macroeconomic stability compared with the boom-bust patterns of its neighbour and rival, Turkey.
But – from the perspective of early 2012, almost five years from the closure of the global inter-bank market in 2007 – the assessment has to be quite different. Turkey, also, has over the last few decades typically been in heavy external deficit. Bursts of above-trend expansion have often been associated with severe over-heating in the construction sector, just as in Greece and other Mediterranean countries. But Turkey has kept its own currency and been able to let the exchange rate move, acting as a cushion against external shocks. The Great Recession did lead to a fall in Turkey’s GDP in 2009, but it was brief and shallow. Turkey has grown during the 2007 – 11 period, whereas Greece has gone backwards.
It is difficult to avoid the conclusion that Greece has gained next to nothing from its Eurozone membership. The better growth performance of its neighbour and rival, Turkey, over the last decade or so suggests that Greece’s departure from the Eurozone would be welcome liberation from the EU’s dysfunctional and unsatisfactory monetary union.
Tim Congdon is the founder of International Monetary Research Ltd.