Fiscal austerity and export performance: The case of Greece

The adoption of the euro by Greece has been associated with loss of competitiveness and generation of large and persistent current account deficits and external debt, which eventually led to a debt crisis in 2010. In an effort to restructure the economy, many hopes were placed on the growth of the exporting sector. One of the pillars in this effort has been the internal devaluation instigated by fiscal austerity. This, along with a series of structural reforms, is supposed to reduce wages and prices, restore the lost competitiveness of the tradable sector through a real exchange rate depreciation, reallocate resources to the production of exportable goods, raise exports, eliminate current account deficit and reduce the external debt. However, the performance of Greece’s exports has been a large disappointment. The numbers indicate that it did not work as expected. Despite the significant decline in wages and unit labor costs and an initial increase in exports at the first period of the Greek debt crisis, there has been a significant slowdown during the last year. Among other factors, some economists argue that the unprecedented fiscal contraction imposed by Greece’s creditors has prevented export growth. This study attempts to evaluate the impact of fiscal austerity on export performance. We expect to find that Greece’s exports have been negatively affected by: (i) Failure to reallocate resources from the non-tradable to tradable sector (ii) Insufficient price adjustment despite the significant decline in real wages, (iii) Credit constraints faced by Greek exporters and (iv) Euro appreciation.