How Greece’s economy is structured and how its output has collapsed

In the past year, enormous attention has been given to Greece’s debt problems, its relations with international creditors, and the possibility that Greece might default on its debts and even exit from the Eurozone. Now that the fears of a “Grexit” have receded, the focus needs to shift to the question of how to bring investment and growth back to the economy.

Here we look at the structure of the Greek economy and at the decomposition of the output collapse in recent years. We identify ten key facts about the economy – ten ways in which Greece stands out relative to other EU countries and especially vis-à-vis EBRD countries of operations (COOs) within the EU.

1. Greece’s economy would benefit from further diversification Four major sectors (out of ten) account for almost 80 per cent of the economy: domestic trade, transport and food services; public administration, education and social services; real estate activities; and industry. By this measure, Greece has the least diversified economy among all EU countries (alongside Lithuania). Since the outbreak of the crisis in 2008, domestic trade plunged by ca. €20 billion, but tourism-related real estate activities and industry remained resilient. The professional sector accounts for just 5 per cent of value added, construction only 2 per cent (a decline by over €10 billion in the crisis), finance and insurance 5 per cent and ICT a mere 4 per cent share (among the lowest in the EU). When it comes to ICT, Greece resembles more the new EU member states from Eastern Europe than the “old” EU-15.

Structure of economy, per cent of gross value added

Source: Eurostat.

2. Industry accounts for a low share of GDP. At 11.6 per cent, the share of GDP accorded to industry is the third lowest in the EU, above Cyprus and Luxembourg only, and similar to Malta. In other EU EBRD countries of operations (except for Cyprus) the share is typically around 25 per cent on average. The role of industry is perhaps the main difference between the the Greek economy and the economies of other EU EBRD COOs (or EU countries in general). Sub-sectors include: manufacturing, at 8.5 per cent, utilities at 2.7 per cent, and mining and quarrying at just 0.4 per cent share.

3. Manufacturing is mainly related to labour-intensive food processing. This is quite different from the situation in most other EU EBRD COOs, among which one can identify three broad groups. The first group represents the countries with a large industrial basis, usually developed in the time of the Austro-Hungarian/Prussian Empires, and further advanced during the socialist era. It consists of the countries in Central Europe, which rely on the tech-intensive automotive industry, machinery and electrical equipment, and which are well integrated into the German supply chain. The second group of countries include two Baltic countries and two SEE countries, with less of a comparative advantage in manufacturing. With only 8.5 per cent of its economy devoted to manufacturing Greece is the least industrialized country in continental EU (except for Luxembourg). Almost two-thirds of the manufacturing sector consists of three subsectors: food, petroleum and basic metals processing.

 Structure of manufacturing, per cent of gross value added

Source: Eurostat.

4. Real estate related activities account for one-fifth of economy. The relative importance of the real estate sector in Greece is almost twice the average for other EU countries. Renting and operating of real estate is the largest subsector within the real estate activities. This sector showed the strongest resilience during the crisis, reflecting Greece’s importance as a major tourist destination. With almost 20 million foreign arrivals per year, the tourism industry, with its strong comparative advantage, represents the most reliable driver of growth for the Greek economy.

5. The public sector is relatively large. Public administration, education and social services account for more than 20 per cent of economic activity, whereas the figure in other EU EBRD countries of operations is 15 per cent on average. The difference can be explained by looking at public administration (including defence), which accounts for 10 per cent of economic activity compared to just over 6 per cent on average in other EU EBRD COOs. This figure is ripe for reduction as the new bailout programme requires significant cuts in military spending.

6. Exports and imports are highly concentrated on oil products. Oil accounts for nearly 40 per cent of both imports and exports, with crude oil typically being imported and refined oil exported. Almost half of the petroleum is imported from Russia, while a quarter is exported to Turkey. Food (especially vegetables and fruit), chemicals, steel and aluminium, are among the major exports of goods. Machinery and transport equipment, including electrical machinery and road vehicles, are the second most important import category (after oil).

Structure of exports and imports, per cent of total

Source: UNCTAD.

7. Export destinations have become more diversified in recent years. Although exporters, like other agents in the rest of the economy, have suffered sharply in recent years, some have found the ways to redirect some of their exports to non-European markets, making the country less dependent on Eurozone markets than before. Roughly speaking, Greece now exports about 1/3 to neighbouring SEE (including Turkey) countries, 1/3 to the rest of the EU (excluding neighbouring SEE) and 1/3 to the rest of the world – see Figure 4.

 Exports of goods by destination, per cent of total

Source: UNCTAD.

8. Exports to Turkey have grown significantly in importance in the past decade. In 2006 about 5 per cent of Greek exports went to Turkey; by 2013 the percentage had risen to 12 per cent. Petroleum makes up for more than 70 per cent of exports in goods from Greece to Turkey. This is followed by textiles fibres, plastics and aluminium.

9. Spending on restaurants, hotels and clothing has been slashed. During the crisis, private consumption has fallen in line with GDP, but some sectors have been hit harder than others. Private consumption declined from ca. €160 billion in 2008 to €125 billion in 2014. Restaurants & hotels, and clothing & footwear, were the sectors that suffered the most, with a combined loss of €20 billion (from €41 billion in 2008 to €21 billion in 2014). The only sector where spending has risen between 2008 and 2014 is the electricity sector, mainly as a result of price increases introduced during the first and second bailout programmes.

Private consumption by different sectors, EUR billion

Source: ELSTAT.

10. Investment has dropped by two-thirds during the recession. In 2008 gross fixed capital formation was nearly €60 billion; in 2014, it had fallen to just €20 billion. Half of this dramatic decline came from the drop in transport equipment investment, but investment in all other areas fell too, including agriculture, metal products and machinery and construction. The size of the investment drop is even starker when compared with the other EU EBRD COOs. During the boom pre-crisis years, the investment share of GDP was around 27 per cent in Greece, a few percentage points below the average of the EU EBRD COOs. By 2014, investment as a share of GDP in Greece was just 10 per cent, less than half the average for other EU EBRD COOs.

Figure 6: Fixed capital formation