Journal Issue

Stabilizing an economy: Greece

International Monetary Fund. External Relations Dept.
Published Date:
September 1966
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Andreas S. Gerakis

From 1953 to 1956, prices in Greece rose appreciably, because of the rise in the price of imports caused by the halving in 1953 of the official exchange value of the drachma, and also because, during these years, the Government permitted considerable wage readjustments. However, price increases came to a halt by the middle of 1956, and thereafter the country enjoyed a prolonged period of stability. Between 1956 and 1961 wholesale prices rose by less than 4 per cent, and the cost of living by about 10 per cent.

This stability was certainly due in part to the exchange reforms themselves. The conviction that a realistic exchange rate had been established inspired a new confidence in the drachma; as a result, the public’s tendency to hasten to purchase goods rather than to hold on to an overvalued and deteriorating currency—which was earlier one of the powerful inflationary factors—gradually subsided. Moreover, the liberalization of imports proved to be an important anti-inflationary influence. It eliminated “scarcity” prices for formerly restricted imports and, by allowing importers to accept credits offered by foreign suppliers, it tended to ease the capital shortage and to reduce interest rates. Furthermore, it helped stabilization by providing the economy with a safety valve permitting excesses of consumer purchasing power over domestic output—which would have otherwise tended to raise prices of domestic goods—to be channeled into imports. While in these and other ways the exchange reforms may be said to have contributed to financial stability, the principal credit for achieving and maintaining that stability is due, of course, to the resolution with which the Government pursued its monetary, fiscal, and other policies. These included a determination to improve the current budget, not to push the development effort to a point beyond the nation’s means, and, in general, to avoid excessive monetary expansion.

Success in the struggle against inflation brought, in addition to price stability, a number of other interesting developments. In the first place, gold, and in particular the gold sovereign, declined in importance in the Greek monetary system; in fact, the Bank of Greece was able to buy considerably more gold sovereigns in the domestic market than it sold. By doing so, the Bank prevented a decline in the value of the sovereign in drachmas which might have made it profitable to export sovereigns to other gold markets in Europe and the Middle East. At the same time it increased the country’s gold reserves.

Second, the public built up its deposits in the commercial banking system; private deposits in commercial banks in 1961 were 18 times as large as they had been in 1952. This growth of deposits enabled the banking system to grant credit to an extent substantially greater than before, both in absolute terms and as a percentage of the gross national product (GNP). It therefore became possible eventually to reduce the maximum rate of interest that the banks were permitted to charge on their loans, while the interest rates charged by lenders other than banks fell to less than half of what these had been in 1952. Furthermore, the authorities were able to eliminate many quantitative and other restrictions on bank lending. They were also able to curtail the central bank’s direct loans to the private sector, which had been having inflationary effects by adding to the money supply and commercial banks’ reserves.

Finally, there was a significant improvement in public finances, attained by determined government efforts. This played an important part in safeguarding monetary stability. Once achieved, monetary stability helped the Government by eliminating a basic budgetary difficulty—that of having to pay higher prices for what it bought than those that had ruled at the time when part of the taxes forming the Government’s revenue had been assessed. Furthermore, it became possible for the authorities to remove gradually some of the subsidies which they had formerly paid, most notably the subsidy on bread. As a result current revenues rose appreciably more than outlays, and the budget for current expenditures shifted from deficit to surplus. The surpluses thus realized were used to finance, in part, a growing investment budget.

Two other developments, both connected with the return of stable prices, were even more important in making it possible to finance more investment. On the one hand, Treasury borrowing from the public and the commercial banks became feasible again, after a long interruption during which Greeks—like citizens of other countries plagued by inflation—had shown no interest in government securities. Indeed, after 1956 the public proved so eager to acquire Treasury securities that issues were sometimes oversubscribed. On the other hand, the Government could now use for its public investments all available counterpart funds. (That is, the drachmas obtained from the sale of goods received as aid from abroad.) In the previous period of instability it had not been possible to use these funds for fear of adding to inflationary pressures.

Effects on the Balance of Payments

Another aim of the Greek monetary reform was, of course, to improve the country’s balance of payments. Exports rose uninterruptedly from $115 million to $243 million between 1952 and 1958. This increase was caused partly by favorable developments unrelated to Greek economic policies, as, for instance, the economic expansion achieved in Greece’s major trading partners—the West European countries. Nevertheless, the establishment and maintenance of a realistic value for the drachma in terms of foreign currencies played an important part. This is clear from the fact that, after the reforms, Greece increased its shares in its export markets at the expense of competing countries, particularly Turkey. (These shares, it should be noted, had decreased appreciably in the preceding period of inflation.)

That the reforms had a significant stimulating effect on exports in the years 1953-58 is demonstrated in a negative way by the considerable decline in Greece’s earnings from exports in the subsequent period 1959-61. Greek exports increased impressively in value in 1956, 1957, and 1958. This would seem to suggest that in the last-mentioned year they still enjoyed much of the competitive advantage they had derived from the 1953 devaluation. The decline that set in after 1958 may be traced to two causes: the currency depreciations carried out by Turkey and Spain, the chief competitors of Greece (see “Economic Man: The Tourist?” in Finance and Development, Vol. III, No. 1, March 1966), and the support given to farm prices by the Greek authorities. Both these factors eroded the price advantage which Greek exports had gained from the devaluation. It should be mentioned in passing that, in order to bolster exports, the Government redirected some of them toward countries with which Greece had concluded bilateral payments agreements,1 chiefly the communist state trading nations of Eastern Europe. However, while the communist state trading nations often paid higher prices for Greek goods than did Western purchasers, they recouped themselves by charging correspondingly higher prices for their own exports. Thus, to some extent, they disrupted Greece’s internal price structure. The communist countries were less exacting in their demands for quality, packing, classification, and sorting of the farm commodities they bought than Greece’s Western customers, but unfortunately this eased the pressure on Greek exporters to make much-needed improvements in export methods. Moreover, the communist countries, instead of retaining for themselves all their imports from Greece, frequently resold them in Western markets at lower prices, thereby reducing the quantities that Greece could sell directly in these markets. It thus became evident that the policy of encouraging trade with Eastern Europe was in some respects more harmful than helpful, and it was eventually abandoned or watered down.

Before the reforms there was a widespread feeling that the official rates for foreign currencies were too low. As a result, there was a very active black market, in which foreign exchange was bought and sold at prices much higher than the official rates. The reforms doubled official foreign exchange rates and the new rates were widely considered as realistic ones, destined to be in effect for a long time. Consequently, activities in the black market declined substantially and the premium formerly paid for foreign currency in this market was substantially reduced. Those who held such currencies no longer had any reason to withhold them from the authorities and to dispose of them in the black market. The result was that, immediately after the reforms, officially recorded receipts from invisibles (that is, receipts from sources such as tourism, emigrants, and shipping) rose sharply, most of their increase no doubt reflecting exchange earnings which had previously eluded the monetary authorities. Thereafter, receipts from these sources continued to increase at a slower but still most satisfactory rate, more than tripling between 1953 and 1961. By 1957, they had surpassed other exports and had become the main source of the country’s earnings of foreign currencies. These developments were not all due to the new, realistic external value of the currency. But there is no doubt that this played an important part. Thus, by making Greece one of the least expensive countries for the foreign traveler, the reforms contributed greatly to the fact that tourist receipts soared from $10 million to $68 million between 1952 and 1961.

Capital Account

Another development in the Greek balance of payments that can be traced to the foreign exchange reforms was a flow of capital into the country, leading to an improvement in the net inflow of capital. This was a remarkable achievement, since it took place at a time when the total of official grants, loans, and reparations received by Greece was declining; in other words, it was due to private capital movements. These cannot be estimated easily from the statistics, but there are grounds for believing that the improvement was substantial—perhaps of the order of $80 million from 1952 to 1961.

Some of this private capital represented a return of funds which Greek residents had exported—illegally—during the preceding years of inflation and overvaluation of the currency. Another part consisted of capital sent back to the mother country by Greek emigrants and invested by them principally in real estate. Yet another fraction, also largely invested in real estate, consisted of money belonging to Greeks who had resided in Middle Eastern countries and, because of political events, were obliged to move themselves and their property out of these countries.

Helpful as this inflow was to the Greek balance of payments, it did not provide much impetus to the country’s economic development. Only a small proportion of it was of the kind that enters a country in order to develop its unexploited resources and to help build up its technical and organizational know-how. In view of the past difficulties which had beset the foreign investor in Greece, this is not perhaps surprising. Yet, by the end of the 1950’s this situation was changing. Investment by U.S. and European firms—attracted by the country’s political, social, and financial stability, its rapid rate of growth, and its over-all good prospects—was rising markedly.


In the period immediately after the reforms, the Greek balance of payments also benefited from a decline in imports; the devaluation made foreign goods expensive to the Greek consumer, and to add to this the Government applied a restrictive monetary policy for some time after the reforms. This stage did not last long, however. Beginning in the latter part of 1953, import payments started rising rapidly; their vigorous upward movement continued, (with some interruption in 1959-60), until 1961, when they were more than twice as great as they had been in 1952. In addition to economic expansion and rising prices, one important reason for this increase in imports was the liberalization policy, which affected them in at least two ways. First, it entailed lower prices for some imported goods which had formerly been restricted in quantity and had, therefore, commanded scarcity prices on the Greek market. Second, the fact that Greek importers were permitted—as they had not been previously—to make use of foreign suppliers’ credits, enabled them in turn to extend credit to their own customers inside the country. As a result, installment sales of imported products—previously uncommon in Greece—increased considerably.

Although the liberalization policy led to an increase in imports which was, in itself, undesirable, it had other effects that were beneficial. As already mentioned, the foreign suppliers’ credits provided funds that relieved the country’s capital shortage and thus pressed interest rates downward. Furthermore, liberalized imports placed the industry of Greece under competitive pressure, forcing Greek industrialists to modernize their equipment, rationalize their methods of production, and keep their prices down. In any event, expenditures on imports, though they rose markedly, remained well within the country’s resources of foreign exchange. Indeed, the net effect on the balance of payments of the Government’s policy of maintaining monetary equilibrium and a realistic external value for the drachma was that the country’s foreign exchange reserves increased from about $72 million in 1952—or less than sufficient to buy three months’ imports at the time—to about $251 million in 1961—sufficient to buy five months’ imports.

The Reforms Helped Economic Growth

The rate of growth of the Greek economy in the postreform decade was high. The real purchasing power of the GNP rose by about 87 per cent. Since the natural rate of increase of the population of Greece was relatively low, and there was large-scale emigration, the purchasing power of income per capita also rose substantially, by 6.2 per cent a year.

One of the most powerful stimulants to growth came from the improved balance of payments. Increased exports, including exports of invisibles, led directly to increased incomes; there were also indirect effects. Successive rounds of income expansion were achieved as the producers of export goods spent a large fraction of their additional income at home, boosting in this way the incomes of other Greek producers, who in turn stepped up their purchases of domestically produced goods. Moreover, as exports of goods and services increased, there was a need for more investment. For instance, the boom in tourism led to substantial investments in facilities for the foreign traveler and a corresponding increase in the incomes of those who constructed these facilities. The capital account of the payments balance also contributed to the growth of income, inasmuch as the inflow of foreign funds provided the basis for greater construction activity and (toward the end of the period covered) brought much needed technical know-how into the country.

Private investment was a second factor in this growth. Between 1952 and 1961 private investment expenditures rose, from Dr 3.7 billion to Dr 11.2 billion, or from 7.5 per cent to 12.1 percent of GNP (all measured in constant 1954 prices). Among the reasons for this increase were the decline in interest rates, the greater availability of credit, the stimulating effect of the balance of payments developments, and the liberalization policy which induced Greek industry to invest more in order to cope with foreign competition. Yet, although private investment rose quite buoyantly, it was in some ways disappointing; it fell short of the not over-ambitious targets of the Government’s development plans. Furthermore, it was devoted largely to the construction of luxury housing.

This being so, it became necessary to expand public investment considerably, from Dr 2.6 billion (5.3 per cent of GNP) in 1952 to Dr 7.0 billion (7.6 per cent of GNP) in 1961. This was a substantial increase indeed, particularly at a time when foreign assistance was curtailed, and it meant that the investment of public money became a third dynamic growth factor. In retrospect, given the degree of price stability and the comfortable balance of payments situation, it might appear that the Government could have done even more without unduly straining the economy. However, some misjudgments made in connection with government projects suggest that an attempt to expand public investment expenditure further might have overtaxed the limited organizational and planning ability of the administration and might have involved waste.

The reforms affected national income in at least two other ways. First, the volume of industrial production rose by almost 110 per cent between 1952 and 1961. This proved the ability of Greek industry not only to survive but also to prosper without the protection afforded by quantitative restrictions. To be sure, the Government extended some assistance to industry in the form of obstacles to imports, such as moderate tariff increases and requiring importers to deposit with the central bank sums equivalent to part of the value of the imports. However, the principal reason for industry’s success in withstanding foreign competition was its own investment effort and the marked increase in productivity which resulted from that effort.

Second, after 1952 there appears to have been a shift toward a more equitable distribution of income. Importers’ scarcity profits and windfall gains on speculative ventures—two prominent features of the earlier period of economic disorganization—disappeared, while increased foreign competition tended to eliminate excessive profits in industry. The reduction in interest rates also helped. Agriculture, a low income sector of the Greek economy, benefited because the reforms made possible increased exports of farm commodities; for the farmer, this meant that he increased his sales and that the prices of his products rose more than his costs. An improved budget situation enabled the Government to raise, in real terms, the salaries and pensions of its employees. In the private sector, too, wage increases outdistanced the cost of living, largely because of the substantial productivity gains in industry. Needless to say, this progress toward a more equal distribution of incomes, coupled with the increase in national income, had salutary effects, not only economically but also in politics. It may partly explain the long period of government stability after 1952, a stability which could not very well have been predicted from Greece’s earlier history of short-lived shaky regimes.

On the whole, Greece fared well under the exchange reforms initiated in 1953. Though these policies should not be given all the credit for the country’s progress, they must certainly be given a handsome share of that credit. They brought a severe inflation to an end. They made possible an improvement in the balance of payments both in its current and in its capital account. Moreover, they contributed to Greece’s high growth rate, thus lending support to those who argue that financial stability is a prerequisite of rapid and sustained economic development. Finally, by leading to greater equality in the distribution of income, these policies strengthened the country’s political framework, further contributing to its economic stability.


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