The Effects of Devaluation on Gross Domestic Product in Greece

Most developing countries have faced the twin problems of a high domestic rate of inflation and a deficit in the balance of payments. The causes of these problems have often been attributed to fiscal deficits, resulting in excessive monetary expansion, and diminishing international competitiveness of the economy. Stabilisation programmes are put into action to cope with these problems. The effects of such programmes are simultaneously exerted on domestic output, the balance of payments, inflation and other economic variables. In Greece, the rate of inflation is very high in comparison with other EC countries. The raw materials and food price boom in 1973 and the two oil shocks contributed to domestic inflation from 1973 on. Other factors have also played a role during the last eight years, such as budget deficits, wage increases and inflationary expectations. The annual average rate of inflation as measured by the consumer price index was 15.2 per cent during the period 1971–81 (compared to 2.1 per cent during 1961–70) and 20.4 per cent during 1982–6. During the years 1986–8 inflation was running at 17.6 per cent after the implementation of the Greek government’s stabilisation programme launched in October 1985. The rate of growth of gross domestic product (GDP) was 4.6 per cent during 1970–81 and 1.6 per cent during 1982–6. The current account deficit was US$ 344 million in 1971, US$ 2421 million in 1981, US$ 1772 million in 1986 and US$ 1010 million in 1988.