The Greek economy began modernizing in the late 19th and early 20th centuries with the adoption of social and industrial legislation and protective tariffs, along with the creation of the first industrial enterprises larger than artisan shops. Industry at the turn of the century was based primarily on food processing, shipbuilding, textiles, and simple consumer products. Greek economic progress was severely affected from the 1920s to the 1950s by an influx of refugees from Asia Minor, the global depression, Axis occupation, and civil war. Recovery began in 1953 with a drastic currency devaluation and reduction in government spending which brought greater price stability and increased exports. From 1955 to 1963, under Prime Minister Karamanlis, Greece's gross domestic product (GDP) almost doubled. Greece achieved high rates of growth in the late 1960s and early 1970s, which also saw some major foreign investments in Greece.
Since the 1970s, however, Greece has suffered a decline in its rate of GDP growth of output, ratio of investment to GDP, and productivity of investment. Between 1963 and 1988:
-- Real GDP growth fell from 10% to less than 4% per year;
-- Investment as a share of GDP fell from 27% to 16%; and
-- The productivity of investment (inverse of incremental capital output ratio) fell from an average of 0.36 to .08 in the 1980s.
There were several reasons for this. Beginning in the mid-1970s, real labor costs and oil prices rose. In 1981, falling protective barriers as Greece entered the European Community (EC) hurt company profitability and private investment. Government policies also created structural supply-side problems which hampered development. The government elected in 1981 at first pursued expansionary policies, which in the face of supply-side constraints, caused inflation and balance-of-payments problems rather than growth in output or employment. Between 1980 and 1985:
-- Net public-sector borrowing requirement (PSBR) on a cash basis rose from 8% to 18% of GDP;
-- The current account deficit went from 5.5% to 10% of GDP; and
-- Inflation accelerated from an annual average of 13% percent during the 1970s to over 20% percent between 1981 and 1985.
Non-debt capital inflows also fell and external debt increased from 15% to 48% of GDP. This economic performance compared poorly with the rest of the EC.
Growing public sector deficits were financed by direct borrowing. This was either domestic, crowding out the private sector, or in foreign markets, adding to the country's debt position. By mid-1985, the government was faced with rising inflation, a ballooning public sector deficit, and growing balance-of-payments problems.
Greece turned to the EC for help. In October 1985, supported by an ECU 1.75 billion loan from the EC, the government implemented a 2-year "stabilization" program with limited success. Incomes policy bore the brunt of the effort, and real wages fell by 13% in 1986-87. PSBR was cut from 18% of GDP in 1985 to 13% in 1987. Tighter monetary policy cut the growth of bank credit, pushed the public sector to borrow more from non-bank sources, and gradually established positive real interest rates on deposits and loans. The current account deficit fell from $3.3 billion in 1985 to $1.2 billion in 1987, and non-debt capital inflows (plus the EC loan) almost entirely financed the deficit, halting the growth of external debt.
Inflation remained a problem, and GDP growth remained sluggish. Inflation fell from 25% in 1985 to 16% in 1987, well above the target of 12%, and very high compared to EC norms. Real GDP growth lagged and was less than 1% during 1986 and 1987. Nonetheless, by December 1987, a good start had been made. Profits, private investment, and non-debt capital inflows all increased; net external borrowing ceased; and real interest rates were positive. External factors favored these improvements.
However, the good results did not last long, mainly because the program did not address underlying structural problems. Public sector inefficiencies and excessive spending continued to strain the economy. And, in 1988 the government relaxed incomes and financial policies.
The results were unfortunate. Real wages grew by 5%, twice the target rate. PSBR hit 16 percent of GDP due to high public spending and revenue shortfalls. Government borrowing was above target and, by the end of 1988, total public sector debt exceeded 100% of GDP. The money supply grew by 23%, and the drachma appreciated in real terms as exchange rate policy was used to dampen inflation. In the short term, this expansionary policy brought growth. Domestic demand soared and real GDP grew by 4.3%. Total investment increased by 9.3% in real terms, with public investment up 1.6% and private by 12% (although investment was low by historical standards).
But over the longer term, the economy was to suffer significantly. Strong inflationary pressures remained during 1988. Unit labor costs rose more than the GDP deflator, eroding profit margins. Based on relative labor costs, the drachma appreciated by 8.5%, hurting competitiveness. The current account deficit fell to 2% of GDP between 1987 and 1988, but this improvement was due entirely to lower world oil prices. The non-oil trade deficit as a percentage of GDP reverted to its pre-1985 peak, and the current account deficit, excluding oil, widened by 0.6% of GDP.
Greece continues to rely on foreign borrowing to finance its balance-of-payments deficit. Total external debt was $21.5 billion by the end of 1989, and may top $23.5 billion by the end of 1990. This is 40% and 42% of GDP respectively. Greece faces a heavy repayment burden over the next 5 years.
The decrease in consumption caused by the stabilization program limited the rate of economic growth to 1.4% in 1986. In order to encourage third country investment, the Bank of Greece in July 1986 significantly liberalized repatriation regulations for dividends and profits for all new investment in "productive" activities made by US and other non-EC investors. However, EC investors still receive more favorable treatment.
The Greek economy is characterized by a strong services sector (56% of GDP) and a relatively large, inefficient agricultural sector (12% of GDP) which represents 26% of the labor force. Principal agricultural products are olive oil, fruits and vegetables, cereals, tobacco, and wines. Agricultural output increased by 1.5% in 1989 but is expected to decline in 1990 due to adverse weather conditions. The manufacturing, mining, electricity, and construction sector (30% of GDP) represents 20% of the labor force and accounts for 45% of Greece's exports-primarily textiles, cement, basic metals, petrochemicals and pharmaceuticals. Manufacturing output rose by 2% in 1989, and is expected to show a small increase in 1990. Construction registered a 10% increase in 1990. About half of the labor force is self-employed.
EC Membership
Greece is being forced to gradually align itself with EC economic and commercial practices during an extended transition period that began in 1981 following an 18-year period of associate membership. Greece has been granted derogations from certain aspects of the 1992 single-market program, which means delays in full liberalization until at least 1995.
EC membership is affecting all aspects of the Greek economy. Small Greek businesses will have to adjust to the strong competition of large EC firms, while the government will need to liberalize its economic and commercial practices. Also, the Greek agricultural sector has had to adjust to the lower intervention price set by the EC for Mediterranean products. Overall, however, Greece has been a net beneficiary of the EC budget. Net payments to Greece increased from $550 million by the end of 1982 to $1.4 billion in 1986 and to a $2.5 billion in 1989. The European Investment Bank has provided development financing of approximately $300 million annually. Together, these funds contribute significantly to Greece's current account balance, reduce the state budget deficit, and provide resources for investment-primarily in the public sector.
The EC's integrated Mediterranean programs (IMP), announced in 1985, in part to meet Greek objections to the entry of Spain and Portugal into the EC, will increase the flow of development funds to less developed regions of the community, including approximately $1.4 billion in grants for Greece over 7 years. Currently, Greece cannot fully draw on available EC structural funds, which require matching, because of a shortage of public funds.
Energy Petroleum is Greece's largest single import. Based on import statistics for the last 5 years (1984-89), Greece imports an average of about 10 million tons of crude oil per year.
About 75% of imported crude is processed by the two state-owned refineries: Aspropyrgos and EKO, and the remaining 25% by the 2 privately owned refineries: Motoroil and Petrola (mainly export-oriented). The 4 Greek refineries produced about 16 million tons of petroleum products in 1988, of which about 2 million tons were exported.
Greece's main suppliers of crude are Saudi Arabia, Libya, the Soviet Union, and Kuwait. Greece began pumping oil from a modest oil field off the island of Thassos in the northern Aegean Sea in 1981 and is exploring and developing oil reserves found in the Ionian Sea. In 1988, Greece produced 1 billion tons of crude oil from its own fields.
Agreements on future purchases of natural gas are being negotiated with the Soviet Union and Algeria. The Soviet natural gas project will require the construction of a pipeline to be completed in 10 years at a cost of about $1 billion. Algerian liquefied natural gas could be used in the Athens region by 1992. Greece also plans to expand its use of hydroelectric power and lignite burning in power plants. Lignite, a soft, coal-like fuel widely available in Greece, provides about three-quarters of the country's electricity.
Tourism
Tourism is a major source of foreign exchange earnings. More than 8.4 million tourists visited Greece in 1989, injecting more than $2 billion into the Greek economy. US tourists (315,000 in 1989) covered about 4% of total tourist arrivals. Although US tourism increased in the last 3 years, it is still far behind the 1979 levels (600,000 arrivals from the US).
Commerce
Greece's location, maritime tradition, proximity to the Middle East and continuing unrest in that area have attracted regional marketing offices to Athens. The Greek government provides incentives to foreign enterprises conducting business exclusively outside of Greece (so-called "Law 89 companies"). Greece remains a net importer, in part because of its petroleum needs, but exports are significant, constituting about 11.5% of GNP. In 1989, Greece imported $15 billion worth of goods, while it exported $6 billion. Leading exports were textiles, metal products, cement, chemicals, petroleum products and pharmaceuticals.
More than 60% of Greece's trade is with other EC countries. EC membership has obliged Greece to eliminate or adjust many of its tariffs and quotas, making Greek businesses compete more directly with their EC counterparts.
The Middle East (including North Africa) is an important trading partner for Greece, due to Greece's reliance on foreign petroleum. In 1986 14% of its imports came from Middle Eastern oil-producing nations which purchased 11.7% of Greek exports. Greek firms continue to be involved in major projects in the Middle East. However, depressed oil prices have reduced Greece's exports to the Middle East.
In 1989, the United States supplied about 4% of Greece's non-military imports, led by machinery and transport equipment, coal, tobacco, corn, soybeans, fur skins, and iron and steel scrap, and purchased about 6% of its exports, with tobacco, petroleum products, antiques, iron and steel products, and fur apparel the major items.
Shipping Greece is traditionally a seafaring nation and has built a successful shipping industry due to its geographic location and the entrepreneurial ability of its shipowners.
In the 1980s, Greek shipowners began to abandon their national flag in favor of flags of convenience to cut costs and to avoid rigid government policies. The Greek flag fleet shrank from 3,896 ships displacing 42.5 million gross tons in 1981 to 2,002 ships and 20.6 million gross tons in February 1990. The Greek fleet thus dropped from first to fifth in the world league table.
Greek shipping does not play a central role in the domestic economy in that it trades internationally and is only marginally taxed on ship size and not on income generated. Nonetheless, it provides employment, and brings in invisible earnings which help Greece's balance-of-payments problems.
Greece's membership gives the EC 15% of the world's tonnage. The Greek fleet is the largest in the EC, with a third of the community's vessels and about 5% of the world's total tonnage.
FOREIGN RELATIONS
In addition to belonging to the European Economic Community, Greece is a member of NATO and, thus is a defense partner of the United States. Historically, Greece's foreign policy has focused on the eastern Mediterranean, particularly relations with Turkey, Cyprus, and the Balkans.
Greece, Turkey, and Cyprus
The 1974 coup against Cypriot President Makarios, inspired by the Greek military junta in Athens, and the subsequent Turkish military intervention in Cyprus, led to the junta's downfall, the creation of a large Cypriot refugee population, and a divided island. The Greek Cypriot community elects the government of the Republic of Cyprus, which is recognized by most other countries; only Turkey recognizes the regime in the Turkish-occupied territory north of the UN-controlled buffer zone.
The UN Secretary General has a mandate from the Security Council to use his "good offices" to help the Greek and Turkish Cypriot communities reach a mutually beneficial negotiated settlement to the Cyprus problem.
The Republic of Cyprus has received strong support from Greece in international fora. Greece has a military contingent on Cyprus, and Greek officers fill some key positions in the Greek Cypriot national guard. Greece and Turkey enjoyed good relations in the 1930s, but relations began to deteriorate in the late 1950s, sparked by the Cyprus independence struggle. Other issues dividing Greece and Turkey center on the Aegean, involving delineation of the continental shelf, territorial waters, territorial airspace, air traffic control, NATO command and control arrangements, and military forces in the area. Greek and Turkish officials held meetings in the 1970s to discuss differences on Aegean questions, but Greece discontinued these discussions in the fall of 1981. In 1983, Greece and Turkey held talks on trade and tourism, but these were suspended by Greece when Turkey recognized the Turkish-Cypriot declaration of independence of November 15, 1983. After a dangerous dispute in the Aegean in March 1987 concerning oil-drilling rights, the prime ministers of Greece and Turkey exchanged messages exploring the possibility of resolving the dispute over the continental shelf. Greece argues for an International Court of Justice decision. Turkey proposes bilateral political discussions. In early 1988 the Turkish and Greek prime ministers met at Davos in Switzerland and later in Brussels and agreed on various measures to reduce bilateral tensions and encourage cooperation. The Mitsotakis government has initiated a revitalization of the Greek-Turkish dialogue.
Central and Eastern Europe
Greece maintains full diplomatic, political, and economic relations with its eastern European neighbors. Efforts to promote multilateral Balkan cooperation and understanding began in the mid-1970s, and the Papandreou government supported a Balkan nuclear-free zone in these talks. Greece generally has had good relations with Yugoslavia since the early 1950s. Diplomatic relations with Bulgaria were restored in 1965, after a 24-year break, when Bulgaria renounced its claim to Greek Thrace and Macedonia, an obstacle to Greek-Bulgarian cooperation since World War I. Diplomatic relations were restored with Albania in 1971, but the Greek government did not lift the declared state of war with Albania until September 1987. In early 1990, relations between Greece and Albania were strained by reports of mistreatment of the ethnic Greek minority in Albania and an incident in which Albanian police reportedly entered the Greek embassy in Tirana and forcibly removed an asylum seeker.
Greek governments in recent years have pursued improvements in Greek-Soviet relations. Soviet Prime Minister Tikhonov's 1983 visit to Greece reciprocated an official visit by then Prime Minister Karamanlis to Moscow in 1979. Prime Minister Papandreou visited the Soviet Union in February 1985, but a reciprocal visit by Soviet President Gorbachev has yet to take place. Trade with Central and Eastern Europe and the Soviet Union accounted for about 4.3% of Greek exports and 5% of its imports in 1989. The Tikhonov visit concluded with the signing of a 10-year economic and technical cooperation agreement, including Soviet assistance in financing and building a $500 million alumina plant in Greece. The Soviet Union will purchase the plant's entire planned annual production of 600,000 tons for a period of 10 years. The plant is scheduled to be in operation by 1992. In June 1987 the Soviet Union and Greece agreed in principle to the construction of a $1 billion gas pipeline through which the Soviets would supply 80% of Greece's natural gas needs. The two countries also signed a shipping protocol agreement in May 1987.
Middle East Policy
Greece has a special interest in the Middle East because of its geographic position and its economic and historic ties to the area. Greece maintained relations with Israel at a level just below that of full diplomatic representation since 1948, until May 1990, when full recognition was extended. In December 1981, the Greek government raised the status of the office of the Palestine Liberation Organization (PLO) in Athens to a similar level. Greece cooperated with the United States and other countries in the PLO evacuation from Beirut in 1982 and from Tripoli in 1983.
DEFENSE
The Greek armed forces number about 185,000 active duty personnel, of which 142,000 serve in the army, 19,500 in the navy, and 23,500 in the air force. The army includes 1 armored division, 1 mechanized division, 11 infantry divisions, 1 parachute/commando division, and a variety of smaller specialized formations. The navy has 10 submarines, 14 destroyers, 7 frigates, 27 fast attack craft, and other vessels. There are almost 300 combat aircraft in the air force. All Greek males must serve approximately 2 years of military service, depending on the branch.
The United States has had 4 major and 12 secondary defense facilities in Greece which serve important missions, including strategic airlift, training, naval support for the US Sixth Fleet, reconnaissance, storage of reserve materials, and communications. Some 3,700 US servicemen are stationed at these facilities, primarily at Hellenikon Air Base in Athens, the Nea Makri Communications Station at Marathon, and Souda Air Base and the Iraklion Communications Station on the island of Crete. As part of a worldwide structural readjustment, in early 1990 the US announced plans to withdraw from Nea Makri in 1990 and to close Hellenikon in 1991.
Greece joined NATO in 1952. Bordering on the Warsaw Pact and strategically located along the air and the sea lanes of the eastern Mediterranean, Greece plays a key role in the defense of the alliance's southern flank. Following the 1974 Cyprus crisis, the Greek government, in protest, withdrew from NATO's military wing but remained a member of the alliance. In October 1980, an arrangement with NATO provided for Greece's reentry into the alliance's military structure. Nevertheless, Greek-Turkish differences led Athens to withdraw from NATO exercises in the Aegean.
US-GREEK RELATIONS
The United States and Greece have longstanding historical, political, and cultural ties based on a common heritage and shared values. Following World War II, when Greece was threatened by the communist-led civil war, the United States proclaimed the Truman doctrine and began a period of substantial financial and military aid: more than $8.5 billion in economic and security assistance since 1946. Economic programs were phased out by 1962, but military assistance has continued. In FY 1987, Greece was the fifth largest recipient of US security assistance, receiving $343 million in foreign military sales credits.
Relations between the United States and Greece were strained at times during the Papandreou/PASOK years. As Prime Minister, however, Papandreou signed a new Defense and Economic Cooperation Agreement with the United States in 1983 allowing for the continued operation of US bases in Greece and was negotiating toward a new one when talks were recessed in May 1989 for Greek elections. Prime Minister Mitsotakis, shortly after taking office in April 1990, told parliament that his government would attach "particular importance to the normalization of relations with the United States." He added that the conclusion of a new defense agreement would be mutually beneficial. US-Greek negotiators signed a new mutual defense cooperation agreement in July. This entered into force in November 1990.
TRAVEL NOTES
Climate and clothing: Lightweight clothing May-September; woolens October-April. Customs: Greek visas are required of holders of official and diplomatic US passports, but not of visitors holding US tourist passports and intending to stay less than 2 months. Visitors wishing to extend their stay must submit an application 20 days before the expiration of the 2-month period. No special inoculations are required, but health requirements change. Travelers should check the latest information.
Telecommunications: Telephone service within Athens is satisfactory, and calls to the US may be made easily. Athens is 7 standard time zones ahead of the eastern US.
Transportation: Streets and highways in Greece are hard-surfaced; smaller roads are sometimes rough and ungraded. Tourists wishing to drive must have an international driver's license. The international car insurance card is valid if Greece is listed on the card. Intercity and local public transportation is adequate, inexpensive, and crowded at rush hours. Taxis are numerous in Athens, but because they are relatively inexpensive they are difficult to find during rush hours.
Principal US Officials
Ambassador-Michael G. Sotirhos
Deputy Chief of Mission-James A. Williams
Chief, Military Advisory Group-BG Edmond Solymosy
Counselor for Political Affairs-Samuel C. Fromowitz
Counselor for Political Military Affairs-Laurel M. Shea
Counselor for Economic Affairs-J. Michael Cleverley
Counselor for Commercial Affairs-Jerry K. Mitchell
Counselor for Consular Affairs-Danny Root
Counselor for Administrative Affairs-Peter Flynn
Counselor for Public Affairs-Arthur Guiliano
Regional Security Officer-Art Manuel
Defense Attache-Stanley Kozlowski
Labor Affairs Officer-John L. Klekas
Consul General, Thessaloniki-Larry C. Thompson
The US Embassy is located at: 91 Vasillisis Sophias Avenue, Athens 101 60 (tel. 721-2951). The Consulate General is at: 59 Leoforos Nikis (Nikis Avenue), Thessaloniki (tel. 266-121).
Published by the United States Department of State--Bureau of Public Affairs --Office of Public Communication -- Washington, DC -- December 1990 -- Editor: Peter A. Knecht.
Department of State Publication 8198. Background Notes Series -- This material is in the public domain and may be reprinted without permission; citation of this source is appreciated. For sale by the Superintendent of Documents, US Government Printing Office, Washington, DC 20402.(###)
