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In 2011, we emphasised the ‘perfect storm’ character of the crisis hitting Greece’s economy concurrently with adverse demographic developments beginning to act as a drag on rather than a force for growth, as it had been in the 30 years up to 2011 (Figure 1). From 1970 to 2004, increases in the labour force contributed three-quarters of a percentage point to growth (van Ark et al., 2007). At the time we pointed out that this trend would be reversed in the coming 30 years. The latest Eurostat population projection (EUROPOP, 2013) suggests an even starker picture: over the next 25 years: until 2040, the working-age population will decrease with more than 1% annually.
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It is possible to mitigate the effect of the negative trend in the working-age population if labour-market participation increases for persons aged 20 to 64. This is what labour market and pension reforms are supposed to facilitate. [...]
Similarly, immigration can alleviate the demographic pressure in the medium and long term if integration is well managed. Here Greece has traditionally done a successful job. [..]
In addition to adverse demographics, we reiterated the point of a ‘small closed economy’ (Alcidi & Gros, 2011; Gros, 2011) and how the structure of the Greek economy with a small tradeable sector is likely to be a weak catalyst for growth in the near future. [...]
The lack of export’s sensitivity to wage devaluation may also partly be grounded in the structural workings of product markets, effectively limiting entrants and/or price competition (Gros et al., 2014).
Thus, developments so far cause us to be even less optimistic about Greece’s medium-term growth prospects. Moreover, other important determinants of long-run prosperity, such as quality of institutions and human capital, are not particularly favourable to Greece either.
Institutional quality is notoriously poor in Greece. [...] The situation is no less different for human capital. Raw indicators of human capital in the form of educational attainment levels are only slightly below EU28 average for 25-54 year olds, although with a somewhat higher share of low-skilled. [...]
These observations point to the fact that even with substantial debt relief Greece is likely to face difficult times for the foreseeable future.