Thursday, July 2, 2015

Greece: the bad apple of the bunch?

Image by Vicky Brock

The present debate about the Greek financial situation tends often  to pit Greece against the rest of the Eurozone. As an example, Joergen Oerstrom Moeller writes that:

Since 2010 the Eurozone economy has turned around from contraction to growth - the growth forecast for 2015 is 1.5 percent, work to set up a banking union is well under way, and measures constituting bulwarks have been put in place. The little stroke can fell great oakes was a proverb that ominously sounded in the corridors 4-5 year ago; not any longer.

Unless Greece is willing to restructure its economy implementing policy objectives and instruments used by the majority of the EU member countries why should the Eurozone bail it out? What is the virtue of having a member that consistently and continually refuse to bring its economy into a shape similar to the one that the rest of the club is running. Ireland, Portugal, Spain, and Italy have all gone through painful reforms and been rewarded with a much improved economic situation and a promising outlook for the future. What are the arguments for not asking Greece to do the same?

Unfortunately, the data tell a different story. Greece is not alone in having economic problems and all the Southern European countries tend to show similar trends. For instance, in terms of GdP per capita, the Greek decline is sharper than that of the others, but not qualitatively different. (image from Google public data) 

If this were not enough, take a look at the industrial production data (from Bilbo Economic Outlook). Greece is sinking, yes, but so are Italy and Spain, and France is hardly doing better.

There are other data showing similar trends: in short, Greece is not the bad apple of the bunch, but simply the weakest member of a group of countries that could never recover after the 2008 crisis. 

As I wrote in an earlier post about Greece, financial factors may be simply a reflection of a much deeper trouble. And this trouble was already identified long ago in the study titled "The Limits to Growth", published in its first version in 1972. Note how the results of the "Limits" model (below taken from the 2004 version of the study) are similar to the decline observed in the GdP and the industrial production index of the southern European countries.

If the "Limits" model describes the present situation, then the Greek decline is not a direct consequence of problems with the Euro or with wrong policies of the Greek government. Rather, the causes at the root of the decline can be identified as the gradual increase of the costs of production of natural resources - and of energy in particular - coupled with the increasing costs of fighting pollution.

These factors affect the weaker economies first, and there is no doubt that Greece is one. Weaker than others, but not different in its structure. So, the problem cannot be solved by purely financial measures: we need to go to the root of it. We have to free the world's economy from its dependency on fossil fuels and transform it into a "circular" economy, not any more dependent on badly depleted mineral resources. It can be done (it is described, for instance, in this recent report by the Ellen McArthur foundation). But we should have started much earlier;  now it may be too late for Greece to avoid major damage (and, most likely, also for the rest of the world).

h/t Graeme Maxton and Anders Wijkman


  1. Hello Ugo.

    Steve Ludlum over at Economic Undertow coincidentally put up a post making much the same point about resources and eurozone GDP:

    Also, it looks as though the link to the Ellen MacArthur Foundation is broken. I think it should be

  2. Thanks, Democritus. What I present here is a minority view, but I am not the only one - hopefully. I fixed the link in my post, also the link you propose seems to have been renamed as

  3. The reasons for the current Greek quagmire are not as complex as presented. Live within one's means. If not, be prepared to live up to your financial commitments. If you cannot, be prepared for the consequences. Pretending this was all foretold by some academics representation of an economic world in a early computer model is just a bad joke...on academics, computer models, and what we as individuals or collectively understand about personal responsibility.

    1. John, these models tell us exactly what you are saying: that we need to live within our means.

      Before you define the models as a "bad joke", you should at least make a minimal effort in order to understand what you are talking about.

    2. I agree. Box and Draper had this covered quite well, and their general commentary does not require elaboration. When human socio-economic development is represented by exponential growth, when it has been demonstrated that no such thing is intrinsic within said system, it seems completely apropos.

    3. And what models are you talking about? Surely not the ones presented here: none of them assumes exponential growth of the system.

  4. As I understand it, George Box's point was that models are inherently simplifications of the real thing, which we hope will be useful, so the object is not to make models infinitely complex but rather sufficiently complex so as to catch the essence of behaviour that we're interested in. So the core question is whether the model is giving either a predictive capacity for future events or a qualitative understanding of past events. In this regard, if one is objective (and scientific), it is not obvious that the limits to growth models (i.e. the World3 variants) do this - for example, in the graphs given by Ugo, the industrial output drops to 90% of 2001 levels, but according to World3/2004, this will not happen until the latter half of the 21st century. There are many disparities between prediction and observation in most economic model (not least those used by the IMF so frame the Greek bailouts). Nonetheless, personally, I have a lot of time for the qualitative conclusions of the various Limits to Growth studies, but this is effectively a bias (which as a human I'm allowed, as long as I adopt methods in my science to mitigate them) - it strikes me that Ugo is expressing a bias here - which is his right as it is afterall his blog!

    To put it another way, as Einstein said: "Make your model as simple as possible, not simpler" (actually this is a paraphrase of what he said, but captures the essence well). So is the incredibly simplified LTG model of worldwide economic, social and environmental interactions too simple? A good scientist must at least grant that it's an open question.

    Ultimately, I think the core problem (with the arguement in the threat, not Greece per se) is that economics is not a science (yet?). Here’s a quotation from another Nodel Laureate, Richard Feynman about social sciences : “Because of the success of science, there is, I think, a kind of pseudoscience. Social Science is an example of a science which is not a science; they don’t do things scientifically, they follow the forms – oh you gather data, you do so-and-so and so forth but they don’t get any laws , they haven’t found out anything... they’re intimidating people.” There's a Youtube video of this if you're interested I'll find it for you.



Ugo Bardi is a member of the Club of Rome and the author of "Extracted: how the quest for mineral resources is plundering the Planet" (Chelsea Green 2014)