George Alogoskoufis

Working Paper no. 7/2023, Department of Economics, Athens University of Economics and Business


This paper reviews, analyses and interprets the determinants and the implications of the twin, fiscal and current account, deficits in the history of modern Greece.

The analysis focuses on the determinants and the dynamic interactions among the twin deficits, domestic monetary regimes, and access to international borrowing.

Throughout its two-hundred-year history, modern Greece was characterized by prolonged periods of low economic growth, monetary instability and sustained fiscal and external deficits. These often led to high inflation, international over-indebtedness, and sovereign debt crises and defaults.

Current account deficits have been a consequence of the shortfall of domestic savings relative to investment. The only exception was during the 1950s and the 1960s. Until the 1950s the main drivers of fiscal deficits have been the occasional military mobilizations and wars because of the pursuit of the grand idea, the two world wars and a civil war. After the late 1970s, the main driver of fiscal deficits has been the attempt to redistribute income and wealth and create a welfare state, in the pursuit of great equality.

Regarding the monetary and financial implications of the twin deficits, two are the main conclusions:

First, when Greece did not have easy access to international borrowing, fiscal imbalances led to monetary destabilization and inflation.

Second, when it did have access to international borrowing, fiscal deficits were generally larger, led to external deficits and, eventually, sovereign debt crises and defaults.

The monetary and exchange rate regime also mattered. Currency convertibility or participation in a fixed exchange rate regime acted as a constraint on the monetary financing of deficits but led to higher international borrowing. When this was not possible, Greece resorted to suspensions of currency convertibility and adopted flexible exchange rates. This allowed for monetary financing of the deficits and led to currency depreciations and inflation.

In addition, historically, the twin deficits acted as constraints on the domestic investment rate and hence the growth of real per capita income. The 1950s and 1960s were the only prolonged period in which the twin deficits were low and did not act as a constraint on domestic macroeconomic developments. As a result, this was the only period in which Greece enjoyed high economic growth, combined with monetary stability and external balance.


This paper is part of an ongoing research project on the historical cycles of the state and the economy of modern Greece. The author would like to thank Chrysafis Iordanoglou, Andreas Kakridis, Pandelis Kammas, Kostas Kostis, Frangiskos Koutentakis, Sophia Lazaretou, Eleni Louri, Ioanna Pepelasi and Apostolis Philippopoulos for helpful comments and discussions, as well as participants in a workshop at the Athens University of Economics and Business for their comments and remarks.

© George Alogoskoufis