George Alogoskoufis
This article is adapted from one in Greek, published in the Policy Journal, October-November 2023
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The term globalization refers to the free inter-connectedness and inter-dependence of individuals, businesses, and countries around the world. Globalization is driven by developments in technology, communications, trade, the movement of people, and international politics. It is a complex and multifaceted phenomenon that has shaped the modern world in many ways.
Globalization is primarily an economic process of interaction and integration linked to social, political and cultural aspects.
The Cycles of Globalization
Historically, globalization has experienced four major cycles in the last two centuries. The first, the cycle of industrialization, emerged in the 19th century, after the end of the Napoleonic wars. It was driven by advances in transportation and communications technology, which caused a rapid expansion of international trade, capital movements and immigration, and the exchange of ideas. The reduction in the cost of transporting goods, services and people over long distances, due to the development of shipping, railway networks and waterways, the development of communications due to the telegraph, the liberalization of international trade in goods and services due to the reduction of protectionism and the free movement of capital and people between national economies were the foundations of this first major cycle of globalization. These processes intensified after the gold standard prevailed in the 1870s, but this cycle ended abruptly with the declaration of World War I.
The second cycle, that of protectionism, lasted from 1914 to 1945. The interwar era saw a dramatic reversal of globalization due to international conflicts and the rise of protectionism. Despite League of Nations pressure for multilateral cooperation during the interwar years, international trade was disrupted amid trade barriers and the breakup of the gold standard into currency blocs. This cycle influenced but also partially caused the Great Depression of the 1930s and possibly led to World War II.
The third round of globalization began hesitantly after World War II, within the framework of the Bretton Woods system of fixed exchange rates and managed trade liberalization. The Bretton Woods cycle saw the United States emerge as the dominant economic power with the dollar, then pegged to gold, as the basis of a system in which exchange rates were set against it. Postwar recovery and trade liberalization fueled rapid economic expansion in Europe, Japan, and developing economies, and many countries gradually eased restrictions on capital movements. But expansionary US fiscal and monetary policy, fueled by social and military spending, eventually made the system unsustainable. The United States ended dollar-gold convertibility in the early 1970s, and many countries after 1973 switched to floating exchange rates.
The fourth cycle of globalization, the cycle of ‘liberalization’, lasted from the early 1980s until the international financial crisis of 2008-2009. It was associated with the gradual removal of trade barriers in China and other major emerging market economies and unprecedented international economic cooperation, including the integration of the countries of the former Soviet bloc. Liberalization accounted for most of the increase in trade during this period, and the World Trade Organization, established in 1995, became a new multilateral overseer of trade agreements, negotiations and dispute resolution. Cross-border capital flows increased, increasing the complexity and interconnectedness of the global financial system, but a lack of adequate financial supervision contributed to the global financial crisis of 2008-2009.
The “globalization slowdown”, or slowbalization, that followed the global financial crisis was characterized by a slower expansion of cross-border lending and trade, and it is a new cycle that continues to this day.
The Consequences of Globalization
Economically, globalization includes goods, services, data, technology and the economic factors of production, labor and capital. The expansion of global markets freed up the the exchange of goods, services and capital. The removal of cross-border trade barriers made the formation of global markets more feasible. Advances in transportation, such as the steam engine, the steamship, and later the jet engine and container ships, and developments in telecommunications infrastructure such as the telegraph, the Internet, mobile phones, and smartphones, have been major drivers of globalization and have led to further interdependence of economic and cultural activities around the world. Migration is also an important aspect of globalization that is largely caused by the large differences in living standards between countries and is influenced by government policies, mainly restrictions on immigration by rich countries.
For the proponents of globalization the expansion of world markets and the liberalization of the exchange of goods and capital is the basis of growth of the world economy. However, globalization is associated with major economic upheavals, redistribution of income and wealth between developing and developed economies, but also redistribution within developed economies, with unskilled workers adversely affected and skilled workers and owners of capital benefiting. Globalization creates winners and losers and contributes to the redistribution of income and wealth, often in favor of the economically stronger.
The ‘Cycles of Globalization’ and the Greek Economy
In its two hundred years since independence, modern Greece has been affected by all four cycles of globalization.
At the time when the Greek state was taking its first steps in 1828, the first cycle of globalization was already underway. It began after the end of the Napoleonic Wars, accelerated from the middle of the 19th century and ended with the outbreak of World War I.
Greece adopted the international monetary system of the time right from the start, initially the silver standard and then bimetallism. It contracted international loans to fund the war of independence and state building and later founded the National Bank, modeled after the Bank of England, as a mixed issuing and commercial bank which also operated internationally.
The country was connected with the rest of the world through trade right from the start. The current account though was almost permanently negative, as Greece had far greater imports than exports of goods and services. A large part of the trade deficit was financed by receipts from shipping but also capital imports from the Greek diaspora. After the 1890s, emigrants remittances, from the Greeks who had started immigrating to the USA, also became very important.
However, the importance of international trade was significant. Not only did it contribute to addressing the country’s food problem, but at the same time it was a source of growth for Greek agriculture and tariffs constituted the most reliable source of revenue for the state.
The largest part of Greek exports was agricultural products, mainly currants. Due to the insignificant size of Greek industry, most manufactured products were imported. Also, there were large grain imports.
In addition to agricultural products, Greece also exported mineral ores, which by the end of the 19th century approached 1/5 of the total value of exports. In 1866 lead was exported for the first time, a product of the mines of Lavrio, and by 1873 the value of lead exports had doubled. Other minerals that were extracted were manganese, Naxos emery and Theraic earth. On the other hand, exports of manufactured goods represented a very small percentage of total exports.
In the context of the first round of globalization in the 19th century, Greece functioned as a hub of international trade between Western Europe, the Ottoman Empire and Russia. Due to international trade, a series of cities with natural ports developed, such as Ermoupolis in the island of Syros (the most important commercial transit center in the eastern Mediterranean until 1865), Piraeus (which gradually developed into the center of Greek trade and later industry) and Patras (the export port for currants).
These port cities, commercial centers and hubs for the first industrial units emerged as the most important urban centers of the Kingdom of Greece in the 19th century, along with the new capital, Athens.
The impact of the first round of globalization on immigration was also significant. Due to the economic crisis that started in the early 1890s, a large number of Greeks emigrated to the USA. These were a small part of the roughly 60 million Europeans who moved to the resource-rich and population-poor ‘new world’ between 1820 and 1913. Three-fifths of the European immigrants, and almost all of the Greeks, headed to the US. It is estimated that between 1890 and 1914 approximately 350,000 young people, the vast majority of them male, emigrated from Greece. This number constituted approximately one seventh of the Greek population during this period.
The reason for this migration to the other side of the Atlantic was the large differences in real wages and the reduction of the costs and risks of crossing the Atlantic ocean, combined with the absence of restrictions on immigration from the countries of the ‘new world’, such as the USA. The large immigration gradually led to an increase in real wages in Greece, due to the reduction in labor supply and consequent unemployment, but also to a reduction in the real rate of return on fixed capital investments, the productive factor complementary to labor.
Part of Greece’s adaptation to the demands of globalization was the Greek monetary system, which was based on silver, according to the international standards of the time. Only in times of significant fiscal disturbances was the metallic convertibility of the currency abandoned in Greece. After the default of 1893 and the defeat of 1897, the stewardship of the Greek monetary and fiscal system by foreign creditors was formalized through the establishment of an International Financial Commission. This forced Greece to adjust its fiscal deficits and to pursue the appreciation of the drachma, as a necessary condition for its admission to the international gold standard, which had meanwhile been established since 1879.
When in 1910 the drachma became part of the international gold standard, the best days of this international monetary system were already behind it. The first great wave of globalization created in the 19th century collapsed with the declaration of World War I, and so did the international gold standard. However, Greece, with the help of exchange restrictions, maintained the semblance of the gold standard during both the Balkan Wars and World War I, until 1919.
With the escalation of the Asia Minor Campaign, maintaining the gold standard system became impossible. Foreign creditors refused to provide new loans, the ‘Entente’ powers refused to honor promises of financial aid to Greece after the end of the world war, and the path of monetary financing and ‘forced’ loans from the domestic public were the only ones left for the financing of the ill fated Asia Minor Campaign.
After the long period of monetary and political instability that followed the Asia Minor debacle, the country’s foreign creditors once again induced it to seek participation in the international gold-exchange standard, the new system that was to be briefly adopted during the interwar period. The adoption of the gold-exchange standard was considered at that time as the appropriate solution to the international monetary instability that had prevailed following the end of World War I. In the case of Greece, gold exchange standard participation was linked the granting of a loan for the rehabilitation of the 1,5 million refugees from Asia Minor, through the League of Nations.
However, attempts at monetary stabilization through the gold-exchange standard failed both internationally and in the case of Greece, due in part to the outbreak of the Great Depression of the early 1930s. Despite the monetary instability that followed the Great Depression of the 1930s, and the fourth Greek default of 1932, the drachma was pegged to the strongest currencies of the time. Until the declaration of World War II, the country managed to maintain relative economic and monetary stability with the help of restrictions on international trade and capital movements. After all, protectionism prevailed internationally during the 1930s and was one of the main reasons for the long delay in the recovery of the international economy.
After the catastrophe of World War II and a civil war, Greece joined the new international system that was created, having participated as early as 1944 in the crucial Bretton Woods conference that defined the post-war architecture of the world economy. After liberation from the triple occupation in 1944 a new period of monetary and economic instability followed, a consequence of the collapse of the country’s productive, fiscal and monetary infrastructures, as well as the escalation of the civil war from 1946 to 1949. Yet, even during the civil war, economic recovery and reconstruction were pursued with some success, with the help of foreign aid, initially from the British and since 1947, the US, through the application of the Truman doctrine and the Marshall plan.
The Marshall Plan, the American economic aid plan that benefited almost all Western European economies, was critical for the stabilization and the reconstruction of the Greek economy. After the end of the civil war, and a successful stabilization effort in the early 1950s, the Greek economy really took off.
Greece was a founding member of the International Monetary Fund and the World Bank, the GATT, as well as the Organization for European Economic Cooperation, which administered Marshall Plan aid and evolved into the Organization for Economic Co-operation and Development (OECD). In the early 1960s, Greece signed an association agreement with the European Economic Community, which it joined as the tenth member in 1981. Participation in the international economy and international financial institutions was therefore a central choice for Greece even after World War II.
The drachma participated in the Bretton Woods system of fixed exchange rates, at a fixed exchange rate against the dollar for about twenty years. After the collapse of the system in 1973, the drachma was delinked from the dollar, and Greece’s monetary policy became independent. In the 1980s, when the countries of the European Union were building the European Monetary System, the drachma remained in free fall as Greece, despite having become a member of the EU, adopted a loose fiscal and monetary policy, a crawling-peg and periodic one-off devaluations for its exchange rate, in order to support the international competitiveness of the economy. However, this policy ended up in an inflation rate significantly higher than the rest of the European Union, which, combined with the explosion of public debt, destabilized the Greek economy.
In the early 1990s, and after the collapse of the Soviet Union, the second wave of post-war globalization gained strength. For Greece, it was the period in which it abandoned the experimentations of the 1980s and began its attempt to stabilize its economy and participate in monetary and fiscal developments in the European Union. Greece’s participation in this second wave of globalization took place through the EU institutions. and particularly through the liberalization of capital movements that was a necessary condition for its participation in the eurozone.
After a ten-year adjustment effort, the drachma was replaced by the euro, with the country fully joining the eurozone. However, the adoption of the euro took place before addressing the root causes of the large fiscal imbalances, or the problem of the low and deteriorating international competitiveness of the Greek economy. This was the main reason why the initial period of economic euphoria resulted in large external imbalances which, after the international financial crisis and recession of 2008-2009, led to the debt crisis of 2010 and the Greek ‘great depression’ of 2010-2016.
As a rule, modern Greece attempted to embrace globalization in its two hundred year history. But what were the economic effects of these attempts? We shall limit ourselves to post-war globalization for which there is relatively sufficient evidence.
From around 5% of GDP in 1951, average imports and exports almost quadrupled to around 30% in 2000, just before Greece joined the eurozone. This allowed Greece to pursue greater specialization in production, taking advantage of its comparative advantages, as well as external and internal economies of scale, factors that contributed to greater production efficiency and high rates of economic growth. In addition, it led to an increase in economic prosperity, allowing Greek consumers a consumption pattern that would otherwise not have been possible.
If one considers that the importance of international trade in the world economy in the last 60 years has almost tripled, the fact that in Greece it has almost increased sixfold, indicates that Greece has opened its economy to international trade much faster than other economies. This is largely due to the country’s accession to the EU, which led to the complete liberalization of trade with the EU member-states, which are Greece’s most important trading partners.
Greece not only eliminated barriers to trade with EU member-states, but also adopted the relatively low EU tariffs vis-à-vis the rest of the world, eliminated barriers to immigration, at least relative to EU countries, and freed up capital movements.
In addition, as a relatively poorer country of the European Union, it had significant inflows from the Community budget, both from structural funds and the Common Agricultural Policy.
The country benefited financially through transfers from the Common Agricultural Policy (CAP), Mediterranean Programs, and structural funds, although these transfers also had adverse economic side effects, dampening incentives for domestic savings and investment. In addition, the participation in the EEC led to some welcome adjustments of the Greek economy and its institutions. However, all things considered, economic adjustment and the introduction of reforms have been extremely slow.
Before EEC accession, the expectation was that adjustment and reforms would be completed after full membership. Policy priorities changed in the 1980s, when ‘socialist transformation’ of the economy became Greece’s first priority. Economic adjustment and reform could wait. The result was the crisis in the relationship with the EEC in the late 1980s and early 1990s, and the consequent change in Greek economic policy.
However, the reforms and adjustment in the 1990s proved insufficient and ineffective. This was followed by the ‘euphoria’ and ‘complacency’ of the 2000s, after joining the eurozone and the acceleration of economic growth, and the ‘great recession’ of the 2010s, after the international financial credit crisis of 2008-2009 and the debt crisis of 2010.
Despite the great political, social and geopolitical advantages of joining the EU, precisely because of the delays in promoting the required economic reforms and adjustments, the path of the Greek economy after joining the EU in 1981 was particularly disappointing, especially compared to the previous thirty years.
It is therefore obvious that not all the effects of globalization and EU membership have been positive for the Greek economy. The reduction of tariff protection after joining the EU, the liberalization of capital flows in the early 1990s and euro area participation with large fiscal imbalances and low international competitiveness also had significant negative effects. Deindustrialization in the 1980s, high real interest rates in the 1990s and the destabilization of the current account after adopting the euro, eventually led to the ‘great depression’ of the 2010s. The conflict of domestic policy choices with the demands of globalization, but also the macroeconomic and structural imbalances of the Greek economy played an important role in these developments.
The ‘slowdown of globalization’ that has been taking place after 2010 is not expected to have significant negative effects for the Greek economy. The adaptation of the Greek economy to economic globalization was less than successful, both during the 19th century and after its accession to the European Union. Due to its structural weaknesses, fiscal imbalances and its low international competitiveness, the Greek economy was not able to successfully cope with the demands of free international trade and the free movement of capital neither during the 19th century nor after accession of the European Union.
Thus, the current challenge is the promotion of domestic structural reforms that will improve productivity, the fiscal position and the international competitiveness of the Greek economy so that it can respond more successfully to European and international developments.
Prof George Alogoskoufis 