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The Business Cycle between Greece and Eurozone

Spread of the financial crisis from the US to the real economy of Europe was relatively quick and is related, among other things, with the strong correlation between their business cycles as well as the transmission mechanisms of the economic disturbances from one side of the Atlantic to the other.

By: Dr. Nikolaos Georgikopoulos - Posted: Monday, November 9, 2009

The Business Cycle between Greece and Eurozone
The Business Cycle between Greece and Eurozone

“The common monetary policy, the increased global trade and the flow of capital are expected to lead the European economies to a higher level of synchronization between them. Is this really happening though? A large number of economists argue that this is indeed the case for most countries of the European Union. What, however, is the case with Greece? Are the Greek economic fluctuations synchronized with the corresponding European ones? Is the transmission mechanism of the economic disturbances from Europe to Greece proved to be “beneficiary” for the avoidance of the forthcoming recession? This article aims at answering the aforementioned questions by making use of econometric models.”

The spread of the financial crisis from the USA to the real economy of Europe was relatively “quick” and is related, among other things, with the strong correlation between their business cycles as well as the transmission mechanisms of the economic disturbances from one side of the Atlantic to the other. Nevertheless, there does not appear a parallel “import”, to the same extent, of the current crisis from the Eurozone to the real economy of Greece. Undoubtedly, the establishment of the Euro as the single currency in the European Union constitutes a big step towards European Integration. As a country, we are undoubtedly in a privileged situation being a member of the Eurozone, especially during the tough period we are currently facing. However, it should be emphasized from the start that the single currency by itself is a necessary but not a sufficient condition for the formation of an Optimum Currency Area (OCA). Even before the formation of the European OCA, i.e. the Eurozone, several surveys have raised questions as to whether European countries can form such a currency area. The relevant literature has supported two views. The first view raises the question of whether the formation of the Eurozone is leading to a “two-speed” or “multispeed” Europe, while the second view argues that the formation of the Eurozone is leading to a unified Europe.

Weak correlation

The survey, the results of which are registered below, contributes to the few studies that are available as far as Greece is concerned. The sample is divided into three different periods, Period 1: 1980 – 1992; period 2: 1993 – 2000; and period 3: 2001 - 2005. This division reflects the fact that since 1993 Greek economy has started to grow remarkably and that 2000 is in between 1999 – the year when the Eurozone locked the exchange rates between national currencies and the euro – and 2001 – when Greece locked its exchange rate. Hence, a comparison between the periods before and after 2000 may reveal different characteristics that may be attributed to the common monetary policy and the euro. As a result, it becomes obvious that there is a weakening in the correlation of the economic fluctuations between Greece and Eurozone. The correlation for the period 1980 – 1992 is statistically significant and mediocre. During the next periods (1993 – 2000 and 2001 – 2005) the correlation weakens substantially. In particular, during the period 2001 – 2005, the correlation is practically inexistent. The cross-correlation between the economic fluctuations of Greece and Eurozone but also the lead – lag patterns change since 1993 onwards. In particular, after 2000, the cross-correlation becomes practically inexistent. As a result, the transmission mechanism of stochastic shocks from Eurozone to Greece becomes increasingly weaker over time, so it would not be unrealistic to assume that we have two separate, independent, business cycles.

Figure  Correlation coefficients between Eurozone and Greece

An outcome of this conclusion could be that the economic disturbances as well as the upturns of the European cycle are not transmitted to Greece in the same way as in the other countries of the EE. One explanation for this “paradox” is that the international trade of Greece (the sum of imports and exports as a percentage of the GDP) is substantially smaller than that of other European countries whose economic cycle has more common characteristics with the European economic cycle. It is indicatively mentioned that during the period 1995 - 2005, the international trade of Greece was never higher than 20% of the Greek GDP. Nevertheless, the findings of the current survey cannot justify a policy either for or against the monetary union. The opponents of the monetary union will find in the observed discrepancy the justification for abandoning the common monetary policy since each zone/country seems to be subject to its own idiosyncratic shocks. On the contrary, proponents of the monetary union can read in this discrepancy the need for even further coordination in order to achieve similarities in the cyclical characteristics. In any case, it can be argued that the economic integration in terms of deepening of the international trade and the financial stabilization can ensure synchronisation in the cyclical fluctuations in the long run. The time that has elapsed since the birth of the EMU is not long enough to allow for an evaluation of its performance. In this framework, the extent to which Eurozone is an Optimum Currency Area, remains to be seen on the basis of its ability to endure. During this period, a more coordinated stabilization policy at both the national and the European levels is required.
Finally, the lack of a strong transmission mechanism of stochastic shocks between Eurozone and Greece may be interpreted that the recessions that affect Eurozone, are not transmitted in our country so easily. At the same time, however, this weak transmission mechanism may be interpreted differently as well: When the economy of the Eurozone is in its upturn phase, one cannot conclude that Greece will also follow in an easy way its exodus from the recession.


Dr. Nikolaos Georgikopoulos is Research Fellow at the Centre for Planning and Economic Research (KEPE) in Athens. Doctoral Visiting Scholar at Stern School of Business (New York University) and member of the Committee on Financial Markets at the Organization of Economic Cooperation and Development (OECD).

 [Acknowledgements to Mr Stylianos Kymparidis (PhD Candidate, London Metropolitan University), for his help in data collection and his useful comments. Opinions or value judgements expressed in this article are those of the author and do not necessarily represent those of the above organizations].

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