After the Yom Kippur War in September 1973, the countries that controlled the sale of oil internationally through cartels doubled its price. Given the use of oil as a driving force in all industries of the world, this increase was translated through an increase in the cost of production into prices, which led to an increase in the prices of final products offered around the world. The situation was unfavorable for the world economy due to the collapse of the system of fixed exchange rates of various currencies from August 1971. The growth of world GDP was practically zero, and the phenomenon of simultaneous fixation of production with simultaneous inflation, stagflation, unprecedented in economic history, became a reality.

The international community sought a compromise solution among its member states, which, naturally, chaotically turned to a policy of avoiding the worst on a national scale. The “Smithsonian Agreement” of December 1971 originally provided for fluctuations within ± 2.25% of the central rate of each currency against the dollar.

However, fund movements were erratic and the deal fell through in May 1973. At this point, the energy crisis in October 1973 made matters worse. A Library Group was convened and a conference was held at Rambouillet with the aim of first committing everyone to find a policy to deal with the congestive affliction. Then followed a long period of unsuccessful attempts to maintain exchange rates at normal levels that would facilitate rather than disrupt international trade.

At the fourth summit in Bonn in 1978, the decisions were more “advanced”. With the mutual obligation of all to all to keep exchange rate fluctuations within ±2.5% against the dollar, there seemed to be a turnaround in global economic governance.

At that moment, the Iranian revolution broke out (1979) and along the way the Iran-Iraq war (1980-1988). The price of oil has once again doubled, further destabilizing an already fragile balance, prolonging the life of stagflation, and introducing additional uncertainty into the international economy.

Introduction of the first restrictive measures

The dictatorship turned out to be completely unprepared for the August 1971 crisis. Cut off from international forums and exhaustive information, relying on pro-junta technocrats and ambivalence between the US and Europe, she pegged the drachma to the dollar and its fall, without a deep analysis of the interests of Greek exports and the balance of payments. “We decide and order” led after the first oil crisis to an explosion of inflation up to 35%. The government of November 1974 faced the acuteness of the balance of payments deficit, while, on the other hand, there were few stops in the decline of the economy, but also dilemmas. Any further efforts to warm the economy were constrained by the need to not exacerbate the external deficit, which would have led to a search for external borrowing in the face of capital shortages, the uncertainty of the international climate, and the possible negative impact on implicit resources from the summer tourism of 1975. To deal with this deficit, the government should, according to the orthodoxy of the time, to use fiscal policy, but for K. Karamanlis, P. Papaligura and X. Gold it is very doubtful that any advertising effect will take place in the economy by increasing the budget deficit.

Therefore, it was decided to wait on this front first with parallel immediate action to limit energy consumption. In the Ministry of Coordination, a staff rate control service for over-invoicing and under-invoicing was established to eliminate the impact of the actions of multinational companies operating in the country on prices. A central procurement control service, DEKO, has also been set up so that the minister has immediate information about what is happening in state-owned enterprises. It was considered that there were three possible sources of external financing for the economy: US aid, funds from the Arab countries (petrodollars), and seeking help from Germany because of its external surpluses. Relations with the US have been at a low ebb since Greece’s withdrawal from NATO’s military arm, the Arab countries needed a thaw in relations, while Germany saw a sign that it was looking ahead and worrying about it. Thus, the government moved towards the decision to apply for membership in the EEC, which was supposed to bring multiple stability to the difficult situation.

Impact on the project development program

On March 6, 1975, the drachma was officially separated from the dollar. In cooperation with the Bank of Greece, a basket of currencies was drawn up with different weights in the overall index, a weighting that was not officially announced and was top secret for a long time, in order to prevent any possible speculation. The following currencies were included in the basket: dollar, mark, franc, lira, Dutch guilder and Belgian franc. The aim of the whole project was to promote devaluation towards countries importing Greek goods and to control the balance of payments in general. 1976 was the year when efforts to join the EEC began. GDP in 1975 increased by 3.3%, inflation was curbed, wages rose above the index, and the balance sheet deficit was under control, but the cumulative deficit of the special account was approaching 25 billion dirhams and should have resolved this outstanding issue in the near future. .

Thus began a fever of development projects and laws, a five-year development program was drawn up, trade and political relations were developed with the countries of existing socialism. More generally, Greece has made a gigantic effort to regain time and initiative in the wider region of Southeast Europe. In May 1976, measures were announced for the development of Thrace as the first attempt to implement the policy of regional development in practice, and at the same time initiatives were announced for the development of the Aegean Islands, as well as Epirus. Thus, the Greek region became part of the planning for the future and the creation of a modern welfare state.

As for the need for reform interventions in the economic field, Papaliguras became the leader of all efforts. At the same time, the state recommended, on its own initiative, to create a Council for Social and Economic Policy, where economic problems between social partners would be discussed and mutually acceptable solutions would be sought. With ELEVME, an attempt was made to use the Greek subsoil for the industrial use of raw materials, while there were also proposals to establish a petrochemical industrial complex in the country in order to expand its production base, but without tangible results. The main reason was the cost of creating and operating the project at a time when environmental initiatives were just beginning to sound. The lack of funding was also the reason why, despite extensive efforts to find rich resources in the bowels of the country, the only investment that came to fruition in practice after decades was gold mining in Halkidiki. However, the fact is that the National Geological and Mineral Research Foundation prepared (in 1976) under the strict supervision of the Ministry of Coordination a plan for the exploitation of the Greek subsoil and began a simultaneous search effort in no less than 20 parts of Greece. for raw materials.

New economic policy paradigm

The aforementioned plan, which would have provided employment and development in the Greek region and possibly a diversified industrial sector on the eve of joining the EEC, unfortunately came to a halt during the second oil crisis and the resulting new price increases. This new global economic upheaval was ultimately the reason that funding for these efforts unfortunately got stuck in the imprinting stage and was not continued after Papaligura’s departure from the Ministry of Coordination. Economic policy efforts were focused on signing the Treaty of Accession to the European Communities and managing the new wave of cost-push inflation experienced by the Greek economy. Indeed, the first flows of Community funds once again reduced the balance of payments deficit. Resources were increased during the Mediterranean Comprehensive Programs negotiated by the Papandreou government with the EEC after 1981, and combined with automatic indexation of wage and pension prices, the effects of the second oil crisis on Greek citizens were further mitigated. However, the structure of the Greek economy did not change for the better with this policy.

The prolongation of stagflation by the second oil crisis led on an international scale to a gradual replacement of the economic paradigm that had prevailed until that time, with the rejection of Keynesianism and the adoption of a monetarist-“neoliberal” model of economic policy management. The new policy had a short- and medium-term positive impact on contained price increases. The deregulation that accompanied these changes—the liberalization of financial markets—greatly intensified in the 1980s that put an end to the consequences of the second oil crisis in the world economic system. At the international level, the policy of full employment and the construction of the welfare state began to be abandoned until the market was called upon to replace the role of the state on a large scale. Greece did not follow this path, gradually turning into a country of services. She stuck to her course with upgrades and restarts, but in the end she did not escape the crisis of 2010.

*Mr. Michalis Psalidopoulos is a Consultant for the Hellenic Institute for Development and Prosperity (IHGP) of the American College and an Emeritus Professor in the EKPA Department of Economic Sciences.

EDIT: EVANTIS HATZIVASSILEYU