effective exchange rate adjustments (of which wage costs were a part) of GIPS. Ireland was back at its 2004 value by 2010. By 2012, Portugal which had the lowest appreciation had undone the appreciation witnessed since 2003. Spain, by 2010 was back to the level in the mid ‐2000s with a depreciation of 3.4%. Despite these wage reductions, Greece’s real exchange rate continued to appreciate the longest, and its minimum wage continued to increase, before finally depreciating 6% from 2011 to 2014. Greece also exports the least “complex” products among the four, and substantially less than Portugal, for example, yet its average annual wage and its minimum wage were both higher than that of Portugal in every year before and after the crisis; by 2014 they were however, at similar GDP per capita. Nonwage labor costs were also lower (except in 2014) in Portugal.

However, movements in the real exchange rate (and wages) are not the only important factor for export growth. Not only did Ireland’s real effective exchange rate adjust substantially, but other factors also supported export growth. It was the only one among the four where export financing was not substantially affected in real terms; in this regard, Greece’s case is noteworthy as trade credit, a major input to trading‐ fell dramatically. As Figure 11a below highlights, GIPS show substantial increases in export credit during 2006 and 2007 while during 2008‐09, export credits (a proxy for the availability of trade finance) fell substantially in GPS, ‐ 13% /year on average, and much more than for the EU28 (7% on average). Only Ireland, whose economy is dominated by multinational corporations (that were presumably less affected by domestic financial market conditions), had a relatively small fall in export credits. The most striking differences occur in later years. During 2010‐2012, at the height of the sovereign debt crisis, trade finance fell around 30% a year in dollar terms for Greece, while it fell a bit more than 1% per year in Portugal, and rose on average in Ireland and Spain. This dramatic decline in trade finance is probably a significant reason for Greece’s worse export performance. Looking at levels compared to 2007, Greece has less than half its original value (Portugal has 30% less and Spain 20% less) in 2014. Only Ireland has more. The evolution of trade finance may also explain some of the diversification in partner countries; following the 2009 and 2010 crises, the _share_ of Greece’s exports going to Turkey rose and Bulgaria, Italy, Cyprus and Germany were also in the top 5. The US and UK shares dropped substantially. In contrast, both Portugal and Spain maintained their top 5 destinations (each being in the other’s top 5 countries with banking sector links) and exports to the UK were maintained (for Spain, the USA followed closely). The US, UK and Belgium remained the strongest export destinations for Ireland.<sup>46</sup> Another factor explaining Greece’s relatively worse performance in exports is its weaker institutions; Figure 11b shows weakening institutional quality relative to other countries. Bower et al (2014), using a rich data set of exports of goods and services, find that Greece exports 1/3 less than what would be predicted on the basis of Greek GDP, the size of its trading partners and geographical distance. Mitsopoulous and Pelagidis (2015) note that Greek wages in competitive tradable sectors such as food and manufacturing are much lower than in state‐controlled sectors such as electricity production or water utilities and that there is rent‐seeking, concluding that oligopolistic market structures are the main factors holding back growth/exports, not wages. Also new risks overcame gains from lower wages. For example, Greece had to raise excise taxes on energy substantially, so that industry in Greece had to pay 80% more for energy than companies pay in other EU countries, while the path of further fiscal reforms was not certain.

# **Lesson 6: Monetary policy’s impact on output is stronger than originally envisaged; and central banks have many tools.**

_‐_ _<u>It is better to overshoot and incur inflation costs than to undershoot and incur long term output costs, especially when fiscal policy is tightened. In crisis recovery periods, monetary policy should</u>_

> 46 The US and UK also provided more wholesale/arms‐length financing‐ a source more likely to dry up in risky times.

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