The story so far:
In Part One, I posted data from Eurostat showing that prior to the present crisis, Greek GDP per capita, on a purchasing power basis, was about 93% the 28 country EU average. Not great, but good enough to suggest the horror stories about the terrible state of the pre-crisis Greek economy are somewhat overblown.
In comments and on his own blog, Nick Rowe asked whether the Greek government budget deficit might have raised this figure, and, consequently, whether balancing the Greek government budget could have an impact on Greece's (PPP-basis) real GDP, quite apart from the demand-side macroeconomic effects.
In Part Two, I agreed with Nick that this is at least a theoretical possibility. (I say "theoretical" simply because, in my toy model, I find effects in running in both directions, and it's an empirical question which one dominates. I don't mean to imply that it is implausible or some kind of weird edge case.)
In this part, I want to look at the potential magnitude of the issue -- that is, how much should this possibility lead us to modify the picture of Greek economic performance painted in Part One?
According to Eurostat, Greek exports in 2008 totaled €21.3 billion, and Greece's nominal GDP was €242.1 billion, so exports accounted for a little less than 9% of the total Greek economy. In 2007, exports accounted for about 8.3% of Greek nominal GDP, and they 2006 accounted for just under 8%. So, roughly, let's say that exports amounted to something like 8.5% of Greece's pre-crisis output.
The next question is how "overpriced" those exports were, due to the Greek government budget deficit.
This involves us in the tricky business of trying to say just how large the pre-crisis Greek budget deficits were. Eurostat declines to publish figures for years prior to 2011, citing the dubious state of Greek statistical reporting. So, like everyone else, we're going to have to make an educated guess. One thing Eurostat can tell us is that the Greek government's outstanding debt totaled €356 billion at the end of 2011. That debt was years in the making, and how much each year contributed is hard to say. I'm going guess that from 2006-8, the Greek deficit averaged €45 billion (a bit more than double the 2011 level), effectively attributing just over one third of the Greek national debt to those three years.
Now the really hard question: how much could €45 billion in spending, largely on things like transfer payments (i.e. pensions), government salaries, and so forth, move the global prices of products Greece exports? The total EU market for tradeable goods is €2.5 - €2.7 trillion (gross annual intra-EU exports for 2006-8) divided by the fraction of tradeable goods that are actually exported. If we assume, more or less at random, that only half of tradeables produced are consumed domestically, that gives us a total EU market for tradeables of around €5.2 trillion. Let's also assume that only half of the Greek government deficit is absorbed by spending on non-tradeables, so that the Greek deficit increases total spending on tradeables in the EU by about 0.4%. (Except, of course, for the fact that the deficit is actually financed by other people -- say, French and German bank depositors -- not spending; the Greek deficit is not simply an addition to EU-wide demand. But let's assume that the forgone spending would have consisted entirely of spending on non-tradeables.)
Assuming a zero elasticity of real supply, so increased spending on tradeables is completely reflected in price increases, we're looking at a price impact of less than one-half of one percent.
Now, that's an enormous heap of assumptions. And it's not necessarily fair to look at the entire range of tradeable products; Greek-produced tradeables are not distributed across sectors in the same way as the EU as a whole. (But they may be less different than you guess; in 2007, about 25% of Greek exports were machinery or chemicals, and the value of its food exports was matched by that of its oil exports. It's not just about olives!) The real point of the exercise is to provide some sense of the relative scale of the Greek government deficit compared with the EU economy as a whole. And the upshot is that it's hard to imagine a very small player like Greece having much of an impact on EU-wide market prices for...well, anything really.
But let's go wild and assume that the prices of Greek exports were increased by ten times as much as our wild guess -- that is, by 4%. That would mean that 4% of 8.5% of the Greek economy might have been "fake," to borrow Nick's term. That's about 0.34%.
Or, in other words, if not for the Greek budget deficit, the measured GDP per capita of Greece might have been, not 93% of the EU average, but a mere 92.66% (or, in round numbers, 93%).
To get a material effect via this channel, you need to argue that the Greek budget deficit...I don't know...doubled the global price of oil, for example. I'm just not seeing it.
The bottom line seems to be that the original impression was correct: that, pre-crisis, Greece had a slightly below-average economy, certainly well below German standards of efficiency (the latter had a GDP per capita about 16% above the EU average), but hardly the Third World backwater of popular imagination.