Decline of private investments in the Greek economy and the way forward

Abstract

Greece was amongst the first countries to be hit after the outburst of the European financial crisis in 2008. The crisis revealed the underlying intra-Eurozone macroeconomic imbalances and turned the attention of the global community and investors towards the very high level of Greek public debt. Private investments in the Greek economy also suffered a heavy downfall since the beginning of the crisis. The level of private gross capital formation kept decreasing since 2008 and forecasts estimate an almost null growth for 2020. This research tries to answer the question of what the main factors behind the decline of private investments are and which policies can re-activate them. To investigate further and answer the question about the link of public and private investments a System Dynamics model of the Greek economy is built based on a traditional macroeconomic approach. With the use of the System Dynamics model for the Greek economy. Next, the Exploratory Modelling & Analysis (EMA) Workbench tool is used to perform the analysis. Two different policies are introduced. The first one concerns a mix of lower taxes and lower government investments and the second one is based on a policy of higher taxes and higher government investment. Sensitivity analysis with the use of SOBOL technique and scenario discovery analysis with the use of PRIM are used to explore the most sensitive factors with regard to private investment.