Greece ultimately joined the Euro monetary area as its 12th member from January 1, 2001 after the European finance ministers' council decided on June 19, 2000 that the country had fulfilled all the convergence criteria and approved its accession (Micco et al, 61). Greece had a troublesome inflation history. In 1990, the performance of the Greek economy was very poor with the inflation reaching higher than 20% and the budget deficit exceeding 16% of the GDP. During that particular year, the growth rate was literally zero and the current account deficit was 4.3% of the GDP. The EMU project came as a blessing in disguise for Greece and throughout the 1990s, Greece implemented economic and political policies that were in tune with those of EMU (Greece in the European Union, 93).
This paper discusses the inflation trends and theories in general, and explores the Greek economic scenario briefly in particular with a view to finding out whether there is a danger of high level of inflation in the coming days in the country. A deep analysis of the economic factors guiding the inflation trends in Greece suggests that the Government economic measures will certainly help reduce the inflation threat considerably.
Part A (Inflation theories)
Before we proceed to assess whether or not an impending threat of high level of inflation is emerging in Greece, there is need to study the essentials of inflation on how it is caused. In any country, inflation is basically caused through the emergence of two powerful but common scenarios.
Factors of inflation
The two factors from which inflation stems are an increase in demand for products, known as the demand pull inflation and an increase in the cost of factors of production, known as the cost push inflation. Monetarists, also known as the neo-classical theorists, point out that when there is a surge of money supply in a nation's economy, it leads to excess money on an aggregate level and creates more demand by increasing the spending capacity of the population. To put it simply, inflation is created when the spending power of the population exceeds the capacity of a country
to produce goods and services in enough quantities. This is a situation where prices of commodities go on increasing with the supply levels of goods and services lying below the supply levels of money in the country. As the inflation is caused through an increase in demand,
it is called the 'demand pull inflation'. Higher volumes of money supply are generally pumped into the economy of a country when its Government prints more currency or indulges in heavy borrowings to meet budget deficits (Theories, Demand pull inflation). On the other hand, the non-monetarists, also known as the Keynesians, argue that when the Gross Domestic Product (GDP) of a country increases it does so with higher prices sending a message that the economy has passed the stages of full employment levels of output.
This type of situation naturally raises the prices of various commodities. In the phenomenon of a cost push inflation, the cost of factors of production increases paving the way for higher prices of commodities. That leads to wage increase and in turn enhances the