Europe’s economic woes don’t seem to be abating, but in comparison to Greece’s they appear trivial. Since the Great Recession over 200 000 thousand Greeks have left for North America or other countries within Europe and it does not appear to be stopping. The implications for the Greek economy are worrying and we can apply some useful diagrams to aid our analysis. Obviously the long term unemployment here is a good starting point. Unemployment is over 50% and unemployment hysteresis postulates that a temporary shock to aggregate demand (AD) can permanently lower the potential output of the economy and increase the equilibrium level of unemployment. The diagram below shows that higher unemployment and reduced incomes results in an inward shift of AD but the structural unemployment, evident here, results in an inward shift of the LRAS.
For ease of explanation we can use the PPF diagram to help illustrate the effects of the above as well as the impact of a significant exodus of human capital from the Greek economy.