Strategic Trade Theory and the Cycle of Money: Analyzing Economic Dynamics and Recovery Strategies in the Greek Crisis

Abstract

This paper explores the intersection of Strategic Trade Theory (STT) and the Cycle of Money to analyze the economic dynamics and recovery strategies during the Greek crisis. Strategic Trade Theory suggests that governments can enhance national welfare by intervening in markets characterized by imperfect competition, such as high-tech industries, through subsidies and protectionist measures. The Cycle of Money, on the other hand, highlights the importance of enforcement versus escape savings in sustaining economic activity. Enforcement savings stay within the local economy, supporting reinvestment and growth, while escape savings are diverted abroad, weakening domestic economic resilience. During the Greek crisis, the significant outflow of capital (escape savings) exacerbated the economic downturn, limiting the effectiveness of any strategic trade policies intended to boost domestic competitiveness. High levels of escape savings hindered the local economy’s capacity to reinvest in strategic sectors, undermining potential benefits from STT-driven interventions. Conversely, Greece struggled with low enforcement savings, further challenging its ability to apply STT principles effectively. The paper argues that integrating STT with the Cycle of Money framework provides a nuanced understanding of the crisis. Effective implementation of STT requires a stable domestic environment where enforcement savings can be maximized to support strategic investments. Reforming public and tax policies to improve the money cycle and strengthen the banking system is crucial for leveraging STT and achieving economic stability. The findings suggest that addressing escape savings and enhancing enforcement savings through targeted policies can facilitate economic recovery and long-term growth.