Greece’s Recovery Prospects

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A distinct lull in news descended over Europe this summer. Many cite improving economies and relative social stability as the sources of the quiet. Those slightly more pessimistic believe that Germany’s Chancellor Angela Merkel has encouraged the calm, putting off major issues until after the September German election results are in. Either way, the international community should avoid confusing a break in news with a break in action.

Of the embattled European economies, Greece’s plight has received the most attention. Of course, there are practical reasons for this phenomenon, including the perception that Greece was hit the hardest by the global economic downturn, and that it was the first of the European economies to experience a veritably severe recession in late 2009.

However, although economic figures can shock and images of social unrest can depress, there must be another factor particular to Greece that invokes such deep empathy within onlookers across the globe. Without Greece’s historical status as the world’s first democracy, the cradle of Western civilization, the country would simply be one of many facing economic depression and social upheaval as a result of the Great Recession.

140808_03After five years of recession, the end of which is still not in sight, Greece has lost a quarter of its GDP, hundreds of thousands of business have closed, and unemployment has surged to 27%, a figure that makes discussions over the United States’ unemployment levels look like arguments over where to go out for dinner. Worse, youth unemployment in Greece hovers around an astounding 60%.

The problems do not stop there; growing social unrest caused by the economic downturn has incited protests and strikes in Athens and across the country. The neo-Nazi Golden Dawn Party has taken advantage of the Greek citizenry’s frustration, blaming a weak government for not protecting true Greeks from the influences of an over-bearing European Union and job-stealing North African immigrants. Scarily, the group continues to see a rise in its popularity. This is the Greece we know now. Our images of the glorious pillars of the Parthenon and stark white houses of Santorini have turned to the angered faces of protesters and dirtied shields of riot police. 

Two questions come to mind: how did it come to this and what does the future hold? 

As with any issue of similar size and complexity, a brief introduction is necessary. According to the World Bank, in 2012, Greece was the 42nd biggest economy in the world with a GDP of 249 billion dollars, and was 36th in the world in terms of GDP per capita, standing at 22,055 dollars. Greece’s developed economy includes a vital tourist industry, merchant shipping (16% of the nation’s GDP), and a little agriculture, including fisheries (approximately 3-4% of GDP). 

When the Great Recession hit in late 2009, Greece’s fortunes turned for the worse. Longstanding problems, including corruption, tax evasion, low global competitiveness, and an inefficient public sector bureaucracy, to name just a few, left Greece severely compromised in the face of global economic disaster. 

Greece’s two main industries, tourism and shipping, especially suffered, causing Greece’s government to take on about 340 billion euros in debt, or 170% of the nation’s GDP. In 2010, policymakers started to suggest that a bailout might be necessary. In April of that year, Greece formally requested relief money from the European Union and the International Monetary Fund, and ratings agencies downgraded Greece’s credit score, plunging the Greek economy deeper into recession. 

A month later, the IMF and the EU agreed to a 110 billion-euro loan. Help was on its way, but not without a price. The austerity package passed by Greek parliament in order to obtain the funds mostly consisted of social spending cuts, and the Greek citizenry, already took to the streets. Massive protests and a national strike broke out. 

When President Papanderou’s government failed to reach a consensus on a new austerity package in mid-2011, the crisis sent ripples around the world, causing stock markets to go into further decline. Even though the package of reforms finally did pass in July, another round of national strikes was sparked. Many economists advocated what is known as an “orderly default.” To them, Greece should have immediately defaulted on its debt in 2011, exited the Eurozone, and returned to a devalued drachma. A low-value currency would have improved competitiveness and attracted foreign investment. The cost, however, would have been severe, as losses in Greece would have risen to 1 trillion euros, hyperinflation would have ravaged the weak nation, and an inter-connected EU would have experienced utter disaster. 

The close of 2011 saw a compromise, and Greece, temporary salvation. EU leaders agreed to engineer a partial orderly default and provided the nation with a 130 billion euro bailout package, conditional on a new set of even stronger austerity reforms, including the privatization of public assets, such as highways, railroads, and energy companies. 

In early 2012, Greek parliament passed the new austerity package, causing riots across the country. In March, however, the Greek government reached a promising debt restructuring deal with private banks. But then, the country experienced another setback in May, as EU officials reminded Greece that if it did not approve another austerity plan by July, future bailouts would be cancelled, forcing a Greek exit from the Eurozone. 

140808_04This was when fears of the “Grexit” were at their worst. A coalition government under President Samaras was settled upon in June, however, and approved the new austerity plan, including privatization, tax hikes, anticorruption measures, and tax evasion prevention. In September, a general strike was called in Greece, and images of tear gas being fired at anarchist protesters infiltrated international media. Despite the ever-increasing social turbulence, Greek parliament passed another round of austerity measures in October, forcing EU leaders to activate another set of bailout funds the next month, finally mitigating fears of a Grexit.

Enter 2013, the year that many describe have described as the bottom of the pit for Greece, the low point from which things can only get better. Therefore, as 2013 matures, it is time to evaluate this assessment. Where does Greece stand now and what are its recovery prospects? 

By the numbers, it indeed seems as if the country and its economy have fallen deeper into a pit. Parliament passed yet another set of austerity measures in July cutting 15,000 civil service jobs, including state-television staff, police officers, hospital workers, and teachers, amid protests. Even so, Greece is still set to miss several economic targets this year, including privatization revenue and GDP growth. Think-tank Foundation for Economic and Industrial Research projects that GDP will decrease 5% this year, a greater loss than previously predicted, and further bailout money (and therefore austerity measures) may be necessary. 

Some within Greece believe the vicious cycle of bailouts, austerity, and resulting protests simply does not work. Yannis Stournaras, Greece’s Minister of Finance, has this summer proposed other ways to create revenue, namely selling short-term treasury bills to banks, thereby furthering privatization. According to Stournaras, further tax hikes and pension cuts will not pass parliament quickly enough to have a positive impact. 

Even IMF board members and EU leaders acknowledge the need for innovation when it comes to saving the Greek economy. The IMF’s quarterly report on Greece, released July 31, 2013, admitted that problems with Greece’s tax collection system made gaining revenue from increased taxes difficult. “Recent developments in Greece confirm some of our worst fears,” IMF board member Paulo Nogueira Batista told The New York Times. He also abstained from a vote to send more bailout money to Greece, saying “implementation has been unsatisfactory in almost all areas; growth and debt sustainability assumptions continue to be overoptimistic.” 

Many doubtful IMF and EU officials cite the latter issue, debt sustainability, to be Greece’s fundamental roadblock concerning growth. This year, Greece’s debt stands at about 175% of its GDP, and the nation will certainly need more relief to achieve its debt sustainability goal for 2022. The IMF also recently warned that the Greek government may face a funding gap of 11 billion euros over the next two years, due to debt, and help is not quite as forthcoming due to Greece’s partial default status credit rating. Chancellor Merkel said earlier this summer that Germany would not take any more losses on its loans to Greece.

The ideas for how to encourage growth in Greece have been starting to sprout up. Wolgang Schauble, Merkel’s Finance Minister, visited Athens this July to announce a cross-EU fund to help small businesses in Greece. The European Investment Bank is fighting youth unemployment by helping business employ youths by providing training funds and the EU has made it easier for young Greeks to cross borders to work or study in other EU countries. Greece itself is loosening its laws on apprenticeship, making it easier for companies to hire more workers. 

Another government initiative, labeled a “mobility program,” will cut 25,000 public sector workers’ wages while helping them find jobs in the private sector. Others even propose “debt forgiveness” to alleviate Greece’s sovereign debt issues, a process that would involve Greece defaulting on loans but not having to suffer the punishments, a bold but risky prospect. 

And despite all its detractors, the situation in Greece has shown signs of improvement. Its banks have been re-capitalized, meaning they can act as lenders again and encourage growth. Its tax system has been simplified in order to fight evasion and corruption. There is no more Grexit talk, wages are looking more competitive, and small-time investors are looking to Greece to invest. 

Although this last quarter was the 20th consecutive one in which Greece experienced a loss in GDP, its loss shows signs of slowing down, with the Hellenic Statistical Authority claiming that Greece’s economic growth rate went down 4.6% this quarter, as opposed to 5.6% last quarter. Some groups even predict a near-zero decline rate for 2015.

Greece has also shown potential in its nascent agricultural sector, with more and more young people starting up companies in the industry, Last but not least, Greece’s tourism industry has seen its best year since the recession began (possibly because of ongoing problems in Egypt and Turkey, its competitors in the Mediterranean region). Roger Cohen, writer for The New York Times, believes that “the Greece of center-right Antonias Samaras is turning the corner.” 

Possibly most encouraging of all has been Greece’s improving current accounts budget, or comparison between its government annual revenue and its expenditure. Christos Staikouras, one of Greece’s Deputy Finance Ministers, recently announced that the nation had achieved a primary surplus (surplus after debt is counted) of 2.6 billion euros, or 1.4% of GDP, in the first seven months of this year, even though a deficit had been predicted. The IMF’s July report on Greece was appreciative of this improvement, and the Bundesbank has indicated that further bailout money may indeed be provided for the still-ailing country. 

World leaders and economists across the world recognize that Greece’s recovery is underway and are adamantly encouraging its persistence. Hugo Dixon of Reuters conceded that Greece is indeed on a “credible path to salvation.” President Obama even met with Greece’s President Samaras recently to discuss how Greece could inspire further growth and expansion and encourage more foreign investment. Obama also made a statement pointing to the necessity of evaluating the Greek economy holistically: “in dealing with challenges that Greece faces, we cannot simply look to austerity…It’s important that we have a plan for fiscal consolidation to manage the debt, but it’s also important that growth and jobs are a focus.” 140808_05

President Obama’s statement speaks out to the double-edged morality lesson that can be taken away from the Greek recession and sovereign-debt crisis. The first side is that Greek government and citizenry must learn to be more conscientious about how they spend money. Kyriakos Mitsotakis, Greece’s Public Administration Minister, and the man whose job it has been to fire tens of thousands of civil servants, said that Greece’s dated economic system depended on parties rewarding people with civil service jobs in order to gain votes, which works during an economic boom, but racks up insurmountable debt in a recession. As such, Greece’s artificially bloated public sector is an impediment to recovery. Reform, including meritocracy and anti-corruption, is inevitable. “Reform is difficult and painful,” said Mistotakis to Roger Cohen of The New York Times, “but this is necessary,” (read: brutal austerity measures). 

Yet, as made clear by Greece’s current situation, austerity cannot be the only way out of the abyss. Mitsotakis himself stated that tax hikes and pension and social spending cuts have been taken too far, and many economists believe that now austerity is part of the problem, causing depression and unemployment. The IMF even was quoted as admitting that the Greek economy was rebalancing but only due to recession, and further improvement will only be achievable through “productivity-enhancing structural reforms.” Another facet of the issue is the relationship between fiscally responsible Germany and leniency-prone Greece itself, with tension between them arising from fraught austerity measures. Yes, Greece must learn to be more responsible and efficient with its wealth, but it cannot simply copy the methods of another nation for the purpose of achieving a full recovery. 

Greece’s path to salvation is a dynamic and flexible combination of two elements: austerity and growth. The result promises to be what Chancellor Merkel calls the “lost generation” of Greek business leaders and entrepreneurs, who are getting ready to take a revitalized Greek and EU economy by storm. Cohen believes that “the new buzzword [in Greece]is resourceful: Greeks are adapting.” As youths take to the countryside to start up food companies, fulfilling previously untapped potential agriculture industry, the writer said, “my bet is that a decade from now the harvest will be rich.” 

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Teddy Miller

Teddy Miller is a sophomore in Branford College. Contact him at theodore.miller@yale.edu

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