Much noise is currently being made about the state of the Greek economy, the stabilisation of public finances, the expected end of recession and the return to growth. The Greek government is presenting the situation as light at the end of the tunnel and as a vindication of the policies followed. The EU is also gradually beginning to claim that ‘austerity works’, though the IMF appears to be much more sceptical. How much truth is there in all this?
Consider first some aspects of public finance. Preliminary figures announced by the government for the first eight months of 2013 showed a primary surplus of 2.9bn, and this was interpreted as a major success and a sign of return to fiscal stability. Things look rather different when one looks more closely at the figures. About 1.5bn is a one-off transfer of profits on Greek bonds by Eurosystem banks. The rest has accrued due to unprecedented slashing of public expenditure (1.9bn below the already very low target for the first eight months of 2013) and an even more reckless misuse of public investment funds transferred by the EU (public investment stood 1.4bn below a similarly low target for the same period).
The government, meanwhile, has imposed a storm of taxes for the remaining part of the year, and is delaying return of VAT and other taxes to its rightful claimants. Quite naturally, the intake on income tax and on the new taxes on property remains very uncertain. And that is without even looking more closely at the precise nature of some of the revenues that the government is including in its account which might well turn out to be borrowings. To sum up, Greece will probably achieve a small primary surplus for 2013, but this will be on the back of a tremendous austerity that is causing long-term damage through lower public investment and onerous new taxes as well as due to stretching accounting rules. There is no inherent stability to this result.
The precariousness of public finances is reflected in the behaviour of public debt which is currently in the vicinity of 320bn, actually higher than its level at the start of the crisis in 2010 (roughly 305bn). This is despite repeated restructuring in 2011 and 2012, the cost of which fell primarily on Greek banks, pension funds and small bondholders. The ratio of debt to GDP has of course rocketed as the economy collapsed and now stands at about 180% of GDP. The average maturity of the debt, however, has been substantially lengthened from about 8 to about 16 years. And the average rate of interest has dropped from slightly above 4% to about 2.5%.
Nonetheless, Greece has debt repayments of over 40bn to make in 2014-5. The funds for these repayments are not certain, particularly as the fiscal balance for 2015-6 and for subsequent years has not yet been worked out, despite government bragging about its primary surplus. Moreover, in the years after 2015, Greece will still have to pay between 5 and 10bn annually in maturing principals, plus 6-7bn annually in interest. These are significant sums for a ruined economy, the expected growth rates of which are not going to exceed 2.5% on average for years. Greece, therefore, needs fresh loans of perhaps 10-20bn to meet its repayments for 2014-5 and beyond, plus some further restructuring of its debt.
Fresh lending will probably come from the EU, and this means new conditionality, which is political dynamite. The idea that Greece could obtain the sums in the open markets in 2014, with which the Ministry of Finance is toying, is ludicrous. As for restructuring Greek debt, it is highly unlikely that the EU will consent to writing off the principal since it would be very difficult to get parliaments to agree to it, not to mention that it would set a precedent for other countries. Yet, lengthening the maturity and lowering the rate of interest further would offer very few benefits in view of the already low rates and long maturity of the debt. In short, the difficult decisions regarding a third bailout and a restructuring of the debt are still ahead of us, and they are likely to prove destabilising.
The fundamental cause of this instability is, of course, the underlying state of the national economy. Growth figures for the second quarter of 2013 indicate year-on-year contraction of ‘only’ 3.8%, slightly lower than projected. The expected turnout for the third quarter is in the region of -3%, or less. If these figures materialise, it is possible that the overall contraction for 2013 might actually be worse than 4%. The government is hailing this as a major achievement and is already claiming that 2014 will be a year of positive growth, leading Greece to sustained recovery.
There is very little solid basis for this optimism. Consumption declined by nearly 7% and investment by 11% during the second quarter. The balance of trade deficit is indeed approaching zero but that is because imports have collapsed. Exports show no particular dynamic. The reason why the growth turnout was better than expected is simple: tourism. The disturbances in the Arab world and in Turkey seem to have rebounded in favour of Greek (and Spanish and Portuguese) tourism. The underlying recessionary pressures in the economy, however, remain very strong.
Sometime in 2014-5 the Greek depression will indeed come to an end. Contractions do not last for ever. At that point, consumption will be extremely weak, public investment will be prostrate and exports will be uncertain. The only force that could make for sustained recovery and ‘better days’ would be an investment boom. Where will that come from, given the persistent investment strike by domestic Greek capital and the heavy distrust of Greece by foreign capital? Far from rapid growth, it is more likely that, under current policies, Greece will effectively stagnate for years, once the depression is over. For the same reason, its public finances and its debt will remain precarious. Those who assure us that Greece is due for a rapid turn-around need to tell a better story.