Wednesday May 27, 2015 Search
Weather | Athens
14o C
09o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
Primary budget surplus is no panacea

 It cannot compensate for the need to revive the economy, and priority must be reviving investments

By Dimitris Kontogiannis

The primary surplus of the general government a year before schedule is important in many respects but it is not a panacea for the country’s economic problems. If the economy does not recover and grow at satisfactory rates in the years ahead as official creditors forecast and market participants bet with their money, the primary surplus may turn out to be a short-lived memory. Even if it is maintained, the surplus will not be enough to ensure the huge public debt will be manageable and contain social discontent.

In a paper presented to the American Economic Association in Philadelphia a few months ago, economics professors Carmen Reinhart and Kenneth Rogoff reportedly argued Greece is likely to need 12 years to recover output losses sustained during the crisis based on data from the late 19th century and early 20th century crises. Greek gross domestic product losses are estimated around 24 percent from 2008 through 2013 so far.

They predicted Portugal was unlikely to do the same before 2018.

In their opinion, advanced economies must adopt some of the approaches adopted by emerging market countries over the last few decades, including restructuring of debt, allowing faster inflation and introducing capital controls.

However, it is clear that it is unlikely Greece’s official lenders will consent to some of these measures and the European Central Bank will change its monetary policy significantly to allow for an average annual inflation well above 2 percent, the implicit target, in the eurozone.

The professors’ pessimistic forecast about the time needed for the return of Greece’s GDP to pre-crisis levels – that is around 232 billion euros from an estimated 181 billion last year – implies much lower average annual growth rates than projected by the official lenders in the next several years.

The economy is to grow by 3 percent on average for a number of years.

Readers are reminded the Greek GDP contracted by 0.2 percent in 2008, 3.1 percent in 2009, 4.9 percent in 2010, 7.1 percent in 2011 and 7 percent in 2012.

The recession eased last year according to a preliminary estimate by the Hellenic Statistical Authority (ELSTAT) to 3.9 percent from 4.5 percent predicted initially by the government and others. However, a closer look at the breakdown of the GDP components reveals the easing of the recession is largely due to an unexpected development: the sharp rise in the stock of inventories by more than 2 billion euros compared to initial forecasts for no change. If there were no change in stock, economic activity would have fallen by more than 5 percent. So it will be interesting to see whether ELSTAT will revise the GDP figure significantly, as it has done in previous years, or will not change it at all next September.

Whether the economy gets out of the doldrums is important because failure to do so will fan the flames of social discontent and have political repercussions.

In the meantime, foreign investors’ appetite for Greek risk appears to be growing stronger and stronger as evidenced by the heavily oversubscribed senior five-year bond issued by the National Bank of Greece last week, yielding less than the recently issued Greek government bond, and the Eurobank’s share capital increase. Undoubtedly, the risk on mood internationally has played a significant role in attracting foreign funds to local financial assets.

The Greek growth story and high yields are also central to the trade but much less so the primary surplus of 1.5 billion euros or 0.8 percent of GDP according to the troika or 3.4 billion euros according to Eurostat when the return of income from Greek bonds held by the ECB and national central banks is added.

Like Ireland, the markets don’t pay attention to one-off spending items linked to the recapitalization of banks.

History teaches that fiscal orthodoxy in the form of high primary surpluses does not suffice to make the huge public debt manageable. This is more so when these surpluses are destined to service the debt and will be squeezed out of the economy. It is noted that revenues are projected to exceed government spending excluding interest payments by about 4.5 percent of GDP in 2016 from about 0.8 percent in 2013 on the troika’s definition and stay around 4 percent from 2017 on. On the positive side, the country can count on a low cost of funding.

Therefore, Greece will have to achieve satisfactory GDP growth rates to help attain the targeted primary surpluses easier and ease social strains created by depressed disposable incomes in the large urban centers and the high unemployment almost exclusively hitting the private sector. However positive the primary surplus may be, it cannot compensate for the need to revive the economy. This should be the focus but policymakers should have no illusions they can achieve it by instituting a few structural reforms. The latter will supplement any effort to boost the economy in the medium to long run but they will not spearhead the much-needed drive toward growth.

Therefore, primacy should be given to reviving investments, especially in export-oriented sectors, and exports of goods and services, but it takes much more than a paper exercise to do so. It needs a national commitment at all levels, starting from the top, like in South Korea in the 1960s.

ekathimerini.com , Sunday April 27, 2014 (21:58)  
ECB said to leave emergency aid level for Greek banks unchanged
A guide to Greece´s debt crisis and what´s at stake
The G-7´s problem: Can the world deal with a Greek default?
Some 300 mln left banks on Tuesday
EU seeks to move 40,000 refugees to north from Greece, Italy [Video]
The European Commission proposed easing the impact of the Mediterranean migration crisis on Greece and Italy by moving 40,000 refugees to countries further north. The proposal looked set to ...
Greece likely to miss May deal deadline
Greece will likely miss a deadline for a deal with creditors by the end of the week as the two sides have made little progress during talks in recent days, four international officials famil...
Inside News
SOCCER
AEK Athens returns to top league after financial collapse
Greek club AEK Athens has just returned to the country's top soccer league, two years after financial collapse sent it to a lower league. One of the country's largest clubs, AEK sealed its s...
SOCCER
Berg brace gives Panathinaikos four-point lead
Panathinaikos beat Atromitos on Sunday and took advantage of the goalless draw between PAOK and Asteras Tripolis to open a four-point gap from PAOK at the top of the Super League play-off mi...
Inside Sports
COMMENTARY
Romantic notions meet reality
Before the elections, there was a considerable number of people who totally disagreed with the ideas and program put forward by SYRIZA, but they expected that the leftist party would, at lea...
EDITORIAL
Solving the Gordian Knot
The leftist-led government, as well as the country, have both been seriously damaged and exposed to risk from the evident indecision and repeated contradictions dogging the ongoing negotiati...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. EU seeks to move 40,000 refugees to north from Greece, Italy [Video]
2. Greece likely to miss May deal deadline
3. US Treasury´s Lew fears miscalculation over Greece could spark new crisis
4. Greece must stay in euro but work to avoid default, German economic adviser says
5. ECB said to leave emergency aid level for Greek banks unchanged
6. A guide to Greece´s debt crisis and what´s at stake
more news
Today
This Week
1. Some 300 mln left banks on Tuesday
2. Target of Greek scorn shapes nation’s fate as IMF’s storm-chaser
3. Romantic notions meet reality
4. The G-7's problem: Can the world deal with a Greek default?
5. Solving the Gordian Knot
6. FYROM PM blames Greece for name impasse
Today
This Week
1. Conspiracy madness
2. National self-awareness put to the test
3. Albanian demarche raises concerns about possible territorial claims over Greece
4. Hotel contracts with a ‘Greek default clause’
5. Neither Grexit nor a dual currency will solve Greece’s problems
6. Merkel said to plan address for Greece if deal reached
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2015, H KAΘHMEPINH All Rights Reserved.