Looming crisis has shock and awe in store for Greece’s economy

The Greek economy is about to experience a powerful shock, unlike any other in the past. This is because it has never been so exposed to the repercussions of international developments and the economic cycle. Without the defensive mechanism of a sliding or devalued national currency any longer, and at a time of fiscal strictness, it must now face international competition. In reality, what is coming is not a total catastrophe but a realization of the fact that the Greek economy is part of the global whole. At the present juncture, Greece’s biggest clients face a serious slowdown in their economies and are therefore likely to trim consumption. On the other hand, its oil suppliers are in a rather unstable phase and will probably take advantage of the price rise. Such a situation has been the result of independent factors and no one can be blamed for not averting it. But the problem is that the Greek economy has run into it without the protection it could have had. The bonanza of the European Union-subsidized Third Community Support Framework investment plan and the projects for the Olympic Games next year have created little mettle; even if the absorption of funds had been faster, the economy would not have had any stronger defenses. The truth is that a large segment of the Greek economy is unable to withstand international competitiveness. This applies to the – still large – farming sector and a large proportion of manufacturing. A lot was said but much less was done, sporadically, in this area in recent years; the mass entrance into global markets has been left half-finished. It is in this state that the economy will have to face rough seas. This is perhaps the most important factor in the Greek economy. To be sure, in the crisis presently unfolding, there will be Greek firms able to move aggressively in foreign markets. But the upheaval will be severe, with avalanches and realignments not seen before. As usual, the government and banks will hasten to shore up some of the very large concerns, will perhaps adopt measures addressing large segments of the population, but they will be unable to avert the general trend. A possible way out might have been the creation of a Pan-European consensus on the formal abolition of the Stability Pact or, at least, its interpretation in a way that would make it part of recent history. Such a decision would logically lead to a fall in the value of the euro and show that governments would be prepared to accept higher inflation in order to speed up growth, though that would risk opening the door to the old foe of stagflation. However, the most likely course of action will be «wait and see.» Most people hope that the economic slowdown will be moderated and perhaps reversed once the situation in the Middle East is sorted out. They hope for a boost in consumer and investor confidence within a short time period. And if things do not develop according to this optimistic scenario, they will try to moderate the negative impact, again with the system of mild measures that cause the least upheaval. However, even an expansive fiscal policy is no solution for the Greek economy, and may even prove a boomerang. The government seems trapped by the old structural problems and the maneuvers for putting off solving them seem likely to have little effect.