The year 2013 is going to be a pivotal one in Greece’s effort to put its public finances in order and stabilize its economy. Given the sizeable amount of front-loaded austerity measures to come, we would expect Greece to produce a primary budget surplus and the current account deficit to shrink further, but unemployment and poverty rates to rise further. With market concerns about a Greek euro exit easing substantially, the ongoing economic crisis and its political implications should take center stage.
At this time a year earlier, the majority of forecasters thought the Greek economy was going to contract by 2.5 to 3.5 percent in real terms in 2012. Unfortunately, the actual outcome is going to be much worse with the official estimate putting the decline of the real GDP (gross domestic product) at 6.5 percent. It is reminded that 2012 was also supposed to be the first year of recovery in the first fiscal adjustment program agreed in May 2010, with the economy projected at the time to grow by 1 percent or more.
The consensus at this point is that 2013 will be the sixth year of recession, with the real GDP declining between 3.5 and 5 percent. The government projects a drop of 4.5 percent in real terms but expects a visible improvement in the quarterly GDP changes from the second half of 2013 onward.
A good deal of this optimism rests on two main assumptions. First, the fiscal multipliers will be close to 1.0, meaning a billion euros worth of spending cuts and tax hikes will reduce the nominal GDP by a similar amount. Greece has undertaken gross measures to the tune of 11 billion euros in the 2013 budget. Second, the credit crunch will be tackled effectively as banks are subject to recapitalization and the state settles its arrears to domestic creditors.
It remains to be seen whether these two assumptions will pan out since others argue that fiscal multipliers may be much higher than 1.0, meaning the GDP will fall further, and the liquidity injection to the economy may ultimately turn out to be much lower than the official forecasters hope for.
Nevertheless, it is safe to say there is a high probability that Greece will be able to produce a primary budget surplus for the first time since early this century.
Assuming that expenditures without interest costs exceed revenues by about 1.2 percent of GDP in 2012, it is reasonable to expect a surplus of close to 2 percent or higher in the new year, but only if the economy does not perform worse than projected. Even if the GDP contraction is greater, the primary surplus will not be put in jeopardy given the size of the austerity package, in our opinion.
So, Greece may not be called upon to take additional measures in 2013 to close its budget hole and may be able to use 70 percent of the excess surplus above the target to reduce the fiscal effort in the 2014 budget.
Of course, there are question marks regarding the targeted privatization proceeds, and any shortfall may be offset by the likely excess primary surplus.
The current account balance should also show further improvement in 2013 on the back of austerity and reduced interest costs to service the public debt. The current account deficit may fall below 2 percent of GDP from less than 4 percent in 2012 based on central bank figures.
But the improvement in both the general government budget balance and the current account deficit will come at the cost of decreased purchasing power, higher unemployment and spreading poverty. The latter, especially, will have political implications.
Given people’s distaste for austerity, the position of anti-bailout parties, namely left-wing SYRIZA and extreme right-wing Golden Dawn – as the right-wing party of Independent Greeks seems to be in a disarray – is likely to be boosted in polls. Already, SYRIZA has had a 2-3 percentage point advantage over main governing coalition partner New Democracy in recent opinion polls.
However, the cohesion of the three-party coalition government does not appear to be in danger at this point. On one hand, PASOK and Democratic Left are polling dismally and therefore have no incentive to rock the boat. On the other, there appear to be no contentious bills to be passed in Parliament in 2013 that could unleash a new wave of dissenting deputies from the coalition.
Therefore, the scenario of early general elections following a collapse of the coalition government should be assigned a low probability. This is despite SYRIZA becoming more vocal in calling for early elections after its party congress in the spring.
All in all, we expect Greece’s twin deficits to show further improvement in 2013 and the exit scenario taking a back seat ahead of the German elections next fall. But the cost in terms of lower living standards will be significant, testing more and more people’s stamina and increasing political risk.
Although we do not expect economic depression to lead to social unrest and/or early general elections, public discontent could manifest itself in other ways with political implications. The two main anti-bailout parties may poll better, more citizens may find themselves unable to pay their contributions to social security funds and taxes to the state and a general paralysis in the already inefficient civil service may set in, potentially precipitating a change in the political landscape in 2014.
Happy new year!