Balancing fiscal and real conditions

The Greek government knows the importance of psychology in determining economic outcomes and seems to be trying hard to bolster morale by pointing to encouraging signs, from the fiscal front to the external accounts, the return of deposits and others. Foreign media outlets and others outside the country appear to be convinced more than many businessmen and ordinary citizens in Greece. They cannot all be right.

Finance Minister Yannis Stournaras said recently that the numbers will prosper first and the people afterwards in an apparent effort to stave off criticism that the real economy is getting worse, as the government sees light at the end of tunnel. He has said that 2014 will be the first year of recovery after a lengthy economic slump, resulting in about 25 percent loss of GDP.

Stournaras and Alternate Finance Minister Christos Staikouras have taken heart from the smooth execution of the budget so far, underscored by the recorded primary surplus. Revenues will exceed primary spending, which excludes interest on public debt, by 300 to 700 million euros at the general government level in the first four months of the year, according to a high-ranking government official. Although the primary balance is evolving in a non-linear fashion, Greece could produce a yearly primary surplus, ranging between 900 million and 2.1 billion euros this year based on the projected outcome of the January-April period.

It is reminded that eurozone states have agreed to take additional measures in 2014 and 2015 to decrease Greece’s debt-to-GDP ratio to 124 percent in 2020 and “substantially below” 110 percent by 2022. These could include further interest rate reductions in the 53-billion-euro EU bilateral loans extended to Greece in 2010 and 2011 as well as decreases in EFSF interest rates. Moreover, the government will be able to provide some tax relief or increase spending for 70 percent of the primary surplus in excess of the annual target. So, it has incentives to produce a larger-than-projected primary surplus.

Government officials also point to the further contraction of the current account deficit by 59 percent year-on-year to 1.1 billion in the first two months of the year as another positive sign. They also refer to Greece’s closing a good deal of the competitiveness gap versus its EU peers but do not mention that this was mainly the result of cuts in nominal wages. Moreover, they stress that more than 19 billion euros have returned to Greek banks since mid-June 2012 as another sign of confidence in the economy. Lately they have added references to labor market figures showing that hirings have exceeded layoffs by more than 20,000 people in the January-April time span, the rise of the economic sentiment index to the highest level in the last three-and-a-half year, the privatization of OPAP gaming company and the restart of four major highway projects. Fully aware of the credit crunch, they point to the recapitalization of the banking system and the gradual repayment of arrears to the private sector by the state as signs of credit easing. One may add the sharp drop of Greek bond yields in the last week or so which took the yield of the bond maturing in 2023 well below 10 percent, from 12.5 percent during the crisis in Cyprus.

Undoubtedly, this is all good news and can be appreciated more by outsiders sitting at their desks in London, Paris or elsewhere. But the feeling from talking to ordinary people and businessmen here is not the same. With the unemployment rate stuck at 27 percent – essentially all unemployed come from the private sector – and joblessness among the young much higher, job insecurity is prevalent. This is complemented by the fact that several hundred thousand employees are paid their salaries with a few months’ delay while at the same time being hit with property and other levies. In most cases they have also sustained pay cuts, like several hundred thousand others in both the private and the public sector who are paid promptly.

On the other hand, several hundred thousand employees – in specific sectors and firms – may have been squeezed by higher taxes but have not seen their salaries cut and still have their jobs. They may complain about their situation but they are essentially okay. Those who work at export companies, segments of the agriculture, most banks and insurance companies have fared better than those in the construction and related industries, the retail commerce, the car industry, the media etc.

Businessmen across various sectors are not optimistic overall, though there are a few exceptions. They point to reduced consumer spending, taxes, insufficient bank credit and state bureaucracy to make their point. Most expect few things to change other than additional taxation. They are aware that the numbers will improve first but they are unsure about the people’s tolerance level. At least, however, most feel more confident that the tripartite coalition government will hold together until next June because a rift would not be in the three parties’ best interest.

The flash estimate for the GDP change in the first quarter should be out in the next few days, shedding some light on the real economy. In general, Stournaras is right when he says that numbers prosper before people do and citing some progress in economic fundamentals. However, the much-touted recovery in 2014 may turn out to be a jobless one and may not go down well with segments of the population which have reached the limit of their tolerance threshold and others approaching it. At least the government has another year or so to bring results and prove the optimists right. In the meantime, we need to keep our fingers crossed because the balance is delicate.