Optimists and pessimists could be right on Greek ‘success story’

The government likes to talk about the Greek success story, pointing to improving economic fundamentals and sentiment, the country’s upgrade by international ratings agencies and the sharp decline in bond yields. However, others doubt it, focusing on the protracted recession, the high unemployment rate and the lower living standards while arguing there is a humanitarian crisis going on. Normally, both sides cannot be right, but the current circumstances are not normal.

There is no question Greece has made a lot of progress in putting its public finances in order. The primary deficit, which is widely regarded a good gauge of fiscal performance, has been reduced drastically since 2009 despite the steep recession. The primary deficit, which excludes interest payments on public debt, fell to about 2 billion euros or about 1 percent of gross domestic product in 2012 from more than 24 billion or 10.4 percent of GDP in 2009. The primary balance is expected to be flat this year or to produce a small surplus.

The overdose of fiscal austerity underpinned by restrictive measures in excess of 30 percent of GDP and the wrong policy mix aggravated the expected contraction of economic activity. This is because of the relatively small share of exports in the GDP and the sharp drop in investment spending. The result has been a cumulative loss of real output to the tune of 25 percent. On the other hand, austerity has helped compress the current account deficit to less than 3 percent of GDP in 2012 from more than 11 percent in 2009. The external deficit is seen shrinking further this year.

As far as competitive adjustments are concerned, Greece has almost restored competitiveness to where it was at the start of Economic and Monetary Union, according to a recent JP Morgan report. Greek unit wage costs in manufacturing had completed 92 percent of the journey to the eurozone average at the end of 2012 while relative unit wage costs in the whole of the economy had completed the journey. The government would add the likely privatization of the OPAP gaming company and the recorded improvement in the economic sentiment indicator over the last few months, as well as figures showing new hirings exceeding layoffs in the last couple of months to support its case for a success story.

However, critics do not buy this argument and emphasize the rise of the unemployment rate to 27 percent and to over 60 percent for young people aged up to 24 years. They also point to the significant drop in households’ disposable incomes over the last three years, the extended use of soup kitchens to feed the poor and the sharp increase in suicides over the same period. With poverty clearly on the rise, it is hard to see any success story as far as they are concerned.

Greece finds itself in a situation where both sides may be right. The statistics and other qualitative figures cited by the government are correct and point to a potential success story. Indeed, many businessmen from various sectors say in private they are cautiously optimistic the worst is over. The removal of the “Grexit” risk appears to have played an important role, as well as political stability as the coalition government holds together.

Many businessmen have also taken heart from the deceleration of the decrease in sales over the last few months compared to a year earlier. Of course, the first half of 2012 was a peculiar period marked by political instability and a very low base to compare with. After all, one wonders how much lower the consumption of cement can fall after dropping to 2.5 million tons in 2012, a level last seen back in 1964 just to give an example. Part of their optimism also stems from the belief Greek banks will open up the spigots of credit to businesses following their recapitalization.

A minority of businessmen and executives appears not to share the cautiously optimistic view. This is because they give more weight to the continuing downtrend in sales and expect domestic demand to remain compressed as austerity continues to bite. They also appear to hope credit will start flowing again to the private sector at some point later this year.

Moreover, conditions in the Greek labor market remain dismal, justifying the prevailing disappointment among ordinary citizens as the real economy continues to contract and there are no tangible positive results from the pickup in business sentiment and better macroeconomic fundamentals. As long as this continues, the economic situation of a growing number of households will deteriorate, undermining recovery. Even if the unemployment rate stays at 27 percent or dips, the number of long-term unemployed – those without a job for more than 12 months – is bound to increase.

From this perspective, one may argue the pessimists are right. But before jumping to any conclusions, one should note the labor force comprises some 4.8 million people. All of them have seen their purchasing power cut because of higher income, property and other taxes, while a good deal of them have been subject to pay cuts. Among them, the unemployed and those who work but are paid with a few months’ delay are definitely worse off. The number of unemployed is around 1.3 million and another half a million or more are not paid for three months or longer according to estimates. The remaining 2.8-3.2 million employees are paid on time, including about 1 million in the greater public sector. So, about 2 million may have been spared pay cuts or experienced modest cuts in the last three years. This describes a complex situation and may explain why analysts and others reach different conclusions about the state of the Greek economy and households.

So the government may turn out to be right in talking about the Greek success story, but the pessimists may also be right as ever more households will see their situation deteriorate and likely fall below the poverty line in coming quarters. Success and misery may be in for cohabitation in Greece for the next year or so.