Next six to eight months will be crucial
Greece may have obtained partial market access and the economy may have stopped contracting in the second or current quarter, but living standards for a sizeable portion of the population continue to deteriorate. Unless this situation is reversed, there can be serious political ramifications and economic consequences. However, reversal requires time, benign international market conditions and less political and economic uncertainty domestically. The next six to eight months will be crucial.
Greece took fiscal measures, that is, tax increases and spending cuts, totaling about 63 billion euros, or more than 30 percent of GDP between 2010 and 2014 to turn its primary budget deficit, equal to 10 percent of GDP in 2009, into a primary surplus of about 0.8 percent last year and a likely 1.5 percent in 2014, depending on the definition used. In other words, fiscal measures of 63 billion euros resulted in a deficit reduction of less than 30 billion – an efficiency ratio of less than 50 percent. This is a poor record by any standards.
As a consequence, private consumption fell to 68.5 percent of GDP from 73.3 percent in 2009 and government consumption eased to 18.9 percent of GDP from 19.3 percent in 2009 based on 2005 prices, according to a recent Eurobank report. The drop in consumption was reflected on decreased imports, falling to an estimated 28.3 percent of GDP last year from 31.5 in 2009. However, the biggest fall was recorded in the component of aggregate demand, which was the least desirable. Investments fell below 14 percent of GDP last year from 18.6 percent in 2009 on sharply falling sales, extremely tight financial conditions and other reasons. The end result of this unprecedented austerity has made the relatively closed economy to lose almost quarter of its output since 2008.
This is the broad macroeconomic picture but it would not be complete without citing labor market conditions. At the start of 2009, about 514,000 people were unemployed with about 43 percent being out of work for more than a year. About 4.5 million were working. At this point, more than 1.3 million are without a job, of which more than 65 percent are not working for more than a year, and 3.6 million are at work. Moreover, a few hundred thousand of those employed are not paid their salaries on time, usually getting paid with a few months’ delay. So, labor market conditions are bad even before considering the sharp drop in the purchasing power of households due to pay cuts and massive tax hikes.
In a country of about 11 million, almost 3.6 million people are working to pay for the rest, including the unemployed, pensioners, children etc. In other words, more than 2.5 dependents correspond to each employee. This is the worst ratio in the eurozone according to analysts. Of course, there are some jobs in the black labor market which may help ease the pain but tighter controls have made life worse for many workers who are not registered. There are references in the local press of people fleeing their workplace and even jumping into the sea in the islands to avoid inspections by the relevant authorities, according to local media.
It doesn’t take a genius to understand that this situation cannot go on forever without serious political and economic consequences. History has taught us that it will take some time for the masses to feel the economic turnaround. It usually takes 12 months or more for the benefits to be felt from the time the economy gets out of the doldrums. It has also taught us that the economic pick-up is usually stronger after a protracted and deep recession, though this may not be the case for a heavily indebted country like Greece. Even if the economy hit bottom in the first or the second quarter of 2014 and slowly starts recovering, it will still need a benign international and domestic environment.
Greece can only hope GDP growth in the eurozone will pick up to boost exports and that the markets’ appetite for Greek and other periphery credit will remain strong to help raise money from selling debt and equity. But the domestic outcome depends on whether the country sticks to fiscal prudence, continues some reforms and takes some new, targeted growth initiatives funded by EU money. The latter will likely be put to the test if political uncertainty leads to delays, postponing a decision on debt relief. All analysts link potential political developments with the election or not of a new president by Parliament. The vote is scheduled to take place in the first quarter of 2015 but some think it may take place this year.
So, it is important that this issue be resolved to reduce policy uncertainty and help prop up economic activity to maximize the beneficial effect in the labor market. This is more so because it may take banks longer to extend credit to the economy if they have to raise capital after the ECB’s AQR and stress tests. In this regard, the next six to eight months will be important as the vote for a new president, the ECB’s stress tests, the troika’s review and the negotiations for debt relief will take place during this time period. Some are hopeful the outcome will facilitate the anticipated economic turnaround, paving the way for a better labor market. However, history has taught us that Greek politics sometimes follows its own random path.