Low rates do not suffice

One of the arguments used by government officials – eager to give a rosy picture of the prospects for the Greek economy – is that the big fall in the cost of borrowing in recent years is the best news for the maintenance of high growth rates in the future (and that such rates will necessarily go on creating jobs and higher incomes). However, most EU economies have been growing slowly in recent years, despite low interest rates. Evidently, the argument ignores a number of crucial factors; apart from money, its cost and financial markets, notions of paramount importance in business, certain other basic parameters are also crucial in issues pertaining to economic growth. First, foreign investment. The fact that it has fallen to near-zero in Greece in recent years means that the country’s productive sector has not received any large infusions of capital, technology or knowhow. It means that this benefit is gained by someone else, an economy competitive to Greece’s. This bodes ill for incomes and jobs in the future. Second, savings. The shrinking of domestic savings and the resulting inability to accumulate capital from domestic sources is an unpleasant development which the Greek economy will pay for when the bonanza of EU investment subsidies comes to an end. Without foreign direct investment and without a satisfactory level of savings, the economy is bound to resort to excessive borrowing to be able to maintain current growth rates and avoid a marked downturn. The lack of domestic resources increases the cost of investment. Besides, a high propensity to consume rather than save further boosts the trade deficit, borrowing and inflation. Third, capital reserves. Capital formation is a fundamental precondition for economic development, and whether the Greek economy is able to achieve real convergence with the European Union average in future will largely depend on it. Ill-conceived investments in the private or public sector can fully annul the expected results in terms of growth. An investment in a big stadium, for instance, will not reproduce the capital invested and therefore will not augment economic growth – in contrast to investment in technology, which reduces costs, increases productivity and creates capital reserves. Fourth, EU investment subsidies. In many cases, studies on projects proved inadequate, in others funds were evidently wasted, and even more needed supplementary work, at a much higher cost.