New environment to place emphasis on both efficiency and effectiveness

The Greek economy has managed to weather the storm of the global financial crisis better than most of its peers so far. This is good news but may make it harder for the economy and local businesses to deal with the new realities of the post-crisis environment. Greece may be lucky after all if the worst financial crisis since the 1930s wanes and finally gives rise to recovery late this year in the US and other industrialized countries. The stock and commodity markets have rallied on this assumption with the Athens bourse gaining more than 30 percent since the beginning of the year.  The way things are going, the bankers who claimed the world may be recovering by the time the Greek economy slips into recession may be proven right. According to this theory, the country will be lifted out of its own shallow recession by the other major economies recovering from their slump and consequently escape the international economic crisis with only minor scars. The local economy grew by a mere 0.3 percent year-on-year in the first quarter and growth may turn negative for the first time since 1993 in the second and third quarter as the sales and earnings of nonfinancial companies continue to be hurt. At the same time, projections of the budget deficit widening to as much as 6 percent of gross domestic product (GDP) have forced the government to take new austerity measures to narrow the gap. The measures, which look certain to be announced shortly after elections for the European Parliament, will deprive households of disposable income and therefore hurt consumer spending, the biggest component of GDP. So, if external demand for goods and services recovers and imports fall to boost the economy, the impetus to the economy along with this year’s high wage growth in the private sector should more than offset the negative impact from higher taxes and the pay freeze in the public sector to pull the Greek economy out of its slump either later this year or early in 2010.  In the short-term, this will be good for Greece because it will limit the loss of output and the rise in unemployment. On the other hand, though, it may be bad because it will not help change the mindsets of Greek politicians and society at large about the ways problems are tackled, and this may turn out to be a big disadvantage in the new era. To the most sophisticated economists and bankers, the post-crisis world in the greater region, and Greece in particular, will not be the same as before. The credit boom that helped generate a prolonged period of economic growth will not be there. The new economic environment will be characterized by lower GDP growth rates, which in turn means that governments and businesses will have to place more emphasis on efficiency and effectiveness. This will most likely be tougher for Greece which had an uninterrupted streak of high growth rates from 1996 through 2008 and did not feel the need to adjust. So, it will be harder for politicians and society in general to accept the necessary sacrifices in order to ensure sustainable GDP growth at a satisfactory rate in the years to come. «Our political system and society are not prepared for what is coming,» says a high-level banker at one of Greece’s largest banks. «The music still plays, but the party is over.» In the new era, our EU partners will be more strict in demanding that we narrow the budget deficit and reduce the public debt as a percentage of GDP, while paying perhaps more attention to primary expenditure and taxes stripped of the positive impact of economic growth.  Moreover, the country will have to pay foreign investors a higher spread above German bonds than in the last few years to finance its annual public sector needs. This in turn will raise the cost of funding in global markets for Greek banks, which translates into more expensive loans to their customers at home and abroad.  So, the economy can expect little boost from the fiscal side and will have to rely more on the private sector, which will most likely have to cope with more expensive borrowing and a slower growth environment in Greece and neighboring countries at the same time.  The solution will be for the state and state-controlled and private companies to become leaner and more efficient, but this is more difficult because politicians and a good part of Greek society are not yet ready to accept the consequences of a lower economic growth orbit. Because of this, avoiding a deep recession may turn out to be worse than skipping it.