Ranks of pessimists grow but not all economic news is gloomy

As the Greek economy heads toward its first recession since 1993, the ranks of pessimists among businessmen, bankers and analysts is growing, forecasting mediocre gross domestic product (GDP) growth rates in the next few years. Although the lack of a strong government and the international economic crisis make their arguments more convincing at the time for this year and next, there are reasons to be more optimistic from 2011 onward, on certain conditions. You cannot easily battle human nature. In general, it is more difficult to find optimists when things turn ugly and pessimists when things look great than the other way around. If we were talking about markets, the lesson would have been clear. History teaches that it pays to be an optimist when panic sets in and a pessimist when euphoria reigns, because that’s when money is made. However, it is harder to adopt this market approach to the real economy. It is likely the Greek economy will contract this year for the first time in more than 15 years, as the main growth drivers, such as construction, real estate, shipping and tourism, are hit on the back of weaker demand at home and abroad. The likely contraction, which may turn into stagnation at best, has revealed the economy’s Achilles’ heel, namely the poor underlying public finances. Unfortunately, the structural budget deficit was hidden to a large extent by the strong GDP growth rates of previous years and came to the forefront when GDP growth took a dive. It is clear that some minor improvements in fiscal affairs are not enough to put the brakes on the budget deficit’s derailment again this year. The government’s efforts to boost tax revenues to partially close the budget hole are doing more to dampen economic growth than the state aid packages given to targeted sectors and professional groups, aggravating even more the economy’s growth prospects. The need for fiscal consolidation is one of the two main reasons the ranks of pessimists are growing at the same time that stock markets are rallying and the first glimpse of hope is coming from the US economy. Those who advocate this view think Greece will be forced by the EU to take tougher economic measures going forward to bring the budget deficit to below the 3 percent limit of GDP. They say the EU authorities will be less lenient on Greece, which has shown little respect for fiscal discipline, as the larger economies of the eurozone recover. But more restrictive economic policy measures to cut the budget deficit and reduce the burgeoning public debt will certainly have an adverse effect on growth going forward. The pessimists cite a second reason to justify their point of view. According to them, the Greek economy’s past outperformance vis-a-vis its EU peers was made possible by strong credit expansion. The country’s battle to join the eurozone and the adoption of the euro brought the lowest interest rates in generations. This, along with the low leverage of the local households, helped to fuel economic expansion. Moreover, banks will be less willing to provide loans than in the past, after the crisis. Undoubtedly, both are valid arguments and will play strongly this year and perhaps next. It would be a mistake though to downplay some other dynamics of the Greek economy: first, its stronger economic ties with the emerging economies in Southeast Europe. Although these economies may suffer at present, it is widely expected to grow strongly in coming years. Second, Greece can still count on huge EU structural funds until 2013 to finance various development projects. Third, the country showed earlier this year that it can borrow vast amounts of money to fund its budget deficit under very difficult conditions on global capital markets even if it pays large spreads over Germany. The economic slump is partially the result of negative expectations by households and businesses, which are spending less on consumption and investment. It is reasonable to expect a gradual improvement as the world economy comes out of its worst recession since the 1930s and things start looking better locally. There is no doubt that the arguments put forward by those who see poor economic growth prospects in the years ahead are valid but the picture for the Greek economy gets less gloomy when the arguments of the optimists are taken under consideration. It is also likely the winning side will be decided by the country’s political leadership.