The outlook for Greece’s economy in 2022
We entered 2021 with good omens. Joe Biden was elected US president. Despite old age and serious health issues, at least he was not the “crude” and “unpredictable” Donald Trump. Biden’s campaign promises were moderate, in Greek terms a bit to the right of Movement for Change (KINAL).
A year later, things are very different and unfortunately darker. President Biden adopted some of the positions on redistribution and taxation of Senator Bernie Sanders, the only self-declared socialist in the US Senate. Biden gave out as subsidies trillions of dollars that the United States will never have the chance to collect in taxes, even they are increased significantly.
Spending trillions of dollars created a tremendous demand for goods without a proportional increase of production, resulting in inflation. Used car prices shot up 20%, and many goods’ prices increased, bringing inflation to 6.8%, a 30-year high. Many businesses have announced additional increases from the first day of 2022. The huge increase in demand also led to problems in the supply chain and resulted in shortages. Many who received subsidies in 2021 did not restart working when their jobs restarted, waiting to first spend the subsidies.
Changes in taxation rules reduced the incentives for investment in the United States, making it almost certain that China will displace the United States as the world’s largest economy in a few years. Fortunately, the Federal Reserve, in its last meeting, decided that inflation is non-transitory and planned three interest rate increases in 2022 to tame inflation.
In foreign policy, the disorderly exit of the US from Afghanistan underlined the weakness of the president. China “remembered” the Maoist slogans urging the conquering of Taiwan and toughened its foreign policy in general. Russia is playing poker with the price of natural gas, holding the EU hostage in its confrontation with the US over Ukraine, having already swallowed Crimea under Barack Obama. The apparent weakness of the president to define a credible foreign policy encourages Vladimir Putin and Xi Jinping to take extreme destabilizing actions.
Under these gloomy circumstances, the Omicron variant of Covid-19 appeared, about five times more infectious that the previous ones. Present evidence shows that it typically causes a mild infection. However, even if few infected have a severe case, its wide and fast dispersion could test the healthcare system worldwide. Economic analysts are already reducing growth estimates because of Omicron.
In this difficult environment, Greece is coming out of a decade of economic crisis burdened by a huge public debt while a neighboring country is dreaming of a medieval caliphate that would have conquered Greece, the Balkans, Cyprus, Egypt, Israel, Syria , Iraq, the United Arab Emirates and Saudi Arabia. The withdrawal of the US from the Middle East under Trump and the exit from Afghanistan under Biden gave Turkey the opportunity to attempt to play a regional leadership role.
Today Turkey occupies parts of Cyprus, Syria and Iraq, and played a central role in the attack of Azerbaijan on Armenia. It also transported and deployed Islamist mercenaries from Turkish-occupied Syria to Libya and Azerbaijan, becoming a leader in international terrorism. Turkey’s 10 years of expansionary aggression campaigns has not met with serious penalties from NATO or the EU. It is therefore not strange that it has increased its aspirations and poses maximalist claims all the way to the Libyan Sea.
In contrast, successive Greek governments refrained from defining the Greek exclusive economic zone vis-a-vis Libya, Cyprus, and Turkey. Fortunately for Greece, the present government is rearming Greece and created strategic alliances with Israel, Egypt and other Arab countries.
Turning to the Greek economy, Greece was successful in attracting important investments from abroad (Microsoft, Pfizer, Amazon) and the new development at the old airport at Elliniko has started. To counterbalance a decade-long dearth of investment, Greece needs very extensive additional new investments.
In fiscal issues, Greece is doing well because the European Central Bank is still buying Greek bonds even though they are not of investment grade. Participation in the ECB’s quantitative easing and other programs reduced interest rates that Greece, its banks, and major companies pay, considerably helping the growth of the Greek economy. Of course it is essential that Greece reaches investment grade so that it will be supported by the ECB in its own right and not as an exception. Additionally, in 2022 or 2023 the temporary Covid-related suspension of the EU rules on budget deficits will end, and likely compulsory surplus rules will return.
This means that Greece has only a period of a few months of independent economic policy before it returns to some degree of EU supervision. The rating agencies view the strong growth of the second and third quarters of 2021 in a positive light but demand structural reforms to increase Greece’s credit rating. Many of these structural reforms were proposed by the Troika a decade earlier but successive Greek governments avoided implementing them so that they would not also pay the political cost involved.
For the last two years the government has lacked a strong political adversary. On the one hand this gave it space to implement significant structural reforms. On the other, without a significant political adversary, inertia tends to take over. Greek society is deeply conservative, and many significant participants (unions, large companies) are “comfortable” with the status quo and put significant pressure on every government not to change anything at all.
Simple and obvious changes such the harmonization of Greece’s competition law with the EU’s was met with furious opposition of the comfortable OTE. However, development in Greece requires low telecom prices, not the highest ones in the EU! Companies even object to the regular collection of information on industrial activity by the Competition Commission. These are only a couple of examples, among many.
The justice system is in shambles, with sentences for the same offense changing radically from one day to the next. Final judicial decisions take a decade to be reached, motivating unscrupulous suits on fictitious offenses dragging their opponents in the courts for a decade. The labor market, despite constructive changes, is inflexible, providing incentives for temporary part-time hirings rather than permanent full-time ones. The banks have made some steps toward reducing nonperforming loans but have not yet cleared their books of these loans so that they can finance the development of the Greek economy.
Prime Minister Kyriakos Mitsotakis was elected to carry out reforms. Paradoxically, the pandemic helped in providing EU funds that can be used for investment. So, Greece now has the ability to invest in areas that will radically transform it, such as new digital technologies. However, conservatism, mainly expressed by the left and the extreme right, as well as the unions and the various monopoly companies, is pushing the government hard so that nothing at all is changed. After two years in power, the dilemma facing the prime minister is whether to carry out deep reforms or to succumb to inertia. If he chooses the former, he can be remembered together with the ultimate reformer of modern Greece, Eleftherios Venizelos.
Nicholas Economides is a professor at the New York University Leonard N. Stern School of Business.