ANALYSIS

Time to change the economic paradigm

time-to-change-the-economic-paradigm

The Greek election campaign enters its final stretch with the leftist SYRIZA party holding a slim lead over conservative New Democracy according to the latest opinion polls. The debate between Alexis Tsipras and Evangelos Meimarakis on Monday night may turn out to be the decisive factor in determining the winner, though no one can escape the straitjacket of the third bailout program. However, the winner and his coalition partners may face the fate of their predecessors if the economy does not grow satisfactorily and this needs a new economic paradigm.

Although there have been plenty of exchanges between the two leaders of SYRIZA and New Democracy on many issues, neither has managed to communicate his vision about the future of the Greek economy. To be fair, former premier Tsipras has stressed the importance of fighting the big corporate vested interests and collect more taxes while Meimarakis has put more emphasis on attracting private investments to jump-start the economy. Both leaders and the potential junior coalition partners have their task cut out for them.

Although the primary budget target has been lowered considerably to take into account the expected recession this year, the situation is not pretty. The primary surplus of the general government stood at 2.35 billion euros from January through July compared to 2.86 billion in the same period in 2015. It is not bad but one has to take into account the fact that state arrears to suppliers and others in the private sector went up to about 5 billion euros at end-July from 3 billion at the end of 2014. In other words, the underlying fiscal situation may be worse than the headline numbers show. However, the collection of some taxes, such as the ENFIA property tax, has been pushed back due to elections and may help improve the picture or partly offset the adverse effects from the anticipated fall in the real GDP in the second half.

Of course the economy surprised many by growing 0.9 percent quarter-on-quarter in the second quarter and 1.6 percent year-on-year according to seasonally adjusted data. It was up 1.1 percent year-on-year in the first half according to estimates, surpassing expectations. It is this performance and the continued encouraging signs from tourism which have prompted economists to predict a milder economic contraction for the year than the initial 2 to 4 percent drop. A growing number of analysts estimate economic activity will shrink by less than 2 percent in 2015.

Fresh data from the Hellenic Statistical Authority (ELSTAT) confirmed the strong contribution of the tourism industry to growth. Turnover in the accommodation and food sectors rose by 13.4 percent in the second quarter compared to the same period a year ago according to ELSTAT. It was up 6.7 percent in the corresponding period in 2014 compared to 2013.

Interestingly enough, wages in the total economy, excluding the primary sector (agriculture), fell more than 2 percent year-on-year from April through June. The decrease in wages and political uncertainty did not stop consumer spending from rising enough to prop up the economy during the same period. It should be noted that neither real estate – the main form of wealth in Greece – nor other financial assets rose to justify a wealth-induced pickup in consumption. The space created by the lack of additional austerity measures and the tendency of a growing number of people not to pay their utility bills (electricity etc) may help explain the pickup in consumer spending.

Moreover, the seasonally adjusted unemployment rate eased to 25 percent of the Greek labor force last May from 25.6 percent in April and 27 percent in May 2014, before climbing to 25.2 percent again in June. About 1.2 million people were jobless and 3.6 million working. There are about three dependents – that is unemployed, pensioners, children etc – for each worker in Greece given the population of 11 million people. This is the worst ratio in the eurozone and perhaps in the European Union, and cannot come down easily. The country will need net job gains of 100,000 or more in each of the next eight years for the number of employed to reach 4.4 million – that is the level seen back in 2010 when Greece sought the bailout program.

The economic constraints are known. Public spending cannot increase much and the tax capacity of the people and companies is finite so the general government cannot do much. Consumption may increase but it will not be sustainable or easy given the additional tax burden, inadequate bank credit and a weak labor market. It is private investment spending and exports of goods and services which could make the difference.

However, this requires a national commitment, superseding any coalition government in our view. It is something analogous to what happened in South Korea a few decades ago and requires a change in Greece’s economic paradigm. A shift from a consumption-based and bank credit-funded model to an investment- and export-based one. Can the country’s political forces deliver it? We have strong doubts since it requires a consistent effort backed by almost all political parties, but hope dies last, as the Greeks say.