Greece’s economy: Is there light at the end of the tunnel?

As the May 6 election approaches, the Greek economy is in its third year of severe austerity and fifth year of economic decline, with no evidence that the trend is likely to be reversed this year, next year or even subsequently.

In terms of the length and severity of the economic decline and the lack of any apparent light at the end of the tunnel the situation in Greece might be compared with that of European countries at the time of the great slump which started in the late 1920s. In addition, with the situation in Greece being even worse than in other vulnerable countries like Portugal and Spain, and with debts that have become unmanageable, it has been portrayed abroad — particularly in Germany — in terms which caricature its weaknesses, leading to a potential feeling in Greece that the country is being punished and humiliated rather than helped by its EU partners. In January this feeling was given justification by the leaking of a German government memorandum calling for a regime being imposed on Greece which would give priority to repayment of debt over all domestic Greek public expenditure. This led to a response from Evangelos Venizelos, then Greek finance minister, that Germany had not learnt the lessons of history.

Mr Venizelos?s response could be justified in terms of the leaked memorandum and Greece?s predicament should be of concern to Europe as a whole, but neither point can be of much comfort to Greece?s politicians in their election campaigns. In 2011 Greece had an overall government deficit of 9.1 percent of its diminished gross domestic product, and a primary deficit (i.e. excluding the cost of servicing the debt) of 3.6 percent, or just under 10 billion euros. What is done about Greece?s government debt of still about 150 percent of GDP after the write-down by private sector creditors of half the nominal debt finally agreed on in March 2012 (and about 70 percent in net present value) is not a matter that can be immediately sorted, but, whatever happens, the primary deficit must be converted into a primary surplus. Since no EU member state would be willing to sharply increase the ongoing transfers provided for by the EU budget on a permanent basis, the need to eliminate the primary deficit remains unavoidable. Is there anything that can be done to break the vicious circle in which further austerity leads to further economic decline?

On April 18, the European Commission released a communication titled ?Growth for Greece.? Most of the communication is a reinforcement of existing pressure on the Greek government to make effective reforms that have in theory been passed to open up competition within the Greek economy and improve administrative procedures to release businesses from the entanglement of red tape. The arguments are valid and should be acted on but the trouble is that they consist of preparing the ground for potential business growth but do not directly lead to that growth.

Business growth is inhibited by the fact that Greek banks, which have lost heavily in the government debt restructuring, need to deleverage and therefore can do little or nothing to extend new loans. In this situation the Greek authorities should actively seek out potential for new businesses and business growth, particularly where there is opportunity for export earnings and secondly to compete with imports. Greece should press EU institutions to do more to help. Significant resources are potentially available. An amount of 20 billion euros of structural funds was budgeted for Greece in the 2007-13 Community Support Framework in the form of non-repayable grants, of which — according to the communication — half has so far been spent. With half to spend in the last two out of the seven years, there could be a relatively big boost to provision but obstacles to the money being well spent are still large. Although the proportion going to businesses is supposed to increase, the majority of the funding still goes to infrastructure, which cannot directly support business expansion or boost exports. The grants could moreover be supplemented by low-interest loans from the European Investment Bank and the European Investment Fund. This is supposed to be happening already but on a much smaller scale than is required. Successful business investments should be publicized as examples that others might follow. Growth will have to come from the private sector but there is much more the public sector — with the help of EU funding available — could achieve.


* Charles Jenkins is lead commentator at the InsightEU blog.