Article / 15 March 2017 at 15:13 GMT

The Greek hot potato Germany at one point must touch

  • Greek economy has been performing dismally for years
  • Almost one in five Greeks is unemployed
  • GDP per capita has been falling behind heavily the last few years
  • Red tape and small tax rate are some of the challenges that need to be adressed
  • Debt ratio of 179% of GDP cannot be solved without relief, IMF and OECD say
  • Germany so far has been the strongest opponent of debt relief
  • Untold truth needs to be faced - Münchau
Greece 1
Its climate, geography and history attract tourists to Greece, but their money 
is not enough to get the economy growing again. Photo: Shutterstock
 
By Clemens Bomsdorf

While tiny Iceland’s economy has rebounded from the 2007-08 financial crisis, as reported here on tradingfloor.comGreece is another crisis-hit European country whose macroeconomic situation does not at all look so good. Some recent country reports help shed more light on the Greek economy’s status quo and outlook.

Cost of crisis

"The social cost of the crisis has been severe and the poverty rate almost tripled between 2007 and 2013, when measured against pre-crisis incomes,” the OECD said in its November 2016 report. 

It added that “[e]mployment is projected to increase but unemployment remains far too high.” At the end of last year, it was 23%, according to the local statistical office, which also reported an employment rate of not much more than 50%. 

Both the OECD (which can be read here) and IMF (to be found here) have in recent months filed reports on Greece, and neither of them is really positive, though there are some signs of hope.

Let’s start with an overview of the basic data.

Greece data 1
Source: OECD (click to enlarge)
 
Just under 11 million people live in Greece, which is only slightly less than in Belgium or roughly a sixth of the French population. When it comes to GDP, however, Greece fares far worse than Belgium, but somewhere between much smaller Austria and much bigger Romania

GDP per capita in purchasing power standards is 68% of that f the EU28 average (2015 data), which is on the level of Poland. But while Poland has improved since 2005, Greece has fallen far behind. Until 2009, its GDP per capita in PPS was above 90% of the European Union average (see Eurostat database for all data mentioned so far).


Poverty in Greece
Parts of the Greek population are so poor that they need to 
go to centres distributing free food. Photo: Shutterstock

Large parts of the Greek population live in conditions almost unthinkable in the northern countries of the EU. ”Fully implementing social policies, such as the guaranteed minimum income, a targeted school meal and housing assistance programmes, is therefore needed. The conclusion of the pension system reform will improve fairness, as pensioners are better off than the younger generation, and free up resources for greater support for the poor and the unemployed,” according to the OECD.

“The modernisation of the public employment service would benefit the high number of unemployed, especially among youth and the long-term unemployed,” it said. 

Reforms and broader tax base needed

The OECD has some clear ideas about what has gone wrong in Greece: “The implementation of structural reforms, especially the reduction of oligopoly power and regulatory burdens, has been too slow to generate sustainable growth. Further reducing administrative burdens and opening up of professions would enhance productivity and investment, particularly for SMEs.” 

Structural reforms would likely also make some people worse off at least for some time. It seems that in a society as the Greek these changes are much harder to implement than in one like Iceland or Latvia – two countries that also suffered heavily some years ago.

But the OECD also is at least slightly positive, as it states: “Output growth is projected to gain strength as structural reforms boost investment and consumption.” 

Similarly, the IMF said: “Helped by the ongoing reforms and official financing from its European partners, Greece returned to modest growth in 2016. Growth is projected to accelerate in the next few years,” and: “both the primary and current account deficits [have] declined from double digits to around balance in recent years. This is an impressive adjustment, especially for a country belonging to a currency union.” 

Angeline Jolie
Due to its proximity to Turkey and Syria, Greece faced a huge refugee inflow in recent years. Here the special envoy of the United Nations High Commissioner for Refugees 
Angelina Jolie meets with Greek Prime Minister Alexis Tsipras. Photo: Shutterstock

The IMF also said growth is “conditional on a full and timely implementation of the authorities’ adjustment program, including a rapid elimination of the capital controls introduced in mid-2015. On the basis of Greece’s current policy adjustment programme, long-run growth is expected to reach just under 1 percent, and the primary fiscal surplus is projected to come in at around 1½ percent of GDP. Downside risks to the macroeconomic and fiscal outlook remain significant, related to incomplete or delayed policy implementation.”

IMF identifies four challenges

The IMF said the Greek economy remains fundamentally uncompetitive and listed four main challenges:

  1. An unsustainable fiscal policy mix based on unaffordable pensions financed by high tax rates on narrow bases 
  2. An ineffective tax administration, weak payment culture, and rising tax debt 
  3. Weak bank balance sheets and governance 
  4. Pervasive structural rigidities, which prevent inclusive growth 

Greece has been much in the news recently, not only because of its poorly performing economy and deep poverty, but because voters in other EU countries are afraid of paying directly for Greece by bailing it out. The IMF and OECD agree that there is no way to avoid supporting Greece financially. Abandoning Greece would ultimately mean paying for its likely failure anyhow, though indirectly. 

Greek debt
Source: IMF (click to enlarge)
 
“Public debt has reached 179 percent at end-2015, and is unsustainable,” the IMF said, adding that “[e]ven with these ambitious policies in place, Greece cannot grow out of its debt problem. Greece requires substantial debt relief from its European partners to restore debt sustainability.” Also the spending on refugees is a burden for Greece.

The OECD similarly said: “The huge public debt undercuts confidence in the Greek economy, a situation that calls for additional debt relief.”

Debt relief as a political question

So, why is this not done? German opposition is one main reason. 

“Europeans are not used to such bluntness,” the German economist Wolfgang Münchau recently wrote in the FT

He referred to the IMF’s statement that the Greek debt is unsustainable and added: “The Germans protested. The European Commission protested. So did the Greeks. They all want to keep up the fairy tale of Greek debt sustainability for a little while longer. They were particularly shocked that the IMF exposed the disagreement when it wrote that 'some directors had different views on the fiscal path and debt sustainability'. These were the Europeans, who are now in a minority in the fund.” 

Greek vs German stocks over the last years using Greek ETF, Dax as proxy. (click to enlarge)
DE GR stocks
Source: Saxo Bank
 

Germany as opponent

Münchau,  a co-founder of the German edition of the Financial Times (which was closed some years ago) and now associate editor of the FT and publisher of the Eurointelligence briefing, expects the IMF to “ultimately pull out of the Greek programme, leaving the Europeans free to mismanage the ongoing Greek crisis on their own.” 

What the other organizations demanded from Greece was in his view simply too much. “No country has ever managed to maintain such a commitment over an almost indefinite period,” Münchau said, referring to the budget requirements and adding that Greek debt sustainability was premised on an "obviously unfulfillable assumption". 

"Greece is not only far away from achieving a 3.5% primary surplus," Münchau said. "It will never do so. Another untold truth is that Germany will never forgive Greek debt. This is because the German parliament will not accept it, and the number of MPs hostile to Greek debt relief will be even higher after the September election. If the German government wanted to accept debt relief measures, it could probably assemble a parliamentary majority today.”

against Merkel
Germany's hard stance on Greece has led to Greek protests
against the government of Angela Merkel. Photo: Shutterstock

Germany made its participation in the Greek bailout conditional on IMF involvement, which is an overlooked part of the programme, Münchau said.

"That gave the fund leverage. If the IMF now pulls out of Greece, one of two things will happen,” he said. His outlook might be anything but optimistic, but probably realistic: “Athens will either default on its debt this summer and be forced to quit the Eurozone, or Berlin will accept debt relief just a few months before the elections.” 

According to a survey by Bridging Europe, 67% of Greeks think Germany is “delaying the successful conclusion of the second bailout review”. The figures for the IMF and the Greek government are only 13 and 10% respectively. 

Germany will hold elections in September. Social democrat Martin Schulz, who has good chances to succeed Merkel as chancellor, is expected to take a softer stance on Greece. But the liberal FDP and the right-wing AfD party are strongly opposed to a Greek bailout, and, although the two parties now are not represented in parliament, they are expected to gain around 20% of the seats together. 

So Greece remains an economic and political challenge.

Piraeus Port
Increasing exports could help Greece. Piraeus port. Photo: Shutterstock


— Edited by John Acher

Clemens Bomsdorf is a consulting editor at TradingFloor

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