Monday, 17 August 2009

How bad is it, really?

The gulf between Greece's predictions about its economy and the predictions of international monitors begs an obvious question: What is the truth of our situation? Are we due for a massively painful comeuppance in the autumn?

Take growth. The original 2009 budget predicted a rather gallant 2.7 percent, down only slightly from last year's 2.9 percent. The European Commission suggested in January that 0.2 percent was more realistic. Incoming Finance Minister Yannis Papathanasiou revised his predecessor's estimate to 1.1 percent in February, and revised it again in June to “around zero”.

First quarter GDP growth was just 0.3 percent, year-on-year, and second quarter growth was -0.2 percent.

It seems highly likely that Q3 will also run negative. It is heavily dependent on tourism, responsible for an estimated one fifth of the economy. The Bank of Greece announced a drop in January-May travel receipts of 17.9 percent as compared to last year. The key industries of shipping, construction and domestic retail are also suffering.

It now appears that 2009 GDP as a whole will be negative. The International Monetary Fund, which last spring had agreed with the Commission's estimate of 0.2 percent growth, published a revised estimate earlier this month of -1.7 percent. The Organisation for Economic Co-operation and Development (OECD) also thinks the Greek economy will contract, by 1.25 percent.

The deficit is another area of statistical disagreement. The original 2009 budget optimistically forecast that revenues would fall short of expenditures by a mere two percent of GDP this year. The European Commission opined 3.5 percent in January, later revising it to five percent. In a biannual survey of Greece released on July 31, the OECD said that Greece will top six percent of GDP in borrowing this year, rising to 6.75 percent next year. The IMF on August 6 predicted deficits of 6.2 percent and 7.5 percent of GDP this year and next.

Who is closer to the truth? Papathanasiou, or the OECD and IMF?

Greece has, for the second time since joining the euro in 2002, incurred the EU's Excessive Deficit Procedure. It has been given until October to come up with a radically revised Stability and Growth Plan. That plan must explain not only how Greece will contain expenses; it must also put in place a programme of structural changes that will cut the public payroll, improve public education, save social security from bankruptcy and make healthcare viable. Until that plan is made public in October, along with the 2010 budget and Q3 results, we are unlikely to know how the Greek government really sees things.

There are early signs that the government is coming around to international pessimism. Papathanasiou told reporters on August 4 that he may ask the EU to extend its 2010 deadline for bringing the deficit under three percent of GDP by a year. A three-year plan had been his original preference, and his return to that position is a sign of lost optimism.

But Papathanasiou also argues that gloomy predictions ignore a windfall of 5.7 billion euros' worth of Public-Private Projects (PPPs), which it will fast-track now after years of bureaucratic wrangles. It also claims it will front-load the programme of EU-funded infrastructure projects, which is worth 24.3bn euros over seven years. Fine, but can the government pull off what it promises?

Greece also claims that international predictions ignore the parochialism of its economy. It is not export-driven, and the forecast 19.2 percent decline in its exports this year (IMF) will affect it less than they would, say, Germany; its banks are not heavily invested in toxic assets; and more than half of its workforce is employed by small and medium-sized enterprises (companies of fewer than 20 employees) rather than multinationals. These points are all true, but they can only limit damage. They do not replace lost growth.

There are also some counter-arguments. The IMF and OECD point out that Greek banks' heavy investment in the Balkans means they are exposed to nonperforming loans there due to economic slowdown and currency discrepancies. And as Bank of Greece Governor Yiorgos Provopoulos warned earlier this year, Greece will suffer from underemployment as opposed to unemployment, so the statistics may be misleading as to the extent of the social damage.

Most importantly of all, the challenge for Greece is not weathering the crisis but recovering from it. Many economists think it can only do so with structural reforms in social services and by lowering public expenses. These are reforms the European Commission, the IMF, the OECD and the Bank of Greece have all called for. So has a chunk of the Greek electorate.

Just as the recession has come to the Greek economy with a delay factor of a few months, so will the impetus for reform as a result of that recession; but come it shall. Press reports suggest that Prime Minister Kostas Karamanlis and Papathanasiou are planning to announce a restructuring programme in the autumn. The socialist opposition will probably attack it, bent on elections. Voters will have to keep their ears open to the argumentation on both sides. Who embarrasses whom in this debate will be important.


  1. there is no doubt that ND has failed emphatically!
    however, I can only be pessimistic ...projecting Louka Katseli in the shoes of Papathanasiou...

  2. I think I'd much rather trust an international assessment than an internal one. And, erring on the side of caution / pessimism is probably safest.

  3. I agree that no-one is going to pull a rabbit out of a hat; the challenge to both Pasok and New Democracy is to sell change in a society that lacks a sense of public mindedness and social responsibility. Everyone seems to think that change will favour some and disadvantage others, and that the criteria will be political, not economic. We all want our social safety net, but we want the state to pay for it.

  4. Thank you for your questions about official statistics. Having mayself computed 70% of the GDP for a country, I know how difficult it can be to have realistic estimations. It gets still complexer when you attempt forcasting for the coming monthes or years. It is then no more a question of statistics, but of econometrics. I think Greece should invest in more precise data about economy and vote for politicians who really want an improvement for the country, and not just for themselves, and not just for the time being.
    I agree in thinking that international organisations will produce data that respects international standards and will be comparable with those of other countries. The part of black / informal / unobserved economy in Greece is high, but in others countries too, due to emigration, EU and Schengen space.
    What Greece really might help is that neighbour countries become EU members, in order to boost commercial activities with northern partners.

  5. Hi John, Great piece, especially timely before the fires. Now let's add those ever expanding recovery costs to an already over-strained budget and guess how much worse things will come out in the final tally. Greece will of course gain some sympathy in Brussels. Structural reform is the key for the long term, and I am glad that you are keeping this in the spotlight. Unfortunately, elections loom, and that means we will see far less reform and effective cost containment than is neccessary. Sounds like a broken record.......


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