Sunday, 14 March 2010

Greek economy forecast to shrink up to 4% this year
Deutsche Bank predicts a 4 percent drop in the size of the Greek economy this year in a report released on Wednesday - far more than the 0.3 percent contraction predicted by the Greek stability and growth plan. A European Commission report on the Greek economy forecasts a smaller contraction of 2.25 percent, according to media that have seen leaked versions. The Greek government revised its own original forecast last week and expects the economy to shrink by 0.8 percent of GDP.

Whichever is closer to the mark, the larger-than-expected negative growth gives rise to fears that Greece's fiscal adjustment of four points of GDP this year cannot be realised since GDP will also change. Even so, the Commission apparently says that measures taken so far "appear sufficient to safeguard the 2010 budgetary targets."

The Financial Times reports that members of the eurozone are working out a financial assistance package for Greece to be announced at the meeting of the currency's 16 finance ministers on Monday and Tuesday. It would likely take the form of bilateral loans from other eurozone members backed by state guarantees. Tuesday is also the day when Greece is scheduled to make public a study into how to save its social security system, while a new tax bill goes to parliament on Wednesday.

Comment: The FT's Brussels Blog opines that German conditions towards the rest of Europe stand in the way of a European Monetary Fund:


  1. Thanks for the update John. We have to see how Deutsche Bank modeled the contraction, but its projection is in line with a lot of the sentiment in the business community that i have seen/heard. The Government's policy mix is wrong,as the new taxes kicking in Monday will severely depress profits and investment. I for one can't believe the government doesn't know it, but it simply must not believe it csn go any further on the expenditure reduction side, which is critical.

  2. With regards to the GDP contraction and its impact on the deficit-to-GDP: It’s true that, mathematically speaking, any contraction in GDP makes a [stable] deficit appear higher. However, the main fear is not so much the changing ratio, but the fact that the government should not expect to meet its revenue targets as easily as before this recession was forecast. Remember that 50% of the latest austerity package – EUR 2.4 bln – is from revenue increases.

    I’ve updated a very conservative forecast of Greek debt here:

    This takes into account a 2% GDP decline in 2010, and then resumes GDP growth as per the Stability and Growth Plan indicators. I’ve added in the EUR 4.8 bln impact of the latest austerity package to the Excel forecast as a permanent measure.

    As stated, however, this forecast is highly optimistic. In fact, I predict end-2010 total debt at EUR 330 bln, as opposed to the EUR 314.38 bln in the model. More measures will definitely be needed, primarily on cracking down on tax evasion, possibly from privatisation.

  3. Thank you both for your informed comments. I, too, am sensing from discussions on morning television shows, newspapers, chamber of commerce events and so on that people are increasingly expecting something in the way of development rather than discipline. It is more and more apparent that the answer is in cultivating the economy rather than in reaping it closer to the root. I don't know if you both saw the comment from Christine Lagarde in the FT today, warning Germany that blind fiscal discipline may not be the answer for many European economies. The Stability Pact, never hugely popular, may now see the creation of an antipode. But what will become of the euro if discipline falls by the wayside officially as well as unofficially?

  4. I find the Maastricht criteria quite beneficial from the viewpoint of macroeconomic and fiscal stability. Although we can debate their applicability in a recession, the fact that Germany and France are also recording recessions and higher-than-usual government funding is no surprise, and indicates there is flexibility in the system.

    From my viewpoint, the question is not to open a debate about these criteria, but about whether Greece can manage its public debt and its wider public sector. The ERM is hardly to blame for the machinations of successive PASOK-ND governments. Better public sector management would benefit Greece first and most of all.

    As for the "choice" of development: it is, and has always been, in Greece's hands. Yet the failed record of foreign direct investment in Greece indicates to me, at least, that the public sector simply is not serious about it.

  5. I think that the seriousness of the public sector about development will now change, however, and that is the most hopeful aspect of this crisis. For years, entitled labour groups, vested capital interests and the parties themselves, who are invested in the people they have made comfortable, have baulked at change and backed the status quo. As fewer and fewer people are happy with their lot, that status quo will become easier to ditch and serious economic reform will be ever more marketable politically.


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