The Greek crisis and the Eurozone: a cure worse than the disease?
Loukas TsoukalisIstituto Affari Internazionali Roma, 6 February 2013
Greece as catalyst for transformation of international financial crisis to a crisis of the eurozone in 2009 1. Budget deficit (15.4% of GDP in 2009) 2. Current account deficit (15% in 2008) 3. Credibility deficit (Greek statistics)
Essentials of Greek problem: 1. Public finances gone out of control, esp. in 2007-9 2. Competitiveness gradually eroded 3. Lack of structural reforms 4. Clientele political system In Greece, it is mostly public debt, not private as in Spain and Ireland. Cheap borrowed money provided mostly by foreign lenders on the assumption that sovereign risk was zero and high growth rates could be sustained forever. Meanwhile, clientelism grew and reforms were postponed.
Greek problem also part of a systemic European problem reinforced by the bursting of the international financial bubble. Banking crisis Sovereign debt crisis Competitiveness problem in a currency union A currency without a state (Tommaso Padoa-Schioppa)
When reality hit in the end of 2009, Greek government dithered and so did its European partners. Since May 2010 (first adjustment programme), Greece has become a test-case for new policies at national and European level. Stress test for political system, economy and society. ‘Unthinkables’ become reality in Greece and the EU.
GENERAL GOVERNMENT DEFICIT/SURPLUS AS A PERCENTAGE TO GDP (2001-2012) 0.0 -2.0 -4.0 -6.0 -5.7 -8.0 -6.6 -10.0 -9.8 -9.4 -12.0 -10.7 -14.0 General government -16.0 deficit/surplus as % GDP -15.6 -18.02001-2007: Average annual general government deficit/surplus as % of GDP2012: Forecast, European Commission, "The Economic Adjustment Programme for Greece", December 2012Eurostat Unprecedented budgetary consolidation (9% of a rapidly declining GDP between 2009 and 2012)
INTERNAL DEVALUATION: NOMINAL COMPENSATION PER EMPLOYEE (1998-2012)8.0 6.66.0 4.04.0 3.6 3.52.00.0-2.0 Nominal compensation per -2.6 employee (annual percentage-4.0 -3.4 change)-6.0 -6.8-8.0 1998-2002, 2003-2005: 5-year averages 2012: Forecast European Commission, "European Economic Forecasts- Autumn 2012" Cumulative decline of nominal unit labour costs by 14% in 2010-12
CURRENT-ACCOUNT BALANCE AS A PERCENTAGE OF GDP (2001-2012) 0.0 -2.0 -4.0 -6.0 -5.8 -5.8 -6.5 -6.5 -8.0 -7.2 Current account balance as -7.6 % GDP -10.0 -10.1 -9.8 -12.0 -11.4 -11.1 -14.0 -14.6 -14.9 -16.0 2012: Forecast IMF Improvement of current account balance by 9% of GDP in 2008-12, but largely due to the shrinking of domestic demand
Slow pace of structural reforms, accelerating since mid- 2012 Pension reform Labour market Closed professions Restructuring of the state Privatisations
GENERAL GOVERNMENT GROSS DEBT AS A PERCENTAGE OF GDP (2001-2012) 180.0 170.6 160.1 160.0 148.3 140.0 129.7 120.0 112.9 102.1 100.0 80.0 60.0 General government 40.0 gross debt as % GDP 20.0 0.0 2001-2007 2008 2009 2010 2011 2012 2001-2007: Average annual general government gross debt as % of GDP 2012: Forecast, European Commission, "The Economic Adjustment Programme for Greece", December 2012 Eurostat Public debt restructuring: ‘haircut’ of private holders of Greek public debt (total €200 billion) at 53.5% of the outstanding face amount% in present value in Feb-March 2012, followed by debt buyback of €32 billion in Dec. 2012
Deadly spiral of austerity and recession sustained by fiscal consolidation, monetary squeeze and speculation on Grexit.
ANNUAL AVERAGE GROWTH RATE (2001-2012) 6.0 4.2 4.0 2.0 0.0 Real GDP growth rate -2.0 -0.2 -4.0 -3.1 -4.9 -6.0 -6.0 -8.0 -7.1 2001-2007: Annual average growth rate 2012: Forecast Eurostat Cumulative decline of GDP by 20% between 2008 and 2012. Further negative growth expected in 2013.
Partial implosion of political system, rise of extremism, society close to nervous breakdownCoalition Government accelerating implementationof adjustment programme since mid-2012 .........but risk of accidents
Given where we started, adjustment was bound to be painful and long. Yet, the pain has been much stronger than anticipated and the suffering has lasted longer, because of the ineptitude of much of the Greek political class, the incoherence of the European political system and a faulty economic strategy. Frontloading of adjustment? Fiscal multipliers? Sustainability of public debt?
Greece needs a peaceful revolution Greeks need to take ownership of a wide ranging programme of reforms; they cannot simply be imposed from outside. Together with other countries of the beleaguered South, Greece needs time, money and an external environment more propitious to growth. And these can be provided by Europe as part of a new grand bargain.
NEW EUROPEAN GRAND BARGAIN Banking Union Recapitalisation of banks Fiscal and Economic Union Symmetry of adjustment Growth policies Debt sustainability Democratically regulated markets or market driven democracies? Restore confidence in the irreversibility of the currency union Restore trust between countries