Greek Odyssey far from over
Debt burden weighs on bail-out exit
by Danae Kyriakopoulou in Athens
Fri 24 Aug 2018
Greece's official exit from the third bail-out this week was celebrated by Greek politicians and their counterparts in the rest of Europe. Speaking from Ithaca on Tuesday, Greek Prime Minister Alexis Tsipras hailed 'the end of a modern-day Odyssey'. Mário Centeno, president of the Eurogroup of euro area finance ministers, echoed other European officials in declaring on Monday that 'Greece has today returned to normal, so welcome back'. The political incentives are clear: Tsipras's speech hinted he is already looking to capitalise on this ostensible moment of victory. Meanwhile, with European Parliament elections scheduled for May 2019, leaders across the European Union are eager to present Greece's bail-out exit as a success story of crisis-management.
The economic reality, however, is more complicated. Yes, Greece has returned to economic growth: output expanded by 1.4% in 2017 and is expected to grow at a pace of around 2% this year. Unemployment has fallen below 20% for the first time in seven years. Economic sentiment is recovering and exports are performing well. The current account and budget deficits have decreased substantially and even reversed, respectively, from their pre-crisis double-digit levels. But, for an economy that has lost more than 25% of GDP during an almost decade-long recession, this is far from enough to avoid trouble in the future.
Growth of around 2% is paltry given the context. To achieve normality, the Greek economy must first be supernormal. For its €240bn official debt burden to remain sustainable, the government must run primary budget surpluses of 3.5% of GDP until 2022, and of more than 2% after that until 2060 – an unprecedented feat, if achieved. Greek and European politicians can afford to delay dealing with the issue: the disbursement of a final tranche of €15bn by the European Stability Mechanism has helped build a cash buffer to cover sovereign financing needs for the next couple of years.
The question is what happens after that. Maintaining high primary surpluses requires a sustainable recovery. There was little in Tsipras's politically-charged Ithaca speech on how to achieve this. The economy is still burdened by long-term structural weaknesses: unemployment, albeit in decline, is still the highest in the euro area, and especially high among young people. Recent improvements in headline employment figures mask the part-time nature of many of the new jobs created, a trend seen in other recoveries such as in Spain. The tax burden on employment remains high, and a lack of stability in tax rates as well as byzantine bureaucracy and judicial dysfunction discourage foreign investment. Emigration remains high, which, coupled with one of the lowest fertility rates globally, may hinder the population expansion needed to propel long-term economic growth.
Greece is entering its post-bail-out history at a time of precarious global economic conditions. Central banks around the world have entered or are entering a phase of monetary tightening. Economic risks, from a US-China trade war to market tremors over Italian debt, could expose the vulnerabilities of an already mature economic cycle. If such risks materialise, the euro area could prove to be insufficiently prepared.
German Chancellor Angela Merkel and French President Emmanuel Macron's 'Meseberg agreement' is a step in the right direction to improve the resilience of the currency union, but its implementation does not go far enough. Rather than celebrate the return to Ithaca, policy-makers should reflect on lessons learnt on this painful journey and continue to reform, for Greece and Europe's sake.
Danae Kyriakopoulou is Chief Economist and Head of Research at OMFIF.
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