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Analysis

The end of Greek bail-outs

Euro area will outperform US, UK

by Joergen Oerstroem Moeller in Singapore

Mon 15 Jan 2018

After almost eight years under European Union and International Monetary Fund bail-out programmes, there is reason for optimism in Athens. At the end of December Greek legislators approved the country's first 'normal' budget since the onset of the country's debt crisis.

Greece's pace of economic growth for 2017 was 1.6% according to IMF statistics, and the forecast for 2018, at 2.6%, is even more encouraging. The EU estimates a public budget deficit for 2017 of 1.2% of GDP and a surplus of 0.9% for 2018. The primary budget balance (not including net interest payments on debt) shows a surplus of 3.8% of GDP, while gross public debt will fall two percentage points as a share of GDP, not forgetting the small surplus on the balance of payments. These developments mean Greece can again tap global financial markets. Indeed, 10-year bond yields below 4% signal this will be a welcome step. The soonest time this is likely to happen is in late summer, after the bail-outs end in August.

The costs have been high, but the reward is a more competitive economy. Regulators, under the supervision of the EU and IMF, discarded many privileges that distorted the Greek economy. Without these changes, Greece may have had to readopt the drachma, which would have immediately depreciated. If Greek politicians had decided to restructure the economy at a later date, the long-term social costs would have been higher.

The four other countries with bail-out programmes – Spain, Portugal, Ireland and Cyprus – were able to return to financial markets several years ago. But this seems to have largely escaped the attention of the press. Spain, Ireland and Portugal registered economic growth for 2017 of 3.1%, 4.8% and 2.6% respectively. For 2018 growth in these countries is expected to decline a little bit, but not much. All three can look forward to falling gross public debt as a percentage of GDP and a surplus on their balances of payment.

Unsurprisingly the good news about Greece was also almost completely ignored by the financial press, which during the crisis devoted innumerable pages to predictions that Greece would leave the euro, and that the single currency would collapse. In fact, it looks probable that euro area growth will exceed US growth in 2018, and be around twice as high as growth in Britain.

While shortcomings still exist in monetary union, the euro area looks strong and balanced when compared to the US and Britain. The region is enjoying high growth amid falling public sector deficits and public debt, as well as stable surpluses on countries' balances of payment – circumstances which other advanced economies can only dream of.

Joergen Oerstroem Moeller is Senior Research Fellow, ISEAS Yusof Ishak Institute, and a former State Secretary at the Danish foreign ministry.

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