Greece emerges from bailouts to an uncertain future – and hard work ahead

  1. Greece, with 11 million people, borrowed nearly half of what the U.S. did for its bailout
  2. IMF and OECD 'cautiously optimistic' about Greek prospects
  3. Poverty rate for under-65s increased by 8 percentage points

Greece is leaving its final financial bailout from what’s been described as “worst depression of any European economy in modern times.” Athens has borrowed €280 billion ($325 billion) (Financial Times) in the last eight years to keep its economy going; almost half the 2008 U.S. financial bailout. As soon as the banks and state ran dry, businesses followed, dismantling investor and depositor confidence. A vicious feedback loop started that persists until today. 

Athens exits the third and final bailout package from other euro zone countries and the IMF on August 20, 2018. In 2015, however, when Greece had not reached an agreement for another round of liquidity assistance before the end of the second bailout program, the newly elected Syriza government had to enforce capital controls. Banks were closed for 20 days and cash withdrawals limited to €60 ($68) per day to avoid a run on the banks. Queues formed outside ATMs every day. Over time, these have been relaxed but the end of these controls is nowhere to be seen.

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Greece’s creditors will come knocking in 2032. The hope is that by then, the reforms initiated as conditions to the bailouts will have boosted the country’s economy so that it can start paying off its debt mountain: 180 percent of its GDP, compared to 109 percent in 2008.

EU Debt/GDP

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The Mediterranean country lost a third of its economy during the crisis. But the good news, for some, is that GDP growth is finally positive after 10 years of recession. The source of this increase in output is the key to determining its future, and whether it will sustain public debt after 2032. 

There is going to be no growth. This is a big lie. There is no investment, there is only speculation.” – Yanis Varoufakis

GDP growth

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The IMF and OECD are cautiously optimistic; they warn that growth will stall after 2019 and are skeptical about the state of the economy. In its latest report on Greece, the International Monetary Fund recognized that real output remains low and Greece continues to rely on imports for essential goods like machinery and transport equipment.

But such indicators were not the top priority of the troika (the EU, European Central Bank and IMF) which oversaw Greece’s economic revamp. At the top of their list was cutting government spending and boosting revenue.

Former finance minister and outspoken critic of the bailout conditions, Yanis Varoufakis, told WikiTribune that “There is going to be no growth. This is a big lie. There is no investment, there is only speculation.” (See accompanying interview here.)

Slashing the budget

Greece has had to travel a long way, both in its internal processes and in restoring its world reputation. The Athens government was forced to admit in 2008 that it had lied about its finances and was spending far more than it was collecting in taxes. It had to borrow to pay for social services, and was crushed by debt. But no one wants to lend to a country at the brink of bankruptcy, unless they believe that bankruptcy will not happen.

The first step was to drastically reduce public expenditure. Social welfare was the first target. Greece achieved ambitious primary balance targets by restructuring the social welfare system, increasing taxes, and overhauling the public sector. Large-scale privatizations of previously public services, such as electricity, were undertaken.

An anti-government demonstrator waves a Greek flag outside the parliament during a protest in Athens, Greece June 15, 2016. REUTERS/Yannis Behrakis
An anti-government demonstrator waves a Greek flag outside the parliament during a protest in Athens, Greece June 15, 2016. REUTERS/Yannis Behrakis

But a high rate of taxation can be counter-productive for growth. The less money people have, the less they consume. “Growth has been well below expectations, in part because the fiscal stance was more restrictive than needed to achieve financial targets,” the IMF wrote. Apart from the balance sheet, however, the government had to fix how much bang it gets for its buck.

“The delivery of social services was extremely complicated and inefficient, different agencies were delivering the same services to different parts of the population,” said Mauro Pisu, OECD senior economist responsible for analyzing the Greek economy. “Social reforms are now under way as policy makers have recognised that these reforms are useful.”

“The social system in Greece has been based on pensions,” Pisu continued. “Pensioners are supposed to help other members in the family. However, during the crisis, countries where pensions are the centre of the social welfare system experienced the largest increase in poverty, especially among families with children and the young.”

The poverty rate for over 65s has decreased by almost 15 percentage points, whilst for under 65s it has increased on average by 8 percent because of higher taxes. Greeks have had to pay “emergency” and “retrospective” contributions” so that the government can achieve its primary surplus targets.

Thousands of Greek engineers were required to pay 113 percent of their income in taxes.

The Council of the State has declared several of these tax hikes unconstitutional, because, in conjunction with lower wages, they render making a living impossible for some. For example, this year thousands of Greek engineers were required to pay 113 percent of their income in taxes.

Liberalizing the labor market

Dimitra Canellou, director of the Chamber of Engineers, explained the changes in the engineers’ working life. It serves as a poignant example of the combined effects of reduced social welfare, a shrinking economy and labor liberalization. 

“There are no collective contracts or minimum wage for engineers any longer. Back in the day, an engineer with a masters wouldn’t start working [for] less than €1,000/month. Now, he/she is probably working uninsured and part-time for €400. That is why most of them are leaving Greece.”

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According to the International Labour Organization, the minimum wage has decreased by a little over 20 percent, collective contracts are no longer an option, which have reduced unemployment from its 28 percent peak in 2012 to 20.8 percent. Unemployment peaked in 2013 when the Greek state started implementing reforms that decreased its gigantic state and businesses were becoming unable to pay their workers.

To this day, it is over double the Eurozone average, despite labour market reforms. It has hit young people the hardest, in part because product reforms have yet to be implemented. People with high levels of education are also out of jobs.

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Advanced education | Flourish

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While overall unemployment is lower than at the peak of the crisis, massive layoffs have increased structural unemployment: this is the part of the labour force seeking jobs, but their skills are irrelevant due to technological and organizational change. This long-term unemployment is expected to stay constant, unless someone miraculously funds a large-scale re-education program. At the same time, much of the increase in employment is due to part-time work, especially during the high tourist seasons. A part-time job might work for a student, but not for a mother who has to feed a family. Families with children face a high risk of poverty.

Making labour cheaper and restructuring the welfare system will pay off. If confidence in investors is restored, and redtape reduced, they will flock to Greece. This will increase its GDP, wages, taxes etc., putting it on a path to growth. At last that is the vision.

Business is still cumbersome and most investors stay away

While labour costs have decreased, gains in productivity are lacking, which means that Greece is still not a preferred destination amongst investors. The current account is still negative and corporate taxes are amongst the highest in the region. “The labour reforms took place before product reform. A lot of people lost their jobs, but because the obstacles to competition had not been dealt with, it was very difficult for them to find new ones,” Pisu recounted. Making matters worse, “The discussion about social welfare and an anti-poverty system was late. It should have started in earnest in 2011.” 

Greece has fallen 16 places in the World Economic Forum’s Global Competitiveness ranking since 2009. Its competitiveness has “improved, but remains well below pre-crisis levels,” the IMF wrote. The basic pillars of competitiveness, institutions, infrastructure, macroeconomic environment, health and primary education have only improved by 2 percent. High tax rates and inefficient bureaucracy remain the main impediments to competitiveness.

For some parts of Greece, this is not true. On popular islands like Mykonos and Santorini, VAT has been reduced to attract tourism. As successful as this has been in attracting tourists and investors alike, apart from creating temporary part-time minimum wage jobs, the effect has been ambivalent.

“From an economic point of view they’re not in Greece. Their bank accounts are in London, their companies are in the Cayman Islands. From the perspective of the Greek economy, they don’t exist,” Yanis Varoufakis told WikiTribune. What is worse, “Tourism is connected with low-value jobs, low-level payments. It’s certainly the backbone of the economy, but it’s not the part of the economy on which the future should be built,” added Dr. Alexander Kritikos at DIW Berlin, the German Institute for Economic Research.

International Tourism Receipts % Exports | Flourish

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“It was the only reason why GDP did not get into negative numbers last year, but why it was not very positive, either. Already, this year, Turkish people stayed away from Greece, and that shows in the numbers. [Tourism] is a very volatile industry, which is why I do not have high expectations. To the contrary, what really should start is making better use of those high-skilled people, which the country has,” Kritikos said. 

According to DIW’s latest report on the Greek private sector, private firms have lost 38 percent of gross value added since 2008. This is a crucial indicator for the productivity of an industry: it accounts for the total value of goods and services produced, minus the consumption necessary to produce them.

The banking overhaul

The crisis started when Greek businesses and the government could not repay loans to Greek banks, so banks, in turn, could not provide credit for other businesses to function. The curve of non-performing loans started sloping upwards in 2010, from a manageable 9.5 percent to an astonishing 49 percent in 2016 (see graph). A legal framework for dealing with these defaulting loans has finally been set up, which promises to mitigate the guillotine hanging above banks’ heads.

NPLs Greece | Flourish

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The problem of insolvency echoed through the whole economy, and was dealt with through a simultaneous process of debt restructuring and bank recapitalization. Greece’s public debt was pushed into the future by offering private companies the chance to switch old, mature bonds with new ones. This was the largest sovereign default operation in history, working with securities with a total value of €205 billion. The Private Sector Involvement program had adverse effects on pension funds, which lost 65 percent of their asset value. 

Much of the public debt was owed to Greek banks, who suffered a loss of 78 percent in net present value. To avoid further insolvency, banks were instructed to reshuffle the composition of their capital by re-issuing shares. The Greek government bought a significant amount, but the private sector was also involved to avoid complete bank dependence on the state. 

Despite all of this, the lack of confidence persists in international and domestic markets. The IMF fears reform fatigue. Capital controls remain in force until today, and despite positive growth, no one knows when Greece will be ready to end them.

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