European monetary policy has previously smashed the fragile plates of the Greek economy to the floor; 12 years on, they've finally pieced it all back together
Opinion: During the European sovereign debt crisis, I contributed a regular column to the Australian magazine Business Spectator.
One week, I noticed a tiny bit of hope, which I wanted to write about. But I was quickly persuaded not to by my editor. As the Euro doomster-in-chief, I should play it safe and not overly confuse my readers.
My column has since migrated to Newsroom, but my general Euro pessimism has remained my trademark. So you, dear readers, need to be brave today.
Because I have some good news from Europe. This once.
On Saturday, Greece regained much of its political and economic autonomy. It exited the European Union’s enhanced supervision mechanism after 12 years of being subjected to various external supervisory regimes.
It is a much nicer kind of Grexit than the one we discussed a decade ago.
For the past four years, Athens had to submit quarterly reviews of the country’s financial situation and reform agenda to Brussels. The surveillance framework ensured that fiscal policy remained tight and the country implemented structural reforms to support economic growth.
To subject itself to such supervision was one condition for accessing bailout funding from the European Union and the International Monetary Fund. Between 2010 and 2015, both institutions had provided more than 260 billion euros to stabilise the Greek state in three aid packages.
Greece had to implement deep spending cuts and tax increases, privatise state assets, including airports and the port of Piraeus, and reform a pension system that had become one of the most generous in Europe.
The approach was painful and risky for both sides. For the Greek people, it meant a time of tough changes to public life. For Greece’s creditors, the risk remained these reforms still would not be enough and yet another bailout would eventually be required.
However, the tough reforms paid off. Greece’s public finances stabilised, unemployment fell from its peak of 30 percent to ‘just’ 13 percent today, and economic growth is solid and projected to reach 4 percent this year. That is even more remarkable as the rest of Europe is in crisis.
As the EU’s finance commissioner Paolo Gentiloni emphasised in a statement, Greece’s “achievements are even more commendable given that this period has been marked by two severe external shocks: the COVID-19 pandemic and Russia’s invasion of Ukraine".
Unsurprisingly, the Greek government was jubilant, too. Prime Minister Kyriakos Mitsotakis called August 20 a historic day for Greece and the Greeks: “A 12-year cycle that brought pain to the citizens, stagnation in the economy and division in society is closing.”
Greece can be proud of its achievements. It has demonstrated that economic reforms, as painful as they are, will eventually pay off.
The unit labour costs best illustrate how much economic ground Greece has gained. That is the average cost of labour per unit of output produced.
At the beginning of the Euro crisis, Greek wages were way too high for the output produced. That made Greece internationally uncompetitive.
The economic reforms reduced unit labour costs and increased Greece’s competitiveness. Greece reduced them by 9 percent, whereas for the OCED, they increased by 22 percent on average. Of all OECD economies, only Ireland has a better record of reducing its unit labour costs since 2010.
The changes in Greek productivity have led to a much-improved performance of the Greek economy. And it is not just because the tourism industry is finally booming again after two years of Covid restrictions.
Theodoros Pelagidis, Deputy Governor of the Bank of Greece pointed out in a column for the Cyprus Mail that Greek economy created 270,000 jobs since 2019, industrial production rose 3.2 percent year-on-year, while retail and wholesale trade recorded annual increases of 18.8 percent and 25.6 per cent respectively.
So, is everything well with Greece? And was the reforms-and-austerity path of the past dozen years the best option?
On both questions, one may have doubts.
Twelve years is a long time to get the economy back to roughly where it ought to be. Without the monetary corset that is Greece’s membership of the Euro, Greece’s turnaround might have been faster.
Had Greece had its own currency, the massive imbalances in the Greek economy might not have built up in the first place. A deterioration in Greek competitiveness would have resulted in pressure on the Greek currency.
Then, when the crisis happened, the lack of a Greek currency prevented a fall in Greece’s exchange rate. But having a flexible exchange rate would have buffered the domestic economic reforms, and unemployment probably would not have shot up to such extreme levels as recorded in the early 2010s.
Meanwhile, Greece’s Euro membership today also carries risks for its future economic development. In the early 2000s, the European Central Bank kept interest rates low to reflect a sluggish German and French economy. That was when Greece grew fast; thus, the low interest rates fuelled an unsustainable boom, which later collapsed.
Today, we might see a repeat of that scenario. The European Central Bank is again keeping interest rates low, mainly out of concern for Italy’s debt sustainability and the prospect of a recession in countries like Germany. But for Greece, that means that the general interest level is probably too low.
Finally, another problem remains for Greece. Even now, having exited from enhanced supervision, its debt level remains at about 190 percent of GDP. A base level of European supervision will continue until three-quarters of the aid loans granted have been repaid – which will not happen until 2059.
Still, it remains a rare good-news story coming out of Europe that Greece left its tight corset of enhanced supervision. One can only hope that the country’s future will be less of a rollercoaster experience than its first 21 years of Euro membership.
