Economy

Hope for Better Days

There are good reasons to believe that Greece is on its way to growth, and that 2016 and 2017 will be much better than the previous years of tough austerity. However, some risks still linger as a new round of debt relief talks commences.

EU and Grecce Hope for Better Days

The economy of Greece is the world’s 45th largest, with nominal gross domestic product (GDP) of $235.6 billion, and the 51st largest in the world in terms of purchasing power parity, at $283.6 billion per annum.

The Greek economy is based primarily on the service sector (81%) and industry (16%), with the dominant industries being tourism and shipping. The Greek Merchant Navy is the world’s biggest, with Greek-owned vessels accounting for 15 per cent of global deadweight tonnage as of 2013. Increased demand for international maritime transportation between Greece and Asia has resulted in unprecedented investment in the shipping industry in the past three years.

Greece has the largest economy in the Balkans and is as an important regional investor.

In recent years the Greek economy was hit hard by the global financial crisis, as well as internal factors, and went through a number of bailout programmes and austerity measures. Greece recorded government debt of 177.10 per cent of the country’s GDP in 2014, which shrank by 25 per cent during the crisis, while unemployment rose and the country faced a long recession. However, things started to look up recently.

If the economy gets back on track, there can be also some positive surprises in terms of performance, because the Greek economy is now substantially below potential, analysts say.

In an interview with the Financial Times, the governor of the country’s central bank, the Bank of Greece, Yannis Stournaras, said recently that the possibility of ‘Grexit’ is “a closed chapter”. Along with some distinguished analysts and economists, Governor Stournaras believes the local economy will return to growth in the second half of 2016, after something of a slowdown was observed in the last quarter of 2015.

Earlier last year the European Commission said in a statement that the Greek economy’s ongoing recession was projected to end in 2016, and that the country may experience real growth in 2017. After long-lasting uncertainty, this would be more than good news.

According to Governor Stournaras, the bailout programme review will greatly determine the Greek economy’s future progress. The hardest part of the programme, he added, is the controversial reform of the country’s social security system. The Greek central banker said that he has urged the coalition government in Athens to focus on the implementation of the bailout agreement, considering that any delay in the process may incur unbearable risks for Greece.

The governor also said that he is looking forward to less austerity, more investments and greater efforts made to better take advantage of state property. He also stressed that the promised debt relief, which has yet to be implemented, will be both meaningful and symbolic. Finally, when asked about the migrant crisis, the central banker told the FT that the countries benefitting the most are those which host migrants, while the cost tends to be higher for the countries which they have departed. With a maritime border of thousands of kilometres, it will be very difficult for Greece to curb the influx or migrants. He estimates the immediate fiscal impact for Greece as being between 0.3 and 0.4 per cent of GDP.

More good news was recently delivered by Greek Finance Minister Euclid Tsakalotos, who said that Greece recorded a primary budget surplus of €2.270 billion in 2015, up from a surplus of €1.872 billion in 2014, but down from a revised budget surplus target of €3.257 billion. While some results are not that flattering – especially when it comes to taxes – the overall situation is positive.

Earlier last year the European Commission said in a statement that the Greek economy’s ongoing recession was projected to end in 2016, and that the country may experience real growth in 2017. After long-lasting uncertainty, this would be more than good news.

In its last quarterly report, the Foundation for Economic & Industrial Research (IOVE) estimated that the rate of recession for 2015 amounted to 0.5 per cent, a significantly lower number than previously estimated, due to higher revenue from tourism, reduced energy costs and the overall weakness of the euro. Nikos Vettas, managing director of IOVE, said that the unemployment rate was expected to rise to 25.5 per cent of the workforce this year, up from 25 per cent in 2015 and down from 26.5 per cent in 2014, while the inflation rate was expected to range between 0.5% and 1.0%. The Institute warned, however, that the domestic economy will continue to contract unless there is a significant increase in investments being made in Greece.

European Commission Vice-President Valdis Dombrovskis said earlier last year that it is likely that Greece will return to positive economic growth around the middle of 2016, provided the government exerts a serious effort to regain financial stability.

“If the government works seriously to regain financial stability, it can return to economic growth,” he said.

“If the economy gets back on track, there can be also some positive surprises in terms of performance, because the Greek economy is now substantially below potential and can catch up to that potential quite quickly,” he told media.

The economic growth rate will also have an impact on Greece’s debt servicing ability, as its euro zone creditors are considering debt relief through capping its gross debt servicing costs at a maximum of 15 per cent annually.

The most serious problems are the question of reform of the national pension system, enforcement of higher taxes on farmers and a privatisation programme

Dombrovskis said that Greece’s net debt servicing costs, which exclude debt rollover, were only four per cent of GDP annually, less than the same costs for both Portugal and Italy.

GDP growth may gather momentum in 2017 and is forecast to hit 2.7 per cent, as long as proposed structural reforms are implemented to boost the domestic demand.

However, the possibility exists for the negative aspects of 2015 to be carried forward into 2016, which may have somewhat negative impact.

Prime Minister Alexis Tsipras predicted at the beginning of 2016 that this year will be the beginning of the end, “a final exit from economic crisis”. With a financial lifeline sealed via an €86 billion aid package from the International Monetary Fund, the EU and the European Central Bank, the country could look ahead to radical change and “national rebirth”.

“The risk for the country now is an anaemic recovery, unable to bring down unemployment and put the real economy back on track,” said Theodore Pelagidis, economics professor at the University of Piraeus and a fellow at the Brookings Institution think-tank.

In its January report, the IMF was more pessimistic about growth perspectives, both at the global level and at the level of the EU, and revised its prognosis further down. Such a dynamic will also impact on the Greek economy.

Representatives from Greece’s European creditors and the International Monetary Fund launched fresh negotiations on debt relief at the beginning of February. In return for money from the country’s third bailout, which was agreed last summer, Greece’s left-leaning government has to meet a series of conditions, from reducing spending to enacting wide-ranging economic reforms.

The most serious problems are the question of reform of the national pension system, enforcement of higher taxes on farmers and a privatisation programme. This would be a tough task for any government, and even more so for one with leftist tendencies.

The country spends roughly 17 per cent of GDP on pensions, the highest rate in the European Union, and – with a shrinking workforce, tax collection below expectations, and legal loopholes existing – the system is no longer sustainable. On the other hand, pensions, which have so far been cut 12 times, represent the only source of income for many families.