There has been a lot of talk about the problems confronting Greece, but little examination of the hard data underpinning its economic depression.
The economic numbers are truly frightening. Be it GDP, unemployment, the budget deficit or government debt, the economic performance of Greece is pathetic, humiliating and worst of all, socially destructive.
There was a general strike in Greece overnight, Australian time. The population is reacting to the austerity drive of the government of Prime Minister Antonis Samaras who is cutting public service numbers, wages and entitlements while tightening up on what were ridiculously generous debt funded transfer payments. The policy agenda extends to privatisations and a move to deregulate what were heavily sheltered businesses.
To qualify for the next round of bailout funds from the European Commission and the IMF – essential if Greece is to avoid default on its debt – the government needs to deliver cuts of €12 billion over the next two years. The task of the government to find savings is increasingly urgent, with the debt roll-over reaching a near-term peak within two months.
It is easy to understand the anger of the people having the largesse taken from them. They were used to generous benefits and avoiding tax, but the situation was not sustainable. It is easier to understand why the austerity measures are needed.
Apologies for the flood of numbers that are coming up, but they are stark and well worth a closer look.
The last time GDP rose in Greece was 2007, when it eked out a gain of 3 per cent. Since then, over each of the next four years, GDP has fallen 0.5 per cent, 3.3 per cent, 3.5 per cent and then 6.9 per cent in 2011. The latest OECD forecasts are for GDP to fall a further 5.3 per cent in 2012 and yet a further 1.3 per cent in 2013. That is six straight years where GDP has fallen, with the cumulative decline totalling just under 20 per cent.
That’s bad enough, but the forecast for a 1.3 per cent fall in GDP in 2013 is looking too optimistic, with private sector forecasters expecting a decline of around 3 per cent and then another fall in GDP in 2014.
This depression is evident in the unemployment rate which was semi-respectable at 7.5 per cent in 2008. Now it is 24 per cent and it is forecast to remain above 20 per cent for at least another three years. Youth unemployment is over 50 per cent. Some forecasters are expecting the unemployment rate to exceed 25 per cent before it starts to fall.
The state of the Greek government’s finances fits this dismal story. Even in the good times in 2007, the budget deficit was at unsustainable and at ridiculously high levels at 6.5 per cent of GDP. It blew out to 9.8 per cent of GDP in 2008 then run at 15.6 per cent, 10.3 per cent and 9.1 per cent of GDP over the following three years. At the moment, the budget does not even cover the ongoing running expenses of government, let alone deal with the massive interest bill on the mountain of debt.
Net government debt in Greece was uncomfortably high at 107 per cent of GDP in 2007, but on the back of the budget deficit disaster, debt hit 165 per cent in 2011. Government debt is forecast to reach 169 per cent of GDP in 2013.
It is a disaster.
The numbers for the Greek economy must create anxiety and stress for policy makers within Greece as well as for those managing the rescue or bailout packages. They also highlight the parlous position of the banks and other corporations with exposure into the Greek economy.
What can be done to fix the economy? How long will it take? What collateral damage will there be along that path to normal conditions?
No one can answer these unanswerable questions, only outline scenarios based on the Greeks embracing domestic reform, the IMF, ECB and European Commission providing financial support in the transition to more sustainable public finances and the people of Greece having to come to terms that the financial aspects of their lifestyles – both personally and in a business sense – were unsustainable.
And a final sobering note in relation to the economic contrast in Australia.
In Australia, we quibble over the difference between a GDP growth forecast of 2.5 per cent or 3.5 per cent, as if there is a material problem even at the low end. We are surprised that the unemployment rate is nearer 5 per cent than 5.5 per cent and look at this stunning low unemployment rate as a problem of skills shortages. We have some people scaring the daylights out of the economically ignorant that government debt peaking at 10 per cent of GDP is a worry. We roll our eyes when the government means tests welfare payments or closes dodgy tax loopholes as it moves the budget to surplus. There are still a few dinosaurs lamenting the counter cyclical fiscal policy over the past few years, which saw government spending levels rise as the government filled in the gap left by the weakness in the private sector, ignoring the record cuts in government spending in place now that the economy has recovered.
Imagine if these doomsayers lived in Greece?