Has The Greek Economy Actually Recovered Or Has The Bailout Programme Wrecked It Into Hopelessness?

The Greek sovereign debt crisis is officially over, and its Eurozone bailout programme has come to an end. Is this a sign that the Greek economy has recovered, or is it the start of decades of deflationary stagnation with no prospect for Greece to prosper in the foreseeable future?
Alexis Tsipras and Jean-Claude Juncker addressing the press about Greece's standing in the Eurozone bailout programme.

Is The Greek Economy Really Out Of The Woods?

Celebrations for the Greek-Eurozone Crises “Ending” Cut Short

Everyone rejoice, put on your best clothes, wash your faces, and ring the bells for the Greek crisis is finally over. The Troika has decreed that the Greek tragedy has met a happy ending, as of Monday the 20th of August 2018 the Eurozone bailout programme for Greece is officially over.

But…is the emergency over because the patient has recovered or is it over just because the patient is dead?

During the weeks leading to its graduation from the bailout programme, Greece made the news headlines once again. Once again as the protagonist of an unenviable situation. Wildfires spread out of Attica through the Greek woodland, setting ablaze the Southeastern part of the Hellenic peninsula, and leaving 99 confirmed people dead. This event put the spotlight back on the toll that the austerity measures had taken on the Mediterranean country.

My Interpretation of the European Commission’s Reaction

The media pointed out how the cash strapped Greek government was having problems responding properly to the emergency. The European Commission swiftly declared that its austerity programme never dictated which specific expenses had to be cut, as long as Greece put its books in order. However, to my ears that excuse sounds like a deafening admission of guilt.

The European Commission’s declaration is a blatant admission that the Eurozone bailout programme was not pursuing any strategy to improve the country’s economic long-term sustainability. There was no effort towards fighting tax evasion, no plan to curb corruption, no vision to utilise resources more efficiently and ultimately expand the country’s production possibility frontier. It confirmed that the austerity imposed on Greece was no reform programme at all, but just a mere accounting exercise.

The Eurozone bailout programme was devised by the Troika, a group composed of:

  • the European Central Bank (ECB),
  • the International Monetary Fund (IMF),
  • and the European Commission (EC).

Its aim was to provide debt stricken Eurozone-member countries the financing they could not access on the market. The troika, and its constituents, put in place various mechanisms to channel and facilitate this financing, including: the European Stability Mechanism (ESM), Outright Market Operations, and direct loans. In exchange the Troika demanded the participating countries to enact numerous “economic reforms”, mainly consisting of spending cuts and tax hikes. Greece had been part of the bailout programme since 2010; other participating countries include Spain, Portugal, Ireland, and Cyprus.

Overview of the Greek Bailout Programme’s Economic Fallout

Let’s have a look at Greece’s economic performance during the last decade, while pursuing the Eurozone bailout programme.

Gross Domestic Product (GDP) Greece 2008-2018

In nominal terms, the gross domestic product (GDP) of Greece is now $200 billion 43% lower than it used to be a decade ago. Since 2008, when it stood at $354 billion, the Greek nominal GDP kept falling each and every year until 2016; when it reached an all time low of $192.69 billion. During this period, real GDP shrunk by 23% while GDP per capita declined by 22.9%.


source: tradingeconomics.com

Labour Market Fluctuations in Greece 2008-2018

The unemployment rate has increased from its pre-crisis level of 7.3%, in May 2008, to 19.1%, in June 2018 (latest data as of September 2018). However, this is the lowest unemployment rate in 7 years; which has been trending downwards since it peaked at 27.9% in July 2013. The youth unemployment rate followed a similar pattern; shooting up from 20% in May 2008 to an all time high of 60.2% in February 2013, then receding to 39.1% as of June 2018.

Total full-time employment in June 2018 stood at 3,919,710, a net loss of more than 738,490 jobs over the 4,658,200 registered in October 2008. This represents a 15.9% decrease over the total initial employment. Additionally, between 2010 and 2015, around 240,000 Greeks migrated out of the country to look for employment opportunities elsewhere.

Greek Public Debt 2008-2018

The main goal of the programme was to reign in the fiscal deficit; stabilise, and reduce the public debt burden. The programme aimed to turn the fiscal deficit into a surplus by cutting expenditure on pensions, education, healthcare, public sector employment, and everything else they could. However, the austerity measures’ contractionary effect on the economy was so strong that the government’s revenue declined almost as fast as its expenditure.


source: tradingeconomics.com

Normally a small deficit would still translate into a lower public debt to GDP ratio due to economic growth and inflation. Conversely Greece’s catastrophic economic shrinkage drove the Public debt to GDP ratio to balloon up to 178.6% from 109.4% before the financial crises, and 130% at the start of the bailout programme. Even the moderate fiscal surpluses registered by Greece in 2016 and 2017 have not managed to dent the maligned public debt to GDP ratio.

Drawing Up Expectations For the Future of Greece

Greece might have been living beyond its means in the past, but now it has been forced to way below the standard of living it could realistically afford. The economic contraction experienced by the country is more severe than any advanced economy went through during the great Depression of the 1930s. The repercussions of Greece’s impoverished economic state extend beyond the current level of well-being, worsening the prospects for the future.

A lower level of aggregate income (output) today results into less investment, both by the public and the private sector, which in turn will translate in a weaker productive capability in the future. The subdued level of aggregate consumption will deteriorate the private firms’ current cash flow, and expected future revenue; decreasing even further both their ability and incentive to invest. Forbidden Economics’ previous article about Austerity policies and the role of money in the economy sheds more light on how this works; keep in mind that, as a Euro Area member, Greece is not a monetarily sovereign country.

Higher unemployment means that Greece is letting more precious resources stand idle than it used to before the crisis. Additionally more workers either emigrated out of the country, or got disheartened of ever finding employment and dropped out of the labour market. The Greek crisis stemmed, in part, from not using its productive assets to their full potential, but now they are not being used at all. A more detailed analysis of what led to the crisis will be the subject of our next article.

My fear is that the Greek economy’s potential has been permanently sapped. It will now have to climb its way back carrying a much heavier burden, while being in a much worse shape.

Once The Economist (magazine) published a cartoon which I dread describes the Greek situation perfectly. It portrays Greece as a morbidly obese person who needs to lose weight. Greece is put on a treadmill, but Angela Merkel (representing the Troika) is shown brandishing a chainsaw seeking faster results.

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Angelo Dalli is the founder and owner of Forbidden Economics

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