The Financial Times explains the ‘Greek paradox’: Strong growth, debt reduction but Greeks getting poorer

The Greek paradox of the impressive recovery of the Greek economy, while the Greeks are getting poorer, is examined by the Financial Times, quoting indicators and evidence that prove that the wound in Greek society is open, as is typically reported.

Indeed, the Greek economy is performing positively among the best in the EU, the Financial Times article begins, but pointing out the paradox: At the same time that the country is indeed among the best recent performers in the Eurozone, it has also become the poorest among them.

Last week, rating agency S&P was the latest to praise Greece, upgrading its outlook to “positive.” This is because the Greek government is implementing “a far-reaching structural reform program to address long-standing problem areas”, boosting growth above the Eurozone average and resulting in a fall in the debt-to-GDP ratio. The positive outlook reflects the markets’ expectation that the tight fiscal regime will continue to drive down public debt, while growth will continue to outperform Greece’s Eurozone peers. Indeed, new data published by Eurostat on Monday showed thatGreek public debt to GDP reduced by 10.8 percentage points to 162% in 2023.

The Greek economy grew by 2% in 2023, the same year in which a contraction of 0.3% is recorded in Germany. As of 2019, before the pandemic, the country had growth rates almost twice that of the Eurozone. Last week, the IMF said that the Greek economy will grow by 2% again this year and will continue to outpace the average growth rate of the Eurozone for the next two years.

Its strong performance tourism — which go hand in hand with an improving labor market and recovery in consumption — are helping in this direction. The same applies to structural ones reforms aimed at removing barriers to development, such as increasing digital access to public services, speeding up judicial decisions and improving transparency and public finances. As Guillaume Derrien, BNP Paribas economist at FTAV, told the Financial Times: “Renewed political stability and strong fiscal consolidation make Greece a much more attractive country for investment than in the past.”

Financial Times: Greece will soon be the poorest country in the EU

The recent recovery in Greece, however, has just slightly raised the standard of living in the country compared to the EU average in the last two years – and not enough to remove the country from the last place, with the poorest residents in the Eurozone, the Financial Times points out and goes on to emphasize that this situation is new for the Greeks, who until 2009 had GDP per capita close to the EU average. Since then, 10 countries have seen their living standards rise above that of Greece, leaving it the second poorest in the EU after Bulgaria, and the poorest country in the Eurozone, i.e. among the EU countries that have adopted the euro. “As the gap with Bulgaria narrows sharply, it is not unreasonable to expect that Greece will soon become the poorest country in the EU“, writes the article of the Financial Times.

“How do these contrasting stories of strong recovery and poverty reconcile?” the article asks, explaining how the answer lies in the wake of the financial crisis and austerity that followed in 2010. Spending was cut and taxes were raised to secure a bailout from the IMF and the EU, squeezing businesses and households and wrecking the economy. The extent of the economic damage was unprecedented for peacetime.

Greek economy shrank by almost 30% from the top to the middle layers. In 2016, consumer spending fell 24% from 2007, government spending fell 20%, and investment plummeted 65%. Over the same period, manufacturing activity fell by almost half, retail trade and business activity shrank by almost a third. THE unemployment soared to an all-time high of almost 30%. As a result, the Greek economy is now around 19% smaller than it was in 2007 – despite the country’s strong post-pandemic recovery – while the EU economy as a whole has grown by 17%.

The financial hit is almost unprecedented in modern times, comparable only to the Great Depression in the US in the 1930s, notes Giorgos Lagarias, chief economist at Mazars Wealth Management. Real wages fell steadily until 2022, the most recent year for which data is available in the OECD database, and 30% left from pre-financial crisis levels, leaving the country with one of lower average wages among developed economies.

THE construction sector — a major driver of growth before the crisis — has all but disappeared. Housing investment, which accounted for more than 10% of GDP at the height of the 2008 bubble, has since sunk to 2% of GDP, the lowest share among Eurozone countries. As BNP’s Derrien says: “Greece now has a less unbalanced model of economic growth — which is positive — but the decline in construction activity has not yet been fully balanced by expansion into new sectors.”

There are also concerns about long-term financial prospects of the country. Lagarias argues that growth with limited leverage (financial leverage) – as is the case in Greece – will remain sluggish and predicts that it will take many years of “persistent reforms” for Greece to return to where it was in 2007. Low investment and sluggish productivity also continue to limit Greece’s economic potential, according to Derrien.

In its latest report on the country, the IMF also mentioned the climate change as a risk – as 90% of tourism infrastructure and 80% of industrial activities are located in areas exposed to high climate risks — and increasingly dismal demographics.

The births in Greece they fell to a ninety-year low in 2022, exacerbating an aging and shrinking population as many young people leave the country each year.

Overall, concludes the Financial Times article, “Greece’s economic recovery should be celebrated, but it must be seen in the context of the significant economic crisis that he left the country in a hole that may take a generation to climb out of».