The paradox of the impressive recovery of the Greek economy, at a time when the Greeks are getting poorer, is put under their “microscope” by the Financial Times, quoting indicators and evidence that prove that “the wound in Greek society is open”, as it is typically reported.
Indeed, the Greek economy is performing positively among the best in the EU, the Financial Times article begins, 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.
The Financial Times article in detail:
“The time has come to see Greece’s strong economic recovery after the pandemic in a historical context. The country is indeed among the eurozone’s best recent performers, but it has also become the poorest.
Last week, rating agency S&P was the latest to sing the country’s praises, as it revised its outlook to “positive.” This occurred in the context of the Greek authorities undertaking “a wide-ranging structural reform agenda and addressing long-standing bottlenecks”, which boosted growth above the eurozone average and resulted in a reduction in the debt-to-GDP ratio. The positive outlook reflects our expectation that the tight fiscal regime will continue to push the public debt ratio down, while growth will continue to outpace Greece’s eurozone counterparts.
Indeed, new data published by Eurostat on Monday showed that Greece’s public debt-to-GDP ratio fell by 10.8 percentage points to 162% in 2023.
The Greek economy grew by 2% in 2023, surpassing Germany’s contraction of 0.3%. As of 2019, before the pandemic, the country grew at almost twice the rate of the eurozone. Last week the IMF said that the Greek economy will grow by 2% again this year and will continue to exceed the average growth rate of the monetary union for the next two years.
Strong tourism numbers – which are in line with an improving labor market and recovery in consumption – are helping. So are structural reforms aimed at removing barriers to growth, such as increasing digital access to public services, speeding up judicial decisions and improving transparency and public finances.
As BNP Paribas economist Guillaume Derrien told FTAV:
Renewed political stability and sharp fiscal consolidation make Greece a much more attractive country for investment than in the past.
However… The latest recovery has only slightly raised Greeks’ living standards relative to the EU average over the past two years – and not enough to lift them from their place as the poorest people in the eurozone.
This is relatively new for Greece, as GDP per capita was similar to that of the EU average until 2009. Since then, in 10 countries living standards have risen above Greece’s, making Greece the second poorest country in the EU after Bulgaria and the poorest in the single currency bloc.
With the gap with Bulgaria narrowing sharply, it is not unreasonable to expect that Greece will soon become the poorest country in the EU.
How do these contrasting stories of strong recovery and poverty reconcile?
The answer lies in the wake of the financial crisis and austerity that followed the crisis of 2010. Greek 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 extraordinary for peacetime.
The Greek economy shrank by almost 30% from top to bottom. In 2016, consumer spending fell 24% from 2007, government spending fell 20% and investment collapsed 65%. Over the same period, manufacturing activity fell by almost half, retail trade and business activity shrank by almost a third. Unemployment soared to a historically high level of nearly 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 economic blow is almost unprecedented in modern times, comparable only to the Great Depression of the US in the 1930s, notes Giorgos Lagarias chief economist at Mazars Wealth Management.
Real wages fell steadily through 2022, the latest available figure in the OECD database, and are down 30% from pre-financial crisis levels, leaving the country with one of the lowest average wages among developed economies.
The construction sector – a major driver of growth before the crisis – has been almost wiped out. Housing investment, which accounted for more than 10% of GDP at the height of the 2008 bubble, has since fallen to 2% of GDP, the lowest 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 the country’s long-term economic prospects. Mr. Lagarias argues that growth with limited leverage* – which is Greece’s case – 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 continues to limit Greece’s economic potential, according to Derrien. In its latest report on the country, the IMF also cites climate change as a risk – as 90% of the country’s tourism infrastructure and 80% of industrial activity are located in areas exposed to high climate risks – and the increasingly dismal Demographics. Births in Greece fell to a nine-decade low in 2022, exacerbating the country’s aging and shrinking population as many young people leave the country each year.
Overall, Greece’s economic recovery should be celebrated, but it should be seen in the context of a remarkable economic crisis that has left it in a hole that may take a generation to climb out of.
* Leverage is an investment model whereby the investor is required to pay only a portion of the total value of the position they wish to take. The provider of the leveraged product is the one who lends the remaining amount.”
