“Greek paradox” – Strong growth, debt reduction but Greeks are 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 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, the same one that saw a contraction of 0.3% 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.
The strong performance of tourism — in line with an improving labor market and recovery in consumption — is helping in this direction. The same applies to structural reforms aimed at removing obstacles to growth, 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 only slightly raised living standards in the country relative to the EU average over the past two years – and not enough to move the country out of last place, with the poorest residents in the Eurozone. point out the Financial Times and go on to emphasize that this situation is new for the Greeks, who until 2009 had a 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 EU’s poorest country,” writes the Financial Times report.
“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 the bailout from the IMF and the EU, squeezing businesses and households and demolishing the economy. The extent of the economic damage was unprecedented in peacetime.
The Greek economy shrank by almost 30% from the top to the middle classes. 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. Unemployment soared to an all-time high 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 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 through 2022, the most recent year for which data is available in the OECD database, and are 30% below pre-crisis levels, leaving the country with one of the lowest average wages among developed economies.
The manufacturing 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 the country’s long-term economic prospects. 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 country report, the IMF also cited climate change as a risk — as 90% of tourism infrastructure and 80% of industrial activity are located in areas exposed to high climate risks — and the increasingly dismal demographics data.
Births in Greece fell to a ninety-year low in 2022, exacerbating an aging and shrinking population as many young people leave the country each year.
Overall, the Financial Times article concludes, “Greece’s economic recovery should be celebrated, but it must be seen in the context of the significant economic crisis that has left the country in a hole that may take a whole generation”.
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