FT: Greece’s economic recovery in a (painful) context – Economic Postman

The Financial Times tries to shed light on “Greece’s strong economic growth after the pandemic in a historical context” in an extensive article, underlining that the country is indeed among the best recent performers in the eurozone, but it has also become the poorest.

Last week, ratings agency S&P was the latest to praise the country, upgrading the outlook to “positive.” According to the author of the article this is due to the fact that the Greek authorities undertook “a program of far-reaching structural reforms and addressing long-standing bottlenecks”, boosting growth above the eurozone average and resulting in a fall in the debt-to-GDP ratio.

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Indeed, new data published by Eurostat last Monday showed that Greek public debt to GDP fell by 10.8 percentage points to 162% in 2023.

The Greek economy grew by 2% in 2023, surpassing the 0.3% contraction in Germany. As of 2019, before the pandemic, the country grew at almost twice the rate of the eurozone. Last week the IMF said the Greek economy would expand by 2% again this year and continue to outpace the average growth rate of the monetary union for the next two years.

The boost of tourism

The FT points out that strong tourist traffic, which has gone hand in hand with an improving labor market and recovery in consumption, is helping. 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.

And as BNP Paribas economist Guillaume Derien told FTAV: “Renewed political stability and strong fiscal consolidation make Greece a much more attractive country for investment than in the past.”

However. . .

Despite the positive results, however, the latest recovery has lifted Greece’s standard of living slightly above the EU average over the past two years – and not enough to dislodge Greeks from their place as the poorest people in the eurozone.

This is a relatively new thing for Greece, as GDP per capita was similar to that of the EU average until 2009. Since then, 10 countries have seen living standards rise above that of Greece, leaving it the second poorest in the EU after Bulgaria, and in last place in the bloc of the common currency

“As the gap with Bulgaria narrows sharply, it is not unreasonable to expect Greece to soon become the EU’s poorest country,” writes the FT.

How do these contrasting stories of strong recovery and poverty reconcile?

According to the FT the answer lies in the wake of the financial crisis and austerity that followed the crisis of 2010. Greek spending was cut and taxes raised to secure a bailout from the IMF and the EU, squeezing businesses and households and wrecking the economy . The extent of economic damage was enormous in peacetime.

The Greek economy shrank by almost 30%. In 2016, consumer spending fell by 24%, government spending by 20% and investment plummeted by 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.

The salaries

The report highlights that real wages were falling steadily until 2022, having shrunk by 30% from their 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 among eurozone countries.

And as BNPR’s Derien 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.”

Long-term concerns

According to the FT there are concerns about the country’s long-term economic prospects.

Mr Lagarias argues in the British newspaper that growth with limited leverage – as is the case in Greece – will remain sluggish and predicts that it will take several years of “persistent reforms” to get Greece back to where it was in 2007. Low investment and sluggish productivity also continue to limit Greece’s economic potential, according to Derien.

In its latest report on the country, the IMF also cited 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 – but also 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.

And the FT concludes: 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.