Miranda Xafa analyzes the mix of challenges for the Greek economy, the need to reduce the debt being at the forefront
WRITTEN BY: MIRANDA XAFA
The Greek economy continues to record positive performance despite the global economic slowdown due to monetary tightening, the energy crisis and wars in Ukraine and the Middle East. For 2024 both the International Monetary Fund (IMF) and the European Commission as well as the Organization for Economic Co-operation and Development (OECD) predict a growth rate of 2.0%-2.3%, marginally lower than 2.4% in 2023, but higher than the eurozone average (1.2%). The positive performance is supported by cheap financing from the Recovery and Resilience Fund (RESF), the good performance of tourism and the continuation of the memorandum reforms to improve the business climate.
In the medium term, the growth rate will gradually decrease, converging with the growth potential of the economy.
The main challenges
Continuing a policy mix focused on investment and exports, through improving competitiveness, remains vital to address the three key challenges facing the economy:
(1) The investment gap created during the 2010-2018 crisis period, due to the reduction of public investment and the uncertainty that affected private investment, remains unbridged. In the eurozone, gross fixed capital investments amounted to 22% of GDP in 2022, while in Greece to 13.7%, marginally exceeding depreciation.
(2) The high public debt and bad loans bequeathed to us by the crisis are a brake on growth. Debt peaked at 212% of GDP in 2020 and rapidly decelerated to 168% of GDP in 2023 (IMF data including capitalized interest) thanks to inflation and a rapid post-pandemic economic recovery. In the same period, however, the debt increased by €35 billion in absolute terms. Today, the debt remains above the 2012 level both in absolute terms and as a percentage of GDP, meaning we have seen no improvement since the 53.5% debt haircut. NPLs have fallen significantly to 8.6% of total loans in mid-2023, but remain well above the Eurozone average (1.8%). In addition, bad loans have been transferred from banks to management companies, but borrowers continue to be burdened with excessive debt because the out-of-court debt settlement mechanism has not worked satisfactorily.
(3) The high current account deficit, which peaked at €20bn (10% of GDP) in 2022 and remained in deficit throughout the deep recession of the past decade, reflects a competitiveness deficit. The deficit is equal to the difference between production and consumption of the private and public sectors, that is, it reflects the fact that we continue to consume more than we produce and borrow from abroad to cover the difference.
The debt
Reducing the debt-to-GDP ratio will become more difficult in the coming years for several reasons:
(1) Its further reduction must be based on the creation of primary surpluses of at least 2% of GDP per year, as growth and inflation rates decline. The Stability and Growth Pact's general escape clause, which allowed for a temporary departure from fiscal rules during the 2020-2023 pandemic and energy crisis, is lifted in 2024. It remains unknown for now whether an agreement will be reached between EU member states on young fiscal rules or whether the old ones will apply. In any case, the creation of a primary surplus of at least 2% of GDP will be institutionally mandated.
(2) Despite the upgrade to investment grade, the debt is refinanced at a higher interest rate than the average interest rate on existing debt (around 2%) due to the increase in ECB interest rates.
(3) In 2022, the income of hundreds of millions of euros per year from the profits made by the ECB buying Greek government bonds ended.
(4) In 2026 the grants from the TAA expire.
(5) In 2032 the grace period of debt restructuring to the EFSF, the European fund that financed the second stabilization program 2012-2014, ends, and interest payments increase accordingly.
Against this background, the perpetual search for fiscal space for benefits must be contrasted with the need to reduce debt as an absolute size through higher primary surpluses. The first option ensures social calm and votes, but dampens the market's signal to reduce consumption. The new generation would gain more from the debt reduction we have imposed on them and less from the government's youth passes and benefits policy.
Dynamics in reforms
Despite wasteful fiscal management, government policy is credited with renewed momentum in reforms. The interventions in justice, the promotion of meritocracy in the recruitment of managers in the public sector, the connection of funding with the performance of the Local Government, the establishment of private universities, the effort to expand the tax base, the establishment of "Hercules 3" to reduce the red loans, improving the functioning of the out-of-court debt settlement mechanism and the Bankruptcy Code constitute a critical mass of reforms. Their effectiveness will be judged solely by the consistency with which they will be applied.
However, other important reforms are still pending that will help the influx of investments, such as the simplification of licensing, the completion of the Cadastre and land uses that have been pending for decades despite the amount of European funds allocated, the improvement of infrastructure in view of climate change, energy interconnections inside and outside the country and the broadband networks throughout the territory.
The full digitization of the state is also pending, but it should simplify rather than duplicate existing bureaucratic procedures. Also pending is the sale or closure of LARCO, a timeless monument to the ineptitude of the Greek state. A recent study by Mr. Bitrou and Mr. Saravakos of KEFIM estimates the cost to taxpayers in the period 1989-2019 at €5.8 billion in constant 2015 prices. And the bleeding continues.
* Miranda Xafa is a member of the Scientific Council of the Center for Liberal Studies (KEFIM). This article was originally published in the Financial Post. It was also republished on the Blog of the Cyprus Economic Studies Society https://cypruseconomicsociety.org/blog/blog-posts/.