Seven years into the crisis, Greece has reached a turning point. The country has been under two economic adjustment programmes with the Troika since 2010. The second programme is due to end on 28 February 2015 provided the reviews of the reforms of the Greek economy are positive. Recognising Greece’s courage for going through major fiscal adjustments and starting structural reforms in order to tackle the severe crisis, it is important to emphasise that these efforts need to be sustained in order to bring the country on the track of recovery, as the storm is not fully over yet. . However, the cloud of uncertainty looms over the country’s future.
The upcoming general elections due on 25th January could bring changes of historic importance, posing risks to continued reforms and threatening to reverse the already achieved results. Greece needs to choose credible leaders with real solutions, not fall in the trap of populism and economic utopia. The country should not return to the failed economic recipes of the past.
The sacrifices of the Greek population are paying off and should not be put at risk now
If we look at the economic and social indicators, we can see the depth of the effects of the crisis on the country as a whole. Just to illustrate, GDP dropped by more than 25% in the past four years. The crisis took its hard toll on the Greek population, with very high unemployment at levels of 27% in 2013-2014 and worrying rates of people at risk of poverty (35% in 2013). Greece has been trapped in a debt spiral, with steep increases of the public debt amounting to 175% of GDP in 2014.
The country has undergone major fiscal adjustments whose merits cannot be discarded, as Greece is close to reaching balanced public finances. Most hard decisions have been made, and the sacrifices of the Greek population, which should not be underestimated, already show effects. Greece reached a primary budget surplus in 2013 and 2014 (which doesn’t take into account interest payments), and had foreseen one for 2015 as well, supporting the country’s goal to exit or reschedule the bailout programme with the Troika.
Nevertheless, Greece can only break the cycle of rising debt if it returns to a stable and more vigorous growth path. For this, more attention needs to be paid to the real economy. Greece has indeed also achieved better current account balance, reducing the 3 year deficit to 3.9% of GDP in 2013 for instance. However, this performance has been driven by the reduction of imports, rather than rising exports. Economic activity is still low, even in spite of lower wage costs in 2014 than in 2007. Greece has not yet fully regained competitiveness and attractiveness for investors.
Other countries that have also been heavily struck by the crisis such as Portugal, Spain or Ireland have managed to gradually change their production systems and export more, thereby contributing to improving the prospects for growth in the future. Greece needs to become more credible and attractive for investments. To achieve this, there is no way around structural reforms.
Further structural reforms are key to improving Greece’s competitiveness
There have been steps towards lowering the burden on companies, as the removal of regulatory restrictions is ongoing in specific areas of product and service markets. Continuing this would further unleash competition in several sectors of the economy. Greece jumped 17 positions ahead in the World Bank Doing Business scorecard in 2014 in comparison to 2013, as a proof of progress made towards improving the business environment. However, Greece’s rank was still on position 72 only. More needs to be done, as Greece still remains one of the highest regulated countries of OECD. Furthermore, privatisation of the economy, improvements of the pension system, anti-corruption and public administration reforms are needed.
Political uncertainties of the past months had a significant negative impact on implementing reforms and attracting investors – the necessary ingrediends to escaping the debt spiral.-
Reversing the path of reforms would bring Greece back to square one
The choice in the upcoming Greek elections is between the current centre-right government, run by New Democracy party, and the Radical Left Coalition (Syriza). In other words, the choice is between a more economically sound reasoning versus economic utopia.
Syriza has an economically unrealistic programme. Their main pledge is the restructuring of an important part of the Greek debt owed to the Troika. The party basically demands a 50% annulment of the Greek debt and an agreement on a conditional reimbursement of the rest of the Greek debt only when the country re-gains growth. Syriza also wants to cease or reverse the privatisation efforts as well as the pension reforms and tax system changes made. These policies would not be advisable in the country’s current economic environment. In fact, they are the same measures that got Greece into trouble in the first place, risking the deepening of the country’s debt burden and economic and social fragility. Pardoning the debt without changing the economic fundamentals will lead Greece into a next crisis soon.
The New Democracy’s programme proposes to continue with economic reforms to boost the country’s growth and competitiveness. Granted, many argue that the party could have done more to reduce the burden of the crisis on the private sector and to protect SMEs from going bust by improving the framework conditions for businesses to be able to continue operations in more efficient ways. However, their promise to support economically sound measures should be given an act of faith.
Greece will stay in the Eurozone; sceptics will be proven wrong
Greece needs to elect leaders that have the credibility in front of Member States and towards private investors to govern the country responsibly. If Syriza wins, there is no certainty that the country stays in the Euro area, in spite of what it promises in the elections. Syriza will not be able to deliver only the attractive part of its programme. If they are left to apply economic utopia, people will burden the cost. Since their programme is not realistically able to bring the country back to growth, Greece will become even less credible for international lenders and unattractive to investors.
With the economy in its current state, it is unlikely that a Grexit would devalue the country’s debt; it might actually increase it. An exit of Greece from the euro would create even higher political instability, significant market turbulences and would actually increase borrowing costs for Greek businesses. Ultimately, the society as a whole would have to bear further costs and the sacrifices already made by the people are put at risk.
Therefore, in spite of what Eurosceptics believe, it is in Greece’s interest to stay in Eurozone. Given the current debt situation topping 175% of GDP, the re-scheduling of the debt repayment from 30 to 50 years would be a possible scenario under these circumstances. In addition, Greece would be on track to finalise the current bailout programme and get ready to enter international markets with more favourable interest rates in the longer term.
The population needs to be better informed about the possible consequences of voting for Syriza. Not taking the route of structural reforms, as Syriza proposes by reversing the already achieved results, poses a high risk to the country’s future welfare.