The IMF has just released its latest review of the Greek economy. “Following a deep and protracted contraction,” it says in its press release, “growth has finally returned to Greece.” The green light has been given for Greece's exit from its bailout program in August 2018.
For many, this is welcome news. Greece has turned a corner. The dark days are behind it, and the future will be bright. But is this really the end of Greece's troubles - or will there be more pain to come?
The magnitude of Greece's collapse over the last decade is extraordinary. Right at the start of the IMF’s review is this chart, which compares the fall in Greek output over the last 10 years with other major historical contractions, including the U.S.’s Great Depression:
Greek contraction compared with other major peacetime contractions
The Greek people have just lived through a Depression as deep as the Great Depression and considerably longer. It is now the greatest recorded peacetime Depression.
Fortunately, the Greatest Depression may now have run its course. The Greek economy grew by 1.4% in 2017, and the IMF projects that GDP growth will rise to 2% in 2018 and 2.4% in 2019.
Of course, IMF growth forecasts for Greece need to be treated with considerable caution. As the Greek economy sank ever deeper into depression, the IMF continued to predict that growth would rebound "any day now." The satirical blog ZeroHedge lampooned the IMF’s dire forecasting record as “hockey stick comedy.” But Greece did emerge from its long-running depression in 2017, and indications so far are that growth will be maintained this year.
In part, Greece's recovery is due to generally strong Eurozone growth: a rising tide floats all boats, as they say. But the IMF says it is also because of Greece’s own painful reform efforts:
The large macroeconomic stabilization effort, structural reforms, and a better external environment contributed to an increase in real GDP….
I suppose the IMF would have to say that, really: after all, if the structural reforms it insists upon don’t result in stronger growth, what on earth is their point?
The legacy of the Greatest Depression, even with the doubtful benefit of those structural reforms, is a terribly weak and deeply damaged economy. Adult unemployment, which peaked at over 25% at the height of the Greatest Depression, is still over 20%, while youth unemployment is twice as high. In a footnote to its review, the IMF comments that structural unemployment (the average excess of people over jobs across the business cycle) was 15% in 2016 and is expected to fall only gradually “over the next two decades.” Many of Greece’s young people will be middle-aged by the time there is any work for them. Some may never work at all. An entire generation thrown on the scrap heap.
Despite all the pain the Greeks have endured to fix their country’s finances, Greece’s fiscal situation remains extremely precarious. The IMF staff predictions show absolutely no room for fiscal expansion, even though it is desperately needed, not least to relieve extremely high poverty levels. One in four people in Greece is living below the poverty line.
Greece’s government is critically hampered by ridiculously tight fiscal targets not of its own making. The Eurozone creditors have agreed a package of debt relief that depends on the Greek government maintaining high primary fiscal surpluses virtually indefinitely. This is from the Eurogroup’s statement of June 22, 2018:
In this context the Eurogroup welcomes the commitment of Greece to maintain a primary surplus of 3.5% of GDP until 2022 and, thereafter to continue to ensure that its fiscal commitments are in line with the EU fiscal framework. Analysis of the European Commission suggests that this will imply a primary surplus of 2.2% of GDP on average in the period from 2023 to 2060.
As primary surpluses are reported as a percentage of GDP, achieving them depends not just on maintaining fiscal prudence, but on robust GDP growth. If growth falters, then the primary surplus targets will be missed, and the Greek government will have to inflict further tax rises and spending cuts on its population to comply with debt conditions, further reinforcing a downward economic trend. This is crazily pro-cyclical. When the next recession comes, as it inevitably will – after all, Greece is expected to maintain these primary surpluses for over 40 years – Greece will head down the Depression road again.
The IMF doesn’t believe that the primary surpluses envisaged by the Eurogroup are remotely achievable. It says that the largest primary surplus that could realistically be sustained for such a long time is 1.5%. If it is right, then Greece’s fiscal finances could quickly take a significant turn for the worse.
There’s a further risk too. Greece is currently paying very low interest rates on its debt. But when the bonds held by its Eurozone creditors mature, it will have to refinance them on the financial markets – if it can. It’s as yet unclear how much market access Greece will have by, say, 2030. But one thing is certain. Market financing will be at much higher interest rates, making Greece’s ability to service its debt more challenging.
“Greece will need to simultaneously achieve high GDP growth and run large primary fiscal surpluses for many years to keep public debt on a downward trajectory,” says Peter Dohlman, IMF mission chief for Greece. Since the staff review insists that large primary fiscal surpluses are a drag on growth, it is not difficult to deduce that the IMF thinks Greece will eventually need more debt relief.
This will not go down well with the Eurozone. But I fear the IMF is right. That battered old can has been kicked down the road once more. Greece has only had a reprieve, not a pardon.
In a few years’ time, when Greece once again faces debt default and Euro exit, what will the price of debt relief be? Well, unless there is a change of heart among Eurozone governments by then, the price will be yet more harsh spending cuts and tax rises, and perhaps another Depression. Greece does indeed have more pain to come.