The primary surplus of the general government a year before schedule is important in many respects but it is not a panacea for the country’s economic problems. If the economy does not recover and grow at satisfactory rates in the years ahead as official creditors forecast and market participants bet with their money, the primary surplus may turn out to be a short-lived memory. Even if it is maintained, the surplus will not be enough to ensure the huge public debt will be manageable and contain social discontent.
In a paper presented to the American Economic Association in Philadelphia a few months ago, economics professors Carmen Reinhart and Kenneth Rogoff reportedly argued Greece is likely to need 12 years to recover output losses sustained during the crisis based on data from the late 19th century and early 20th century crises. Greek gross domestic product losses are estimated at around 24 per cent from 2008 through 2013 so far.
They predicted Portugal was unlikely to do the same before 2018.
In their opinion, advanced economies must adopt some of the approaches adopted by emerging market countries over the last few decades, including restructuring of debt, allowing faster inflation and introducing capital controls.
However, it is clear that it is unlikely Greece’s official lenders will consent to some of these measures and the European Central Bank will change its monetary policy significantly to allow for an average annual inflation well above 2 per cent, the implicit target, in the eurozone.
The professors’ pessimistic forecast about the time needed for the return of Greece’s GDP to pre-crisis levels – that is around 232 billion euros from an estimated 181 billion last year – implies much lower average annual growth rates than projected by the official lenders in the next several years.
The economy is to grow by 3 per cent on average for a number of years.
Readers are reminded the Greek GDP contracted by 0.2 per cent in 2008, 3.1 per cent in 2009, 4.9 per cent in 2010, 7.1 per cent in 2011 and 7 per cent in 2012.
The recession eased last year, according to a preliminary estimate by the Hellenic Statistical Authority (ELSTAT), to 3.9 per cent from 4.5 per cent predicted initially by the government and others. However, a closer look at the breakdown of the GDP components reveals the easing of the recession is largely due to an unexpected development: the sharp rise in the stock of inventories by more than 2 billion euros compared to initial forecasts for no change. If there were no change in stock, economic activity would have fallen by more than 5 per cent. So it will be interesting to see whether ELSTAT will revise the GDP figure significantly, as it has done in previous years, or will not change it at all next September.
Whether the economy gets out of the doldrums is important because failure to do so will fan the flames of social discontent and have political repercussions.
In the meantime, foreign investors’ appetite for Greek risk appears to be growing stronger and stronger as evidenced by the heavily oversubscribed senior five-year bond issued by the National Bank of Greece a few days ago, yielding less than the recently issued Greek government bond, and the Eurobank’s share capital increase. Undoubtedly, the risk on mood internationally has played a significant role in attracting foreign funds to local financial assets.
The Greek growth story and high yields are also central to the trade but much less so the primary surplus of 1.5 billion euros, or 0.8 per cent of GDP according to the troika, or 3.4 billion euros according to Eurostat when the return of income from Greek bonds held by the ECB and national central banks is added.
Like Ireland, the markets don’t pay attention to one-off spending items linked to the recapitalisation of banks.
History teaches that fiscal orthodoxy in the form of high primary surpluses does not suffice to make the huge public debt manageable. This is more so when these surpluses are destined to service the debt and will be squeezed out of the economy. It is noted that revenues are projected to exceed government spending excluding interest payments by about 4.5 per cent of GDP in 2016 from about 0.8 per cent in 2013 on the troika’s definition and stay around 4 per cent from 2017 on. On the positive side, the country can count on a low cost of funding.
Therefore, Greece will have to achieve satisfactory GDP growth rates to help attain the targeted primary surpluses more easily and ease social strains created by depressed disposable incomes in the large urban centres and the high unemployment almost exclusively hitting the private sector. However positive the primary surplus may be, it cannot compensate for the need to revive the economy. This should be the focus but policymakers should have no illusions they can achieve it by instituting a few structural reforms. The latter will supplement any effort to boost the economy in the medium to long run but they will not spearhead the much-needed drive toward growth.
Therefore, primacy should be given to reviving investments, especially in export-oriented sectors, and exports of goods and services, but it takes much more than a paper exercise to do so. It needs a national commitment at all levels, starting from the top, like in South Korea in the 1960s.
* Dimitris Kontogiannis holds a PhD in macroeconomics and international finance.