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The Greek Economy

Back from the Dead
by robert looney

bob looney, teaches economics at the Naval Postgraduate School in California.

Published June 24, 2024


Few economies were laid as low as Greece by the Great Recession. And, given a series of unfortunate events in its wake, few observers predicted a recovery would be possible by now. But happily, pessimists are sometimes wrong.

Been Down So Long …

All of Europe (and pretty much everywhere else) was bludgeoned by the financial crisis in 2009. And the failure of the European Union (led by Germany) to aggressively fight the recession that followed only added to the misery. But no other developed country was hit as hard as Greece, which had been able to borrow cheaply on lenders’ assumptions that the Eurozone currency bloc would never allow a sovereign member to default.

Meanwhile the government had been spending far beyond its means, opening a yawning budget hole that had been disguised for years with wishful thinking and outright fraud. When reality finally hit home, lenders (mostly German banks) scrambled for the exits, leaving Greece without access to private capital markets. Equally important, membership in the Eurozone meant that Greece could not make its exports more attractive by devaluing its currency – typically a vital step in restoring market-driven growth after a major shock.

In 2010, Greece received its first bailout loan, a stunning €110 billion from the IMF and the EU. But that liquidity came at a high social price in terms of fierce austerity conditions, which led to widespread protests and political instability. And that was just the beginning.

In 2012, Greece, unable to cover lenders’ due bills, negotiated a debt restructuring with private creditors, resulting in a 50 percent “haircut“ that amounted to approximately €100 billion in debt write-off. But the hole had been so deep that more financial resources were needed to cover it. The IMF and the EU subsequently approved a second bailout package in 2012, which provided an additional €130 billion in financial assistance – with austerity strings again attached, of course.

Nonetheless, Greece defaulted on a €1.6 billion debt payment to the IMF in 2015, becoming the first developed country to fail to meet its obligations to the giant multilateral lender. That year also saw the closure of many banks and the imposition of capital controls to slow a race for the exits. Fed up, Greeks voted to reject further austerity measures required for a third bailout.

Some factors were working to Greece’s advantage. For one thing, the injections of capital from multilateral lenders added up, partially replacing the withdrawal of private capital.

This endless crisis in slow motion left the economy prostrate. Greece’s GDP in terms of purchasing power fell by 20 percent between 2008 and 2012, and, lacking any means of stimulating demand, grew only sluggishly for the rest of the decade. Unemployment peaked at a sickening 28 percent in 2013.

… It All Looks Up to Me

Experts were generally pessimistic that Greece could pull itself up by the bootstraps, in part because the crisis had revealed how badly the country had been governed and how soft corruption had become endemic. Nouriel Roubini predicted a prolonged period of stagnation. Paul Krugman decried the measures imposed on Greece that left millions hungry and unemployed, arguing that austerity was counterproductive in the sense that it would frustrate efforts at reform needed to bring Greece into the European mainstream.

Even within the IMF, there were concerns that austerity was a dead end. And by 2020, many European economists were echoing the American view that the Eurozone’s handling of the Greek crisis was just plain wrong.

Nothing has happened since to alter the conclusion that austerity didn’t work. In 2018, per capita income remained far below the pre-crisis peak. And public debt had risen from 103 percent of GDP to 191 percent, even as public services deteriorated.

But some factors were quietly working to Greece’s advantage. For one thing, the injections of capital from multilateral lenders added up, partially replacing the withdrawal of private capital. For another, the end of the pandemic saw a global resurgence of tourism. And Greece, which has long been heavily dependent on the industry, was exceptionally positioned to enjoy the fruits.

From 2021 to 2023 the economy expanded at an average annual rate of 5.3 percent. Ruchir Sharma, chair of Rockefeller International, included Greece among the “seven wonders” of the world’s economies. He cited Greece’s rapid recovery, driven by a return of foreign investment and tourists, as well as a significant reduction in nonperforming bank loans.​

Christine Lagarde, the director of the European Central Bank, echoed the sentiment. She praised Greeks for their “remarkable” fortitude, citing their “phenomenal recovery capacity” amid a recession that lasted longer than America’s Great Depression. She also praised their “stellar performance” in reforms deep into Greek society. Greece’s improvement resulted in a positive rating from S&P Global Ratings, following 13 years of having its debt classified as junk.

Greece’s public debt is still one of the highest in the world, limiting Greece’s ability to respond to future shocks or to invest in infrastructure, education and innovation. And unemployment remained at 12 percent in 2022, with the young suffering the brunt.

Greece’s experience highlights the importance of structural reforms, though in this case the temporary dislocation added to the already high costs borne by Greek households. The Legatum Prosperity Index for 2023 ranks Greece’s economic quality, a measure of how well an economy is equipped to generate sustainable wealth as the 20th highest out of 167 countries.

Key labor market fixes included reforms included mandating decentralization and flexibility, particularly in wage-setting mechanisms. This involved allowing wages to adjust in line with productivity levels to restore competitive labor costs. The government cut the minimum wage by 22 percent and subsequently froze it through 2019, which was a significant step in reducing labor costs and improving competitiveness.

The government also deregulated the collective bargaining system, with procedures for the conclusion of firm-level labor agreements simplified. Firms could set wages below sectoral levels if they could obtain the labor they needed, increasing their ability to adjust to economic conditions. Other actions included reducing notice periods and severance pay for new hires on permanent contracts. This was part of a broader strategy to address labor market segmentation and encourage the use of more flexible forms of employment.

To be sure, the Greek economy continues to face daunting problems, putting its will to stay the course to the test. Despite debt relief efforts, Greece’s public debt is still one of the highest in the world, at 168 percent of GDP in 2023, which will limit Greece’s ability to respond to future shocks or to invest in infrastructure, education and innovation. And while unemployment has fallen from the peak, it remained a disquieting 12 percent in 2022, with the young suffering the brunt.

Greece’s economy strongly relies on services, notably tourism, leaving it especially vulnerable to shocks like the Covid-19 pandemic. Diversifying the economy by supporting innovation and higher-value-added activities are critical to Greece’s long-term viability.

Consider, too, that Greece’s rapidly aging population will relentlessly pressure the social security system, and more generally, the public budget. Meanwhile, the country also faces the growing consequences of climate change. Increasingly hot weather is likely to weaken the attraction of Greece’s beaches, while severe storms and fires will intermittently wreak havoc with the country’s infrastructure, agriculture and tourism.

All that said, the Greek economy is proving remarkably resistant in light of the slow-moving disasters it has been forced to endure. Indeed, given the hard decades since the financial crisis, the Greek economy shows what is possible even in the darkest of times.

main topic: Region: Europe