Monday 25 September 2017

Chickens come home to roost after Greek public sector boom

GREEK TRAGEDY: Despite having no identifiable boom in any particular sector, Greece still enjoyed huge increases in living standards — because Greece had a largely public-sector bubble masked by book-cooking in the finance ministry in Athens
GREEK TRAGEDY: Despite having no identifiable boom in any particular sector, Greece still enjoyed huge increases in living standards — because Greece had a largely public-sector bubble masked by book-cooking in the finance ministry in Athens
Dan O'Brien

Dan O'Brien

It's been a rollercoaster - a long period of extraordinary boom followed by deep and protracted bust. We all know the recent history of the Irish economy.

But if you thought we have had our ups and downs in Ireland in the 21st Century, consider the experiences of the Greeks who have been dominating the news of late in a way that is very rare for such a small country.

Nothing illustrates their rollercoaster ride better than what has happened to GDP per person, a measure which is among the best for comparing living standards. The figures for the eurozone peripherals are illustrated in the accompanying chart. By this measure, the Greek boom of 1999-2008 was, to borrow a Bertie-ism, "boomier" than ours. Indeed, it was the strongest growth surge of any of the long-established EU members, with a one-third increase in GDP per person recorded in the eight years up to the crash.

But since 2008 all of those gains have been lost. As of 2013 (the last year for which figures are available), Greeks were, on average, slightly less well off in real terms than they were in 1999.

Though cold comfort though it may be, that is significantly worse than the Irish performance. In the five years after 2008, we lost just over half of the gains in per-person GDP made in the previous eight years.

Although the Greek economy finally turned a corner in 2014, the chronic uncertainty hanging over it now as its teeters on the brink of 'Grexit' could well kill off that recovery. If Greece does depart the single currency, then it will face a further huge slump.

What could have been done to avoid all of this?

It is common to hear the view that all of Greece's woes are down to wicked foreigners who imposed austerity, and that it is austerity alone that has caused the misery. But that doesn't stack up. In reality, short of a very large gifting of cash to Greece by the rest of the world, there was always going to be a massively painful adjustment in Greece.

While there is no doubt that the extent of the fiscal consolidation since 2010 has made the Greek depression worse that it would otherwise have been, the notion that austerity is to blame for everything that has happened to Greece is as incorrect as saying that the ill effects of Ireland's property crash could have been avoided if alternative policies had been implemented once the bubble burst.

To see why, one needs to consider what happened up to 2008 and the alternative scenario thereafter. (That is, what would it have taken to maintain aggregate demand in the Greek economy?)

For some context let's look first at the peripheral eurozone economies since 1999, the year the euro came into existence and the first year for which figures on GDP per person are available for all fives PIIGS - Portugal, Ireland, Italy, Greece and Spain.

Neither Italy nor Portugal have done well. Indeed, both have gone through very long periods of stagnation. By contrast, Ireland and Spain had credit, construction and property booms up to 2007/08. These inter-related booms were the main drivers of economic growth in the early years of the new century in both economies.

Greece was different from the other four peripherals. Despite having no identifiable boom in any particular sector it still enjoyed very large increases in living standards. That was because Greece had a largely public-sector bubble - one that was famously masked by book-cooking in the finance ministry in Athens.

But after the autumn election of 2009 when a new government saw the state of the public finances it was clear that the game was up. Things had gone so far that further cover-ups were not an option. The revelation that Greece was massively more indebted than was previously thought triggered the euro debt crisis.

But even if every cent of Greek public debt had been written off there and then, and no further interest paid, the gap between spending and revenue would still have been massive - the "primary deficit", which excludes interest payments, was 10pc of GDP in 2009 (and it is worth recalling that the Greek government itself initially eschewed the default option because it believed the consequences would be worse than trying to struggle on and service it).

So even if Greece had had the slate wiped clean in 2010, it would have required much more official lending (from the EU and IMF) than was actually dispensed in order to keep public spending levels closer to their previously bubble-like levels, or, in other words, to have had less austerity.

There is certainly a case to be made that more money would have made the adjustment less painful, but there is no guarantee that it would have worked.

The argument for Keynesian-type stimulus is that it gives the private sector time to recover and rebuild. But given that Greek standards of living had not been based on private sector activity in the first place, stimulus spending would almost certainly have been needed for far longer than the three-year duration of the initial bailout. And because of Greece's private sector is weak - as best exemplified by very low export levels for an economy of its size - there was no certainty that private activity would have taken up the slack.

The economy has - very painfully - rebalanced at a much lower standard of living. But even if Greece avoids the shock of Grexit, its prospects do not look too rosy. A weak private sector, an inefficient state and public sector and new government whose views on economic management would win the approval of Hugo Chavez, are not a recipe that have ever lead to sustainable prosperity.

That is bad news for everyone - but most of all for the Greeks who have experienced the biggest shock of any economy on record.

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