Dancing with recession and reboot of the economy

by Antonis D. Papagiannidis

Up to the last day before the 2021 Budget was tabled at the Greek Parliament – it is expected to be discussed starting December 11, voted upon December 15 – the officialdom and the political leadership of the Ministry of Finance were grappling with a dilemma: should the Budget be built around a rather temperate estimate of the recession expected for 2020 (which, in a coronavirus context would mean not to go for a double-digit figure) and for a rosy growth estimate for 2021 (based on the Great White Hope of EU Recovery Fund assistance,) or bite the bullet right now and ride the wave as it comes?

The option taken was to pen in the Budget a 10.5% loss of GDP over the “Covid-19 year” as 2020 will be remembered, instead of the 8,4% recession that was the earlier estimate; the growth rebound of the economy expected for 2021, with the much-vaunted assistance of the Next Generation EU funds, would be at a quite moderate 4.8% instead of the 7.5% upswing expected just weeks  ago. The Ministry of Finance has estimated that, without the support measures decided for the pandemic, the Greek economy would have taken a nosedive of some 17.5% of GDP. With the expected fiscal cost of the lock-down underway in November and stretching into December being computed at around 3.3% of GDP (the overall cost of support measures for 2021 is expected to reach 23.9 billion euros), a quite optimistic 7.5 billion euros is set aside for the next year. Which would mean that a hefty dose of optimism  – probably based on expectations of Covid vaccination getting a grip on the pandemic early enough, to prevent a more dramatic drop of economic activity.

A further point to be kept in mind is that the team currently at the helm of the Greek economy tried to obtain some sort of ex ante clearance on part of the EU enhanced surveillance people who finally opted for a non-committal stance. The fact that the capital markets are still quite favourable to Greek paper – 10-year bonds have seen their yields going lower than 0.65%, while 5-year bonds are nearing zero-to-negative territory – has planted a seed of a step-by-step approach on part of the Greek Government. An approach based on the expectation that the deterioration of the country’s debt-to-GDP ratio (already over 205%) due to a sinking GDP will not alert the markets in the near future.