Greek Business File, September-October 2020, No 127
COMMENT by Anthony Kefalas
Greece and the K-shaped Recovery
The Greek economy is entering the autumn of 2020, weakened by the ten-year old crisis of 2010-2020, hobbled by the coronavirus, and threatened by Turkish irredentism. Heavily dependent on tourism and, generally, on human contact activities, the economy is likely to suffer more than other European ones, which rely on a relatively large industrial base and technologically advanced activities.
Two significant statistical indices best underline the current dire foundations of the economy. By the end of 2019, the production gap, expressed as a percentage of potential GDP came to nearly -5%, after having reached -15% in the two-year period of 2011-2012. Even worse, Greece’s net international investment position was at staggering -150% of GDP. With a public debt amounting to about 180% of GDP – top in the E.U. – Greece was ill-equipped to deal with the pandemic.
In accordance with the relaxation of E.U. rules regarding the size of the primary deficit, the Greek government was able to inject significant liquidity into the system. By the end of the third quarter this will now amount to about 3% of GDP. Should this support continue at its present level to the end of the year, this will nearly necessarily mean that public debt will exceed 200% of GDP. Just recently, though, indications have surfaced that the government is indeed considering significant extensions of the current support schemes till the New Year – albeit with some modifications.
In order to mitigate this fiscal mess, Greece counts on the loans and subsidies that it will receive from the negotiated E.U. package. The country’s share is said to amount to about € 32 billion, including the money she is to receive under the regular 7-year E.U. budget. This comes to about 3% of GDP per year – a significant amount to count as a unilateral transfer of resources.
As a favored recipient of E.U. aid during the last 40-odd years, Greece has not always risen to the occasion. The past abounds with stories of misappropriations, weak plans executed even more weakly, inability to keep standards and time limits, revisions of investments, transfers of money amongst different investment plans, waste of resources and bureaucratic inefficiency as well as lack of transparency. Essentially there is no end to the list of woes. So, this time, the challenge facing Greece concerns its willingness and ability not to repeat the mistakes of the past.
Even more, Greece needs to receive and spend the E.U. funds, having adopted a new set of targets and in an entirely new operational environment. The intense negotiations that preceded the finalization of the package, rightly indicated that, this time around, Brussels will not allow divergences and shenanigans. The money has to be spent in accordance with well-designed and centrally approved plans – mostly of a pan-European nature. This approach has been dictated by the E.U.’s belief that today’s world is facing global problems, and these need global solutions. This means that Greek dreams of using E.U. funds to reduce taxation are just …dreams.
Essentially, Greece will have to design and develop investment plans along three main axes: modernizing and strengthening the health system, so as to enable it to better deal with full emergencies like a pandemic; building an infrastructure better able to meet the nearly-daily challenges brought about by climate change; and, creating a less unequal society.
Today, it is the issue of inequality that consumes the world of most intellectuals and of a respectable number of politicians—because it appears to justify attacks on democratic institutions. Greece is not immune either to the problem or to the attacks.
Inventive as always in terminology, economists have now come up with the so-called “K-shaped” recovery. This represents a sharp departure from the usual alphabet – the V, the U, the W, the L shaped recoveries. There has also been the “square root recovery”– indicating a rapid but possibly shallow recovery, followed by a persistently low growth rate.
The “K- recovery” underlines today’s fact of life: parts of society will do much better and other parts will do much worse. This reflects the ever-widening gap between the rich and very rich on the one hand and, the middle class, the low paid, the poor and the unemployed on the other. It reflects the fact that in the pandemic world stocks soar while thousands and millions report as unemployed, thousands and millions declare they do not have enough money to provide food for their family.
The rising inequality of income has extended to nearly all aspects of life: from access to health coverage and health treatment to the quality of education and the ability to compete on equal terms. It signifies a significant retreat from, nay a reversal of, the 1945-1975 period, which saw a decline in inequality and a wealth of opportunities for most. This large and ever widening inequality gap explains to a large extend the rise of populist policies, the declining faith in democracy and its institutions, the return of extremism to the political scene.
For about 20 years (roughly from 1990 to 2010) Greece had its own “roaring twenties”: the stock market took off, bank credit expanded to one and all, EU subsidies added to the riches. Consumption went up and investment languished. As a result the country was largely spared the worse aspects of the then exploding problem of inequality in the mature capitalist states. The 2010 crisis, however, forced Greek society back to reality. Unable to continue its borrowing on the international capital markets, forced under IMF and EU tutelage, (which proved sadly inadequate due to the lack of relevant experience) and blindly refusing to implement necessary structural reforms, the economy suffered a 25% decline over a five-year period.
This proved to be the beginning of the inequality problem for Greece. Inevitably, the pandemic will worsen it. The signs have been there for quite some time now: extremely high unemployment rates amongst the young (19 to 24 age group), very high rates of permanently unemployed, negative net investment rates, non-existent foreign greenfield investment, nearly mass emigration which amounted to a significant brain drain and a near-collapsing welfare system –particularly in the health sector. Greece has essentially joined the international club.
The Mitsotakis government had no time to bring the economy back to an even keel. Its coming to power restored investors’ confidence, but developments cut the story short, in terms of growth and fiscal rectitude. The year of 2020 has proved to be an annus horribilis for Greece. It started with the Turkish effort to push thousands of refugees across the northern frontier, it continued with the pandemic and has now reached a peak with the on-going Aegean crisis. Not even one of these developments can provide some sort of hope for a safe and fruitful tomorrow.
On the contrary: in their sum, they point to a troublesome future, with inequality occupying a prominent position. Possibly, for the first time since the end of the civil war and the launching of the modern Greek economy in 1953, Greece will have to deal with the issue of rising economic inequality coupled with a weakening of social mobility. It is an issue that will cut deep across social classes, political alliances, and institutional resiliency.
To recognize the emergence of this problem, to acknowledge its dimensions and to examine potential ways to deal with it, is the least that one may expect from this government—rich in talent and imagination. To ignore it is to court with disaster.