The Greek Economy: Which Way Forward?
By Mark Weisbrot, David Rosnick, and Stephan Lefebvre
In the past six years the Greek economy has gone through a massive adjustment at a steep price, with unemployment currently at 25.8 percent and youth unemployment at 49.6 percent, and lost output of about 26 percent. The current account and primary government budget balances have been brought into surplus; Greece now has the largest cyclically adjusted primary budget surplus in Europe, at 6.0 percent of potential GDP.
The economy finally grew in 2014, by 0.6 percent, but the recovery is weak, slow and fragile. While some have attributed the nascent recovery to the success of years of austerity, in fact it is due to the near end of fiscal tightening. The cyclically adjusted budget surplus – which measures the government’s fiscal tightening -- moved from 5.7 percent in 2013 to 6.0 percent of GDP in 2014, or just 0.3 percentage points. In the three years prior, the adjustment had been 3.2 percent of GDP (2012-13), 3.8 percent of GDP (2011-12), and 5 percent of GDP (2010-11). It should be obvious that this huge drop-off in fiscal tightening would be the main cause of the return to growth.
The IMF projects unemployment to remain at 12.7 percent in 2019, yet this is considered “full employment,” since the economy will be above its potential GDP according to IMF estimates. In order to meet Greece’s current program debt targets, the government is required to run very large primary budget surpluses – more than 4 percent of GDP – for “many years to come,”beginning in 2016. This will be a serious drag on growth.
This paper argues that prolonged mass unemployment and reduced living standards, brought about by years of recession and budget cuts, are unnecessary, and that a robust recovery is feasible. It presents an alternative macroeconomic scenario with a moderate fiscal stimulus, which brings the economy much closer to full employment over the next five years, with a lower net debt than currently projected by the IMF. This alternative is just one of many possible scenarios, some ofwhich might include debt cancellation, or more help from the European Central Bank in maintaining low interest rates, especially in light of its recently announced quantitative easingprogram. The current program, which forecasts a weak recovery with many downside risks, as well as continued mass unemployment in the years ahead, should be replaced with policies that offer a much stronger and faster recovery.