There are, apparently, still hopes that some deal can be done with Greece this week so that the final €7.2bn tranche of the current €240bn bailout can be released. If this is the case then, presumably, talks will go ahead for a third bailout and thus the Greek saga struggles on. Sadly, however, all this activity is little more than “kicking the can down the road” because Greece’s very basic economic problem, lack of competitiveness, remains unresolved.
Ever since the Greek crisis exploded in 2010, the debate about Greece’s difficulties has focused on its financial problems and, indeed, the implications for the rest of the Eurozone of its financial problems. There is more than an element of truth in the claim that Greece’s rescue packages have been partly driven by the need to shore up the Eurozone and relieve Greece’s foreign creditors, mostly French and German banks.
Greece’s financial situation is, of course, dire. Government debt amounts to over 175 per cent of GDP. No one, surely, believes that Greece can pay this back. But even if Greece defaulted on this debt it would bring little economic relief. Interest payments due on the debt have already been significantly reduced, so any savings to the Greek exchequer of default would be modest.
If Greece’s financial problems remain dire, the economic situation is worse. After showing some signs of recovery in the middle of last year, the economy fell back into recession in the fourth quarter. GDP has fallen by about a quarter since 2007-08. The unemployment rate is currently 25 per cent and youth unemployment is 50 per cent, a shocking waste of lives.
Greece needs an economic shock to stimulate demand. The Greek government, understandably, makes much of an “end to austerity” and the need to alleviate restrictions on the public sector balance. But within the Eurozone, it is difficult to see its creditors making any major concessions because, quite simply, fiscal rectitude is one of the rules of the Eurozone club. And even outside the Eurozone, any Greek government’s fiscal policy would be restrained by the demands of the financial markets. More positively, Greece needs to improve its competitiveness and stimulate the external sector in order to stimulate exports, principally tourism, and encourage import substitution.
Within the Eurozone, Greece’s only means of improving price competitiveness is through internal devaluation. Given German low inflation rates (say), this is extraordinarily painful and slow. Accordingly, Greece has experienced deflation since 2013, but I doubt that this is sustainable in the longer term. It is the economic equivalent of a war of attrition. A preferable option would be to leave the Eurozone. The new drachma would then surely rapidly depreciate and provide the much-needed economic shock.
No one can guarantee a return to prosperity if Greece left the Eurozone. But at least the country would have a fighting chance. And I would be optimistic that growth would return, unemployment would fall and living standards rise. In the Eurozone’s straightjacket, I see no chance at all. Indeed, Greece’s Eurozone membership seems to guarantee little but ongoing immiseration.