Review by Christos T. Panagopoulos –
The IMF’s report on Greece outlines that in the last four years Greece has been implementing the most ambitious program of fiscal consolidation and structural reforms among advanced economies.
Despite the long recession – 2013 will be the sixth successive year of output contraction that cumulatively amounts to a drop in real GDP close to 27 percent – the achievements so far have been impressive.
By the end of 2013 Greece is expected to achieve a primary surplus, which is a necessary condition for Eurogroup to fulfill its commitment of 27th November 2012 “to provide adequate support to Greece during the life of the Programme and beyond until it has regained market access”. Between 2009 and 2012, the primary deficit (excluding support to the financial sector) declined by 9.3 percentage points of GDP – the biggest and fastest ever recorded adjustment by an OECD economy.
The European Commission estimates that between 2009 and 2012 Greece reduced its structural budget balance by 13.8 percentage points of GDP and that in 2013 Greece will achieve a structural primary surplus of 6.3 percent, the highest in the EU. In addition, the external balance and the competitiveness of the Greek economy have also improved significantly.
The improvement in competitiveness is reflected in the rapid fall in the current account deficit from -14.9 percent of GDP in 2008 to -3.4 percent of GDP in 2012, while the IMF projects that the deficit will be nearly eliminated in 2014. Compensation per employee in the total economy fell by 6 percent in 2012 and is forecasted to decline further by 7.9 percent in 2013. Currently, Greece has the lowest inflation rate in the euro area with prices actually falling, for the first time in 40 years, by 1.0 percent in the year to August 2013, compared to a euro area average increase of 1.3 percent.
As a result, approximately three quarters of the cumulative loss in Greek competitiveness between 2001 and 2009 vis-à-vis the euro area was recovered by 2012. In the financial sector, all four core banks have been recapitalized by the Hellenic Financial Stability Fund.
Three of the core banks managed to attract at least 10 percent of the required additional capital from private sources and remain under private control. All bridge banks were absorbed by the core banks. Major consolidation has been achieved. There are now only four large banks and a few smaller ones, compared with a situation of 17 banks before the crisis. A new stress test exercise is now being conducted and will be concluded by December.
Banks will submit to the authorities appropriately revised restructuring and funding plans, while a major reduction in costs is already underway. All these developments have led to increased confidence and a rise in deposits. In August 2013 private deposits stood 6 percent higher than in August 2012.
Since 2010 Greece has also implemented a large number of structural reforms, covering various sectors of economic activity. Most of them had an immediate fiscal impact (for example, reforms of pensions, public health care, public administration and fiscal governance, etc), while others focused on labor and product markets and enhanced the competitiveness of the economy (for example, liberalization of regulated professions, liberalization of fuel and energy markets, judicial reforms, licensing procedures, fast track process for investments, etc). Finally, the privatization process was revived and a number of state-owned enterprises were transferred to the private sector (such as the State Gaming monopoly and the Gas Transmission Operator).
While the above achievements have come at an extremely high socio-economic cost, recent developments, in Greece, are promising. In 2013, GDP is expected to decline by approximately 4 percent, but moderate growth is forecast for 2014. Unemployment remains extremely high (27.1 percent), while the rate of youth unemployment in Greece is the highest in the EU – close to 60 percent. However, in the second quarter of 2013, the unemployment rate started to decline marginally.