Greece's Herculean task is to survive a recession as big as the Wall Street Crash

 

Amid the frenzy of strikes, street protests and stalled negotiations it is difficult to get a clear picture of whether or not the two debt bail-outs for Greece are working. The renewed speculation that Greece might need further support next year adds further concern.

Soon Greece will have gone through a recession similar in size to that of the Wall Street Crash of 1929. If the task remains Herculean, the experience has appeared akin to that of Sisyphus. 

Progress has been made on the core issue. In the first year of the crisis, Greece achieved the biggest deficit reduction recorded by any European economy in the post-war period. Last year, its budget consolidation was ahead of target and in 2013 it may well achieve a primary surplus (net of interest repayments). Currently, only Ireland is out-performing Greece in its budget consolidation effort. 

Yet with their deficit reductions, both Ireland and Portugal are enjoying much better rates of economic growth. Greece may not return to growth until next year.  And the social pain in Greece creates a cauldron for popular protest. Two out of three young people are unemployed, public sector salaries have been slashed, and bankruptcies have exploded. Some months ago, the IMF admitted it had wrongly estimated the ‘multiplier’ effects of the cuts it insisted upon.

Greece needs investment in growth and it has sectors that offer good returns. But, not only has the rescue so far had the wrong speed, its direction has also been wanting.  Given Greece’s record on structural reform, the ‘troika’ overseeing its bailouts opted for crude, across-the-board savings.  So, this week’s protests over public sector job cuts are both correct in the sense that the target figures are not the result of any serious review of what resources and skills the state administration needs, but wrong in dismissing evidence of under-performance and wastage. The target figures for job cuts follow a purely fiscal-savings logic.

Thus, the bargaining between the troika and Athens does little to focus attention on reform priorities. The Opposition is encouraged to defend every last job, making the state sector a poor substitute for an all too absent welfare regime.

And, after all the painful measures, the best Greece can hope for in 2020 is to have a debt burden higher than the one it had at the start of the crisis.

Professor Kevin Featherstone heads the LSE’s Hellenic Observatory.

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