MacroPolis

Covid is a shock to the Greek economy. The economic impact of the coronavirus pandemic has reawakened painful memories of the last crisis in Greece. But unlike its predecessor, the Covid-19 challenge is a transitory shock. This pandemic will go away. It is not a structural crisis as emerged in 2010. As difficult as it may be for the country to pass through this episode, Greece will get to the other side of the bridge.

Once there, it can continue rebuilding the economy and begin, slowly and gradually, to amortize the additional debt that was issued to bridge private households and business firms through the days of reduced economic activity. Economists can calculate what is a sensible way to do this--this should not be done too fast, but it should be done credibly and with conviction. International capital markets underlined throughout 2020 that they have the confidence to finance Greece without jumping the cost of credit. Negative yields for Greek sovereign debt in 2020 became a reality. A continued determination, credibly demonstrated, on the part of the political system to place the country on a safe path with less debt exposure in the future for new generations is key to maintaining calm and trust.

But Greece does face a structural shock that is of a much longer duration. The key word here is demographics, i.e., the gradual reduction in the country’s population. Eurostat, in its 2020 version of the EU population projections, estimates that the Greek population peaked in 2011 at 11.1 million people; and is projecting that the population will decline during the rest of this century to approximately 8.1 million people. This decline by 3 million (!) people is the equivalent of an average reduction of -0.35 percent a year until 2100. The projections change a bit every year, but the downward trend is by now well recognized in the last versions of the population projections of Eurostat and the United Nations Population Division. In a word, Greece is expected to become smaller in population during the lifetime of the current young generation who still have their working careers ahead of them.

Greece is not the only country that is expected to have fewer people in the future. Eurostat also projects that in the eurozone, the population as a whole will decline by -0.13 percent a year during 2020-2050. Within the eurozone, Italy and Greece lead the way with a decline of -0.35 percent a year, Spain is at -0.23 percent a year, and Germany follows at -0.15 percent a year. On the upside, we find the Netherlands with a projected population growth of +0.38 percent a year (all of it net immigration[1]) and France with population growth of +0.12 percent a year (France has higher fertility rates than other euro zone countries). Further afield, Africa is the world’s demographic fastest grower, with a projected annual growth rate of +2.08 percent a year through 2050 due to still-high fertility. Even an economy already as large as the US is expected to grow its population by +0.45 percent a year, mostly through immigration. It is important for Greece and the EU to note the global context. On average countries with faster demographic growth rates are also likely to record faster headline real GDP growth rates. This may affect political and economic competition.

Those of us who study macroeconomics and politics cannot ignore such striking data. Demographics is a fundamental driver of the size of country economies. It is not a fundamental driver of income per capita, because that mostly depends on productivity, or how efficient every unit of labor is. Luxembourg is a tiny economy with 450,000 people, but its per-capita income is the highest in the world, at over US$70,000 a year.

Implications

What are the implications for Greece of population decline, and what can be done about it, if so desired? For one, a smaller population will deliver a GDP that will grow very slowly on average or even stagnate. This means that per-capita income will still go up, so, again, it is important not to panic. More attention may also be spent on the possibility of immigration, as well as re-integration of the Greek diaspora. We should also take into consideration that refugee inflows to Greece will continue in the next years.

Nevertheless, it is very important that the Greek people be aware of the possibilities and constraints of a smaller population. It is even more important that the political system does not stick its head in the sand and try to pump up the economy beyond what it can deliver for the proverbial “next election”--that will lead to a debt ratchet and tears for the population down the line. Politics needs to shift its policy horizon to the long run and the outlook and conditions for the new generations. Once they have calculated what is sustainable for the next generations, then they can work backwards to figure out what is the need and what are the constraints for near term budgets. Can the Greek body politic do this?

The Pissarides Report published in November 2020 advocates structural reforms to make the economy more efficient, transparent, and flexible. This is excellent advice, but easier said than done. A danger exists that the political system will now want to pick winners among industry and services sectors to fuel GDP growth for the future and provide special sectoral incentives. But not even Mr. Pissarides knows what sectors have high growth potential in the Greek setting. The best that can be done is to improve the playing field, improve statistics and disclosures, enhance accounting and transparency, provide well-argued and credible long-run visions for the economy’s potential growth rate and overall size, improve probity and governance in politics, and the courts. To do this in an even-handed way without picking winners and losers is a big job for any country. But the effort is well worth pursuing.

Further, Greece has good average working hours per person employed, but it is behind in labor market participation, especially among women, and older workers (continuing the controversial policy of early retirements, etc.). This makes Greece a more traditional economy and it may reflect legitimate cultural roots and preferences. That is only OK if it comes simultaneously with the acceptance that lower participation rates of certain labor market constituencies automatically means a smaller economy. And a smaller economy has consequences: look no further than fiscal deficits and public debt incurred.

Participation

Participation is also intimately linked to the labor market. Can the labor market be made more flexible? Can unit labor costs be reduced to become more competitive and attract more international business? Can job contracts allow more part-time and share work, so important to draw in women and others with a need for more flexible work arrangements? Can red tape for business firms be cut to liberate entrepreneurship? Can labor unions, business representatives, and the government get together in a tripartite institution to discuss what is best for the country’s long-run well being in a cooperative manner? Can social security institutions be reformed to provide more appropriate incentives for participation? There are many questions that may have controversial answers. Greece is working on addressing these issues.

Getting participation up is all about getting more people to work within an existing population. The setting and the incentives have to be right for all to be able to work, each within their own range of capacity. Which brings us to the second crucial variable in our potential output calculations: how efficient is the average unit of labor in Greece--what is their average productivity?

A smaller economy naturally puts limits on scale economies and productivity. That is why Greece is smart for having made itself part of a larger internal market in the European Union. If Greece is competitive, then the EU is the relevant direct market, not just Greece itself. Greater economic competitiveness also unleashes improved export capacity, a process that is gradually emerging as Greek companies expand their market presence in neighboring countries such as Serbia, Bulgaria and North Macedonia while also growing a commercial and investment footprint in Israel, Egypt, Iraq and Lebanon.

Also, interestingly, a smaller economy, and especially an economy that grows relatively slowly, needs less investment. It is not correct to think that moderate investment ratios are a sign of poor economic performance. Rather, it is the quality of investment and the ability to absorb investment funds efficiently and quickly, that determines the success of investment activity. Greece is attracting new investment from companies such as Tesla. The EV manufacturer wants to include the country in a mega-project to build vehicle superchargers along an already-existing route which starts in Portugal and ends in Turkey. In October 2020, Microsoft announced its intention to invest in new data centers which will establish a Microsoft Cloud region in Greece. The billion-dollar investment is the biggest commitment of Microsoft during its 28 years’ presence in Greece.

Once again, then, our eyes turn to the political system, because Greece is among the highest potential recipients of EU structural funds and resources from the pandemic recovery fund. But Greece’s uneven record of fund absorption leaves serious questions unanswered. What is it that so often gets funds placed in the freezer when political disagreements prevent Greece from fully benefiting from this European combination of grants and low interest loans? Sustainable solutions to this challenge will be in high demand once the EU recovery fund becomes operational in the course of 2021.

In every country one always circles back to the basics: good governance, probity, good statistics, transparency, cooperation and compromise, and recognizing opportunity and also constraints, make for a healthier and more productive policy mix. Overpromising and grand-standing should by all means be avoided. Show results before talking about them (the latter then, in any event, becomes unnecessary). The slower plodding and Platonic turtle can win the race against a light footed hare who wants to run in every direction at once.

*Bob Traa is a macroeconomist and author of "The Macroeconomy of Greece: Odysseus' Plan for the Long Journey Back to Debt Sustainability" published in 2020. Jens Bastian is senior policy advisor at ELIAMEP.