MacroPolis

The Central Bank of Greece recently announced on its website the launch of a new publication, called “Note on the Greek Economy.” This new publication aims to “inform the broader public about the recent economic developments and prospects of the Greek economy.”

It is a quarterly issue with the second installment to be published on March 15, 2024. Further, the Bank says that the note is scheduled to be published “prior to the Meetings of the Governing Council and the General Council of the European Central Bank.” I have read the first note with much interest and wish to applaud the Bank of Greece for starting this new series.

The first note is excellent. It provides a comprehensive set of data on all the relevant aspects of the macroeconomy, a short update on new data releases, developments in the real sector, labor markets, the balance of payments, and fiscal, monetary, and banking developments. It also contains a summary of reforms under way, and developments in funding from the EU for Greece’s large Resilience and Recovery Plan (RRP) efforts.[1]

The reader is struck by the clear presentation of many data, suitably annotated in the explanatory texts. Together with the connection to meetings of the Governing Council and the General Council of the ECB, if I were on these Councils, discussing Greece, I would want to have read this note before attending the meetings. After all, one assumes that these important parties are looking at the same data that the BoG is now sharing with the public at large. This brings the public closer to the complex matters involved in policy decision making. It provides for a richer understanding of the tradeoffs and choices at hand, and builds confidence in the authorities’ efforts on behalf of Greece. The public needs good data to make up its own mind as to how the economy is doing, not endless political spin. The Bank of Greece is now providing as complete a picture of the short-run cyclical developments in Greece as I have seen. Bravo, Bank of Greece for doing this.

Reading this first note, I came upon a few specific thoughts:

• The note is very cyclical and short run. This is understandable for quarterly decision making. However, the economy is bumped around by shocks all the time, so some additional longer-run underlying structural picture is helpful to assess and interpret the short-run ups and downs of activity and developments.
• Specifically, can the BoG add some data lines on demographics (population, working-age population, participation, labor force, and their growth rates)? These tend to be slow moving variables, but they have a powerful compounding impact on what the economy can deliver. This comes into stark relief when asking how long the recent sharp employment growth can continue? With a shrinking population and even sharper shrinking working-age population, when does Greece run out of usable labor (apart from whether the smaller reservoir of unemployed are equipped to step into emerging jobs…). This is critical to assess how long the recovery can last and how much growth can still be extracted from the long rebound from both the Great Recession and Covid episodes.[2] The note makes forecasts for 2024 and 2025, but I find these a bit optimistic, which introduces risks of disappointment that can and should be avoided.
• It would also be helpful to include numbers on potential output growth and the output gap.
• In several tables the BoG provides data and/or ratios to GDP. But, in the forward looking numbers the note is uneven in using the BoG’s own forecast for GDP in 2023, 2024, and 2025—in some tables the ratios to GDP are reported on the basis of the BoG’s own numbers, and in others they are not. This should be made consistent in the whole note. Always use the BoG’s most recent forecast for GDP to provide ratios to GDP, in all relevant tables.
• The BoG reports on competitiveness and ULCs. In this context, productivity developments are critical. It would be helpful if the note could provide the time series upon which the productivity series are based. Productivity growth (generally) has risen to a positive number recently, which is a good development, but how strong and lasting this will be remains to be seen. The numbers are sensitive to even small variations in the precise data series used, and that is why presenting the underlying data series used in this note is relevant.
• The note honestly reports that much growth is dependent on the support from the EU.[3] This begs the question what proportion of the recovery is home-grown and what portion is good fortune (transfers from abroad). The note could give a deeper analysis of this point (again, to be on the lookout for optimism bias; authorities always want to talk things up, which presents risk that the public often does not understand).
• In discussing labor market developments, can the BoG give a view of Greece’s natural rate of unemployment once the current recovery runs its course? How much “labor space” is still left? Would this inform a deeper understanding, and confidence, in the near term growth forecast?
• Unfortunately, the BoG employs the ultimate “chicken sentence” on page 6 of the note: “The risks surrounding the growth forecasts are mainly on the downside.” This sentence begs the question what a forecast would look like if the risks were evenly balanced? Why does the BoG not present this balanced forecast instead of one where the probability of expectation is one of disappointment (as promptly happened just now for 2023)?
• This point above is not innocent: authorities that habitually overpromise and underdeliver lose the public’s trust. It is hard to recover from this politically and it damages the wellbeing of the public. Instead, countries that are modest and on occasion overdeliver face an entirely different set of consequences: the public is not disappointed, maybe even happy; and the authorities may have a bit of room at the end of the year to give something back to the economy (after the overperformance is firmly established). The psychology of these two paths is so different that it influences politics, and trust in government. Setting up expectations that you may underperform is a sign of weakness, and should be avoided.
• It is striking how much recent investments in Greece have taken place in structures (building/real estate). To boost productivity and real GDP, Greece needs broader capacity enhancement on the supply side. Is this investment accommodating the increase in tourism demand, or is there also deeper capacity building (including with machinery and equipment)? Is the legal system and is the governance of land use equipped to allow a large and broad buildout of capacity? The note could further analyze this question.
• According to the general government bulletin of the Ministry of Finance, Greece may have well exceeded its primary balance objective in 2023. However, the ESA results, based on a national accounts system, that will be published by ELSAT may give a different result. The note hints that the discrepancy may come, once again, from military procurement. Generally, it is to be avoided to have a substantial discrepancy between the general government bulletin results and the eventual ESA reports. Can the Ministry of Finance, the BoG, and ELSTAT work together to avoid such discrepancies, or at least to inform the public how big this discrepancy might be, so that it is anticipated and becomes part of the expectation?
• The note helpfully states that in the longer run, (fiscal/debt) sustainability risks remain elevated, and it calls for fiscal vigilance. This is well taken. Can the authorities provide some long-run scenarios to see how wide the cone of probabilistic outcomes could be? What are possible contingency plans?
• The note comments on “revenues from privatizations.” Could another word be used, such as “cash inflows”, or “receipts,” because proceeds from privatizations are not “revenue” (above the line)? One cannot reduce a fiscal deficit with money from privatizations; one can only finance a deficit by selling assets/privatizations (below the line).

In short, I applaud the Bank of Greece for producing such a helpful and detailed note on the Greek economy. It generates lots of ideas and also questions. All countries grapple with similar questions, so providing good information that generates ideas is a valuable contribution. Bravo, Bank of Greece.

*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.