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The challenge in Greece: Funding an emerging economic recovery
A fragile, uneven and weak recovery is gradually manifesting itself in the real economy of Greece. The recent data published by ELSTAT for the first two quarters of GDP performance in 2014 suggests that Greece is on course to register its first quarterly GDP level in positive territory in the third quarter this year.
That is indeed a significant piece of good news, all the more when considering where we have come from and how long it took until the “promised land” was finally reached again. After 25 consecutive quarters of negative GDP figures, dating all the way back to 2008 in the pre-Lehman Bank bankruptcy era, the Greek real economy is now showing signs of recovery that are increasingly taking root.
But before we enter into the business of unreserved cheerleading for this positive development, some inconvenient questions have to be asked. It is not the author’s intention to highlight them in order to spoil the part; quite the contrary in fact.
Any evidence of economic recovery in Greece must be met by the fundamental question of how this dynamic can be made sustainable over time and despite some economic headwinds moving in the direction of Athens. How can this recovery be made to last, grow in strength and spread across various sectors of the Greek real economy, including positive feedback loops in the domestic labour market and increasing credit growth through bank lending?
The provision of adequate funding remains essential in order to make the emerging economic recovery in Greece sustainable. The engines of the Greek economy continue to run low on one of its most important lubricants: Liquidity. Recent data from the Bank of Greece about credit availability for private households and the corporate sector, in particular for SMEs, shows this continues to be the critical problem plaguing a recovery that needs more pro-active domestic banks making affordable credit available to its clients.
The reinvigoration of the Greek economy will hardly gain traction if a shortage of financial resources to fund it persists. The case of neighbouring Italy is a warning sign for Greece. We learnt last week that the Italian economy yet again slipped back into recession in the second quarter of 2014. If such a scenario is to be avoided in Greece, there are important lessons to be learned and applied in the short-term for Athens.
Funding the recovery in Greece will need more than record tourism numbers for this year and even more emphasis being put on the narrative of this recovery. Scraping together new funding resources and instruments remains the order of the day for the authorities in Athens. This includes kick-starting investment in the country’s infrastructure, as evidenced by the impressive increase in fund absorption levels by the Greek authorities from the National Strategic Reference Framework (ESPA) programmes of the European Commission.
This achievement is critical and points to a reinvigorated determination on the part of ministries and regional as well as local authorities to use available funding resources in a timely and transparent manner.
However, we must also highlight in that respect a lingering risk inherent in this process in Greece. The danger may rest in a rising dependency of third-party public financing, relying primarily on ESPA resources from Brussels and cheap credit programmes from the European Investment Bank (EIB) at the expense of private sector financing initiatives and risk taking.
ESPA resources and rising EIB commitments are important for Greece in their own right. But they cannot become funding resources that replace on a permanent basis private sector investments and liquidity provisions. While the former are rising, the latter resources continue to be in scant supply to support the emerging economic recovery in Greece.
Moreover, the availability of “fiscal space” is the term economists use to argue the case for expenditure increases by public authorities. In other words, can the authorities in Athens create sovereign financing instruments that support the emerging recovery? Finding the money will have to include a critical departure from the policy concepts advocated by the troika of international creditors during the past four years. This departure is as much conceptually rooted as it is a legacy of the crisis.
To what degree can Greece again use sovereign debt to finance investments? The answers to this major policy challenge will have to be defined in the forthcoming negotiations with the troika delegation in Paris. Funding the emerging Greek economic recovery needs additional fiscal space and sustained private sector investment. Both complement each other in order to make the recovery narrative tangible and sustainable over time.
*Jens Bastian is an independent economic consultant and investment analyst for southeast Europe. From 2011 to 2013 he was a member of the European Commission Task Force for Greece in Athens. He is a regular contributor to The Agora section of Macropolis. Follow Jens on Twitter: @Jens_Bastian