If you think it's bleak for Greece now, wait until tomorrow
Understandably, when the International Monetary Fund published its Debt Sustainability Analysis (DSA) last week, its gloomy projections regarding the unsustainability of Greece’s debt drew all the attention. This meant that many overlooked the fact that the Fund was even gloomier about the Greek economy’s long-term growth prospects.
The Fund outlines these details in a dedicated box within the report. Given that the Washington-based organisation has been part of the Greek programmes since 2010, both as the author and enforcer of conditionality, and has had a major influence in shaping the country’s present and future, its assessment deserves to be considered.
The IMF assesses Greece’s prospects based on the model that an economy’s long-term economic level depends on its capital stock, its human capital and factors that enhance capital and labour. The basic logic is that economies require certain levels of investment that will cover depreciation of the existing stock of capital and the growth of the population and technological progress. As long as the economy saves enough and redirects those savings to investment exceeding the required level then the economy grows until it reaches a theoretical steady state in which actual investment equals required investment.
Based on these three growth determinants, the IMF seems deeply pessimistic about what awaits Greece.
The devastation in the Greek labour market is described in the sentence that argues the country will struggle with high unemployment for decades. After years of recession (of which the IMF cannot simply wash its hands), the structural unemployment rate is 20 percent. In 2022, the Fund sees Greek unemployment at 18 percent and it anticipates that it will take another 24 years, until 2040, before it drops to 12 percent, which is around half where it stands at the moment. Unemployment is not seen nearing its pre-crisis levels of around 6 percent for another 44 years, or until 2060.
In other words, one of the key players in shaping policy in Greece recently foresees that it will take more than four decades to repair the damage done in just over four years. It can only be seen as an utterly disheartening admission.
The IMF also sees Greece’s working population declining by 10 percentage points, faring far worse than the rest of the euro area. The combined effect of all this is that labour will contribute negatively to Greece’s long-term prospects.
There is not much cause for hope in the prospects of Greece’s capital stock growth either. Investment in the early euro years, assisted by external financing which formed an unsustainable current account deficit, was averaging 25 percent of GDP. Greece entered the crisis with a 20 percent of GDP investment ratio, only for it to plummet to 12 percent in the ensuing years.
The pre-crisis levels are unlikely to be seen again not only because the capital flows seen when Greece adopted the euro no longer exist but also because the effect will be compounded by the domestic banking system not being in a position to finance projects while it is struggling a non-performing exposure level of 44 percent, another by-product of the policies followed over the last few years.
That said, the IMF sees investment rebounding in the medium-term and maintain a level of around 17 percent of GDP, below the eurozone average but enough for it to have a positive, albeit small, contribution to long-term growth.
Given the limitations in terms of capital and labour, factors that improve these elements will determine Greece’s long-term growth prospects. The country’s track record over the last 40 years is not a source for great optimism.
Greece’s total factor productivity growth since 1970 has been averaging 0.7 percent, by far the lowest in the euro area, which saw growth of 1.2 percent. The equivalent for Ireland has been more than 2 percent.
Since reforms will drive any productivity growth and considering that Greece is a rather closed, sclerotic economy that is run by a political class with limited strategic capacity and is allergic to any type of change that will endanger its clientelistic interests, total factor productivity in Greece is not seen exceeding the eurozone historical average and just reaching 1 percent.
The combined effect of these factors will lead to a long-term growth trajectory of just 1.25 percent, after a stronger rebound in the medium-term as the huge output gap from the economic depression begins to close.
It is a depressing outlook for an economy that has suffered so much in recent years. A very slow and painful recovery will erode the prospects of thousands of Greeks, spreading over generations to come. To compound matters, those that have been in charge of policy since 2010 show no sign of reconsidering their approach, while those in charge domestically do not have what it takes to steer Greece away from the current course.
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