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From Grexit to Growth, or Trapped in Recession? Nicos Christodoulakis Athens University of Economics & Business, and Hellenic Observatory LSE Brussels, November 2013 2007 The Adjustment … Fiscal deficits back at pre-crisis levels 2009 2010 2011 2012 2013 2014 -2 -7 -12 -17 Greece from -16% -4% in 2013 Ireland from -32% -5% in 2013 2008 -22 DEF_GR DEF_PT DEF_IR -27 DEF_SP -32 5 0 External deficits all in surplus -5 CAB_GR CAB_PT -10 CAB_IR CAB_SP Source: Ameco Database, 2013 -15 The Result … All economies in serious contraction for six consecutive years Greek economy collapsed by -23% of GDP 105 100 95 GDP_GR 90 GDP_PT 85 GDP_IR 80 GDP_SP 75 2007 2008 Source: Ameco Database, 2013 2009 2010 2011 2012 2013 2014 Output gap from potential GDP much higher and proportional to the intensity of austerity programs The intensity of austerity the size of adjustment programs as % GDP, per country j=GR, IR, IT, PT, SP and GE Source: Financial Times http://www.ft.com/cms/s/0/feb598a8-f8e8-11e0-a5f7-00144feab49a.html#axzz2JSOwncys. Recessionary impact is defined as a simple time-trend projection in 2000-2007 For details: Christodoulakis (2013), Austerity and Recession in the Euro Area 0 -1 Avg Recession per year, % GDP 2008 -3 -5 2 4 6 8 10 Austerity package, %GDP GE PT IT SP -7 As austerity gets more intense, its impact becomes stronger -9 -11 -13 12 correl = - 0.92 t - stat = 4.74 IR GR -15 This is in sharp contrast with the early optimism adopted by IMF and ECB, that a front-loaded adjustment would have only small and transient effects Optimism #1: The growth impact of fiscal consolidation was estimated to be mild and in any case disappear soon IMF WEO Report (2010, p. 94): • The deflationary impact would be limited and recession would bottom-out in late 2010 and gradually rebound afterwards. • A fiscal correction by 1% of GDP, reduces output by 0.50% and raises unemployment by only 0.30%. Optimism #2:The optimal-debt theories Debt to GDP above a range 80-90% is detrimental to growth AER: IMF: OECD: ECB: Reinhart and Rogoff (2010) Kumar and Woo (2010) Cecchetti et al (2011) Checherita and Rother (2010), Baum et al (2012). Thus, Governments should “… swiftly implement ambitious strategies for debt reduction GREECE: Fiscal Punishment and Failure 35 180 30 DEBT % GDP 160 25 140 20 120 15 UNEMPLOYMENT % 100 10 80 5 2006 2007 2008 2009 2010 2011 2012 2013 Unemployment from 8.5% to 27% Debt from 125% in 2009 to 180% of GDP in 2013! The snow-ball effect on debt in Greece and the Euro area Percent of GDP 20 Greece 15 10 Euro17 5 0 2008 2009 2010 2011 2012 2013 After 2008, Greece adds 5-15% of GDP on debt every year, solely due to the lack of Growth The case of Greece: Major shortcomings 1.Private sector salaries fiercely attacked 2.Public sector universally cut, hitting incentives 3.Too many taxes, most on the same households 4. Banks’ recapitalization by issuing new public debt 5.The Grexit scare: lack of strategy, referendum, etc 6.RECESSION: Debt burden increases in recession Domestic Devaluation and Competitiveness 14,000 12,000 10,000 1,600 14,043 14,594 1,400 2013 12,132 1,200 2012 1,000 8,000 800 6,000 600 4,000 400 2,000 200 0 MONTHLY , MIO EURO ANNUAL NON-OIL EXPORTS, MIO Euro 16,000 0 Non-Oil Exports improved in 2012 by only 3.90% vs. 2011 despite a wage cut by -23% in the private sector Source: Bank of Greece, Conjectural Indicators, Aug 2013 2,000 14,631 1,800 12,000 2012 11,683 1,600 1,400 9,238 est 1,200 8,000 1,000 800 4,000 600 2013 400 200 0 MONTHLY REVENUES, MIO EURO ANNUAL REVENUES, MIO EURO 16,000 0 Income Tax Revenues not improving, despite rates surging In 2013, nearly 1.5% GDP below 2012 Source: Bank of Greece, Conjectural Indicators, Aug 2013 VAT rates rise, VAT Revenues fall ! PSI 2012 had only limited effect in cutting debt I. Banks recapitalization annulled most of the “haircut” II. Haircut in Social Funds, no effect on current debt of GG Banks Capital Injection Social Funds PSI+ PSI+ Recapitalization haircut Govt. Debt Central Government haircut Bailout Installment Debt fully restored GG Debt cut = 0 PREREQUISITES for Exiting Recession in Greece 1.Recapitalize Banks via EFSF, not Greek Public Debt (Financial Times, editorial, 22/2/2013) 2.Change the Policy Mix: More reforms, less austerity More Public Investment Fewer taxes to raise demand & liquidity Selective actions, no universal cuts 3.Create a Growth Front: More CSF, EIB initiative 4.For credibility, endorse fiscal rules in the Constitution The official scenario (European Economy, 2012) GDP growth real (%) Gross debt (% of GDP) Primary surplus (%of GDP) 2012 2013 2014 2016 2017 2018 2019 2020 -4.70 0.00 2.50 3.00 2.80 2.60 2.50 2.30 160 164 161 145 137 130 123 116 -1.00 1.80 4.50 4.50 4.50 4.30 4.30 4.30 All failed!!! Impossible figures !!! An alternative scenario with more growth, less austerity 1. Primary surplus less by 2% of GDP. From 4.5% to 2.5% per year Finance Public investment, cut taxes, etc 2. Growth higher by 1.80 to 3.40% per year (according to the higher fiscal multipliers) Result: Debt/GDP ratio falls more, because of the snow-ball effect Debt Forecast 2020: Push Less to Get More More investment, fewer taxes can spur growth, cut unemployment & achieve debt sustainability Some General Conclusions: 1. Before the crisis, fiscal multipliers were very low. Fiscal policy homogenized via SGP, growth affected by other structural factors. 2. After the crisis, countries got differentiated Fiscal cuts seriously affected incomes. 3. Intense and front-loaded austerity programs fuelled uncertainty and caused deep recession 4. Adjustment programs should relax immediately, thus causing milder effects on recession