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CURRENT DEVELOPMENTS IN GREECE:
Can economic policy change
with a new government?
Gikas A. Hardouvelis
IES, U. C. Berkeley, 180 Doe Library
Wednesday, April 29, 2015, 6:30 p.m.
C U R R E N T D E V E LO P M E N T S I N G R E E C E :
Can economic policy change
with a new government?
I.
Introduction and summary
II.
The state of play at the end of 2014
III. An enigmatic policy strategy following
the January 2015 elections
IV. Will the Review of the 2nd Economic
Adjustment Program close on time?
V.
Conclusion
IES - UC Berkeley - Hardouvelis
FUTURE GROWTH MODEL, REQUIREMENT #1:
NEED TO CORRECT THE DISEQULIBRIA
I. Introduction and Summary






Greece is again at the epicenter of world media attention; an aberration
to the positive growth in the rest of Europe
Greek economy on a dive, as possibility of default has negative effects on:
business prospects, exports, FDI, privatizations, investment, economic
sentiment, bond yields, stock prices, bank deposits
Yet, only a few months ago the country was close to a major take off!
Reforms were on a roll and 2015 growth was forecasted at 2.9%
Current disarray is self induced, entirely due to domestic politics
 New government lacks practical experience, is full of ideological illusions,
and faces severe cash constraints
 New government adopted wrong strategy in dealing with lenders, creating
long delays for the receipt of €7.2bn (4% of GDP)
A policy of reforms is necessary for the country to escape its current
predicament: ECONOMIC POLICY CANNOT CHANGE WITH A NEW
GOVERNMENT.
My baseline scenario: No default, but Muddle Through until new point of
take off – perhaps with intervening elections
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II. A Bird’s Eye View on Greece
2012
Population (mil.)
Geographical Area (thousand km2)
GDP per capita (€)
Human Development Index
among 194 countries)
(2011 UN ranking
Greece
EA17
World
11.3
333.5
7,056.7
132.0
2,624.0
148,940
17,146
28,460
9,729.1
29
80.0
79.8
Motor vehicles per 1000 inhabitants (2010)
624
593
Suicides / 100 thousand inhabitants (2010)
2.9
9.1
Primary Sector (% GDP)
3.4
1.8
4.3
Secondary Sector (% GDP)
16.4
25.2
29.3
Tertiary Sector (% GDP)
80.2
73.1
66.4
Tourism (Total contribution, % GDP)
16.4
8.3
2.1
5.9
Public Sector (Prim. Gen. Gov. Exp. % GDP)
45.4
46.7
Exports (% GDP)
27.2
45.8
Imports (% GDP)
32.1
43.1
Private Consumption (% GDP)
74.6
57.5
161.6
93.1
Life expectancy (years)
Construction (% GDP)
Gen. Gov. Debt (% GDP)
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(EU-27)
71.2
175
(EU-27)
9.2
FUTURE
GROWTH
MODEL,
REQUIREMENT
#1: elections
II.
State
of
Play
prior
to
January
NEED TO CORRECT THE DISEQULIBRIA
Gen. Gov. Balance
 Enormous fiscal
consolidation since
2009 when Gen. government expenses were €128.2
bn and Gen. government
revenues €91.9 bn. In the
budget of 2015, the corresponding expenses and
revenues were both
projected at ≈€80bn.
140.0
1.5%
Assumption of
average GDP
growth at 2.3% for
2014-2030
2029
2028
2027
2026
2025
2024
2023
2019
2018
2017
2016
2015
2014
2013
2012
80.0
2022
117.0
Baseline
2021
100.0
3.0%
2020
120.0
2011
 Soon out of the MoU,
into ECCL with Euro
Area, and a precautionary agreement
with the IMF
160.0
2010
from 6 years to 17 years,
interest rates low
Sensitivity of Debt/GDP
to Primary Surplus
0.0%
180.0
2009
 Debt sustainability on
track, Average Maturity
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FUTURE GROWTH MODEL, REQUIREMENT #1:
NEED TO CORRECT THE DISEQULIBRIA
II. State of Play at the End of 2014
 A new Growth strategy
based on 3 pillars:
institutions, education,
competitiveness
Current account, lhs
% Real GDP
14
12
22.6
20.7
26.8
22.6
2016
CA as % of GDP, rhs
Investment
23.0
2015
4
2
0
-2
-4
-6
-8
-10
-12
-14
-16
2014
2013
2012
2011
2010
2009
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
2008
FDI in 2013 and 2014
exceeded 2007 level
Privatizations picked up
momentum
Investment in machinery & equipment up
% of GDP
Current Account
2007
Evidenced by country rankings in
competitiveness
Current account in surplus after
years of deficits
2014 growth of 0.7%, after a
cumulative drop of ca 26%
€ billion
2006
 Foundations of an extrovert and
competitive economy via reforms:
% Real GDP
30
25
20.5
10
18.3
20
15.8
8
13.7
13.4
14.0 15.2
15
6
10
4
5
2
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0
2015
Dwellings (lhs)
Other Buildings and Structures (lhs)
Transport + Other Machinery Equip. (lhs)
IES - UC Berkeley - Hardouvelis
GFCF (rhs)
6
II. Decoupling since early October 2014
 Prospective presidential elections in
2015 Q1 gave power
to the opposition
parties to force
governmental
elections a year & a
half early
 Since October,
markets worried
about it, with bond
yields de-coupling
from the rest of
European yields
 And correctly so,
judging from the
post-election
inaction & stalemate
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Spreads of 10-yr government bond yields
over Bunds
Possibility of
early elections
in the news
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FUTURE GROWTH MODEL, REQUIREMENT #1:
NEED TO CORRECT THE DISEQULIBRIA
III. An enigmatic Strategy
 New government’s top priority at end -January 2015 was to reduce the
size of public debt, instead of worrying about the foundations on which
the economy is built - Yet debt is not of immediate concern
 Other enigmas:
1) Disregard of the need to bring cash into the economy; “we do not need it”
was the original statement of MinFin
2) Slow response in decision making and lots of cheap talk. The lack of cash
caused the creation of arrears and a crowding out of the private sector.
Hence economic stagnation
3) Overall strategy unclear and confused. Did not behave cooperatively, but
rather insulting to the other Europeans
4) Brushed away issues of moral hazard. Should have tried to gain perks
without appearing of having broken any major rules or signatures
5) Treated the European side as if Europeans worry about CONTAGION, which
they do not. Yet GREXIT may be caused by accident even if other European
countries think that a Greek departure is not beneficial to the long-run
stability of EMU
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FUTURE GROWTH MODEL, REQUIREMENT #1:
NEED TO CORRECT THE DISEQULIBRIA
IV. Will the Review close on Time?
 On February 24, 2015 the new Greek government requested a 4-month
extension of the 2nd Adjustment Program (the earlier MoU) & promised
explicit actions on a number of policy areas:
Fiscal structural policies (taxation, revenue administration, public
spending, social security reform, public administration)
II. Financial Stability (installment schemes, Non-Performing loans)
III. Policies that Promote Growth (Privatizations, Labor market reforms,
product market reforms, better business environment, reform of the
judiciary, statistics)
IV. Humanitarian Crisis (Guaranteed Minimum Income Scheme, policies
to deal with absolute poverty that have no negative fiscal impact)
 A stalemate followed, with a jump-start occurring after PM visit to
Brussels & Berlin, and with Lenders getting impatient about Greek
stalling on pension reform, VAT reform, privatizations, etc.
 Budget execution difficult, with onerous liquidity squeeze: Even T-bill
issuance difficult as foreigners abstain from rolling-over their past T-bills.
Expected inability to pay lenders in full in July & August or even earlier.
I.
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FUTURE
GROWTH
MODEL, REQUIREMENT
#1:
IV.
Will
the
Review
close
on
Time?
NEED TO CORRECT THE DISEQULIBRIA
Economy badly affected
Huge challenges ahead before the Review can close:
1) The fall in growth makes primary surplus target extremely difficult to
attain even if it comes down to 1.5% of GDP from 3%. Recall that in
November 2014, lenders already had claimed there was a €2.6bn fiscal
gap in 2015 under the assumption of 2.9% growth.
2) Banking sector fragile
 as fear of GREXIT led to massive exodus of bank deposits and
disappearance of interbank market, with costly borrowing from ELA and
no access to QE. Half of bank lending financed by the Eurosystem
 NPLs have not stabilized and Government lost control of EFSF €11.4bn
3) Exports are difficult to materialize as demand shrinks and obstacles rise
4) Private sector companies are on the verge of collapse, with a weak
banking sector unable to help
5) Economic sentiment declines drastically
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FUTURE GROWTH MODEL, REQUIREMENT #1:
NEED TO CORRECT THE DISEQULIBRIA
V. Conclusion
 Lower oil prices, a weakening euro and QE are pushing Europe into strong
growth trajectory in 2015. Also, prudent policies have helped Ireland,
Portugal and soon Cyprus to get out of the strict EU surveillance.
 Yet, only one country follows its own lonely negative trajectory because
of its inability to face reality: Greece. It took just 3 months of
contradictory statements, ambiguity, bravado statements, domestic
media manipulation, ideological stereotypes, and lack of action, to
almost destroy the efforts and pain of the previous five years.
 There is a pessimistic and an optimistic reading of the future:
A. The pessimistic envisages capital controls, a further drop in economic
activity and even a possible separation from the EU
B. The optimistic is my baseline scenario. It envisages a muddle through
and economic stagnation for a while, yet a subsequent new beginning
free of illusions and ideology. It assumes a new maturity among the
full spectrum of Greek political parties, which is enforced on the
politicians by the citizens, who are more rational than is assumed.
IES - UC Berkeley - Hardouvelis
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C U R R E MODEL,
N T D E V EREQUIREMENT
L O P M E N T S I N#1:
GREECE:
FUTURE GROWTH
C aTHE
n e cDISEQULIBRIA
onomic policy change
NEED TO CORRECT
with a new government?
ANSWER:
E c o n o m i c p o l i c y C A N N OT c h a n g e
with a new government
THANK YOU FOR
YOUR ATTENTION
IES - UC Berkeley - Hardouvelis
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