By Barry D. Wood, Market Watch
THESSALONIKI, Greece (MarketWatch) — The Greek economy is not yet picking up but it is stabilizing. In the past 17 months the coalition of conservative Prime Minister Antonis Samaras has bravely pushed the budget closer to balance. But more structural reform is needed if long-suffering Greeks are to experience growth and employment gains sometime next year.
In the short term more fireworks are likely. On Nov. 6, about the same time the troika of Greece’s creditors arrives, a 24-hour general strike is planned. There will be more complaints that citizens have endured too much austerity and can’t take more. They’re wrong; much more needs to be done.
Greeks desperately need the structural reforms that will boost competition and bring down the high prices that daily afflict consumers who have seen their wages fall while supermarket prices held steady.
Analyst Miranda Xafa in Athens writes of “an urgent need to improve the business environment by reducing red tape, regulatory obstacles and barriers to competition.” Examples, she says, are government-mandated rules prescribing who can sell what, dictating shop-opening hours, and setting unnecessary standards to limit competition from imports.
Economist Megan Greene, an astute observer of the Greek economy, relates a personal encounter with the over-regulated small-business sector. Visiting a new bookstore cafe in downtown Athens, she ordered coffee and was surprised to see the waitress dart across the street to fetch the coffee. The owner explained that she couldn’t obtain a license to sell coffee. Wanting to buy a book, Megan was told she couldn’t because it was after 6 p.m. and books couldn’t be sold after 6.
Samaras pledged in a recent speech at Washington’s Peterson Institute for International Economics “to replace red tape with a red carpet for foreign investors.” That’s a tall order as nearly half the members of Parliament come from protected, privileged professions.
Greece’s leading economics think tank, IBOE, says the economy “is very near the stabilization point.” While a further 4% fall in gross domestic product is likely this year, that projection is mildly improved from six months ago. There is improvement in public finance as both the trade and budget deficits have narrowed.
Barry Wood
A vendor sells beans in an open-air market in Thessaloniki, Greece.
The biggest plus is the turnaround in tourism, a main driver of the Greek economy. Reassured by relative social peace this year and bargain hotel prices, tourists have been flocking into the country. 2013 is set to be a record year for both tourist arrivals and revenue. The tourist association says arrivals are up 15% and that 2014 should be even better. Tourism, it says, is likely to account for 35% of anticipated GDP and job growth over the next decade.
In Thessaloniki, a commercial center rather than tourist destination, hotel prices are down at least 20%, a pattern replicated throughout the country. Unemployment approaches 25% while wage reductions have not been matched by price cuts, severely squeezing household budgets. With the economy in its sixth year of recession, a recent survey shows that many households will cut back on home heating this winter because they can’t afford heating oil. Statistics suggest that household incomes are down 40% from 2006 while house prices are down 35%.
This kind of internal devaluation, say troika economists, is the only way an economy can regain competitiveness when it is locked in a common currency zone. While doomsayers at the depth of the crisis predicted Greece would abandon the euro -0.41% , such a drastic response was opposed by government and the public. A May 2012 survey showed that while Greeks opposed austerity, 88% wanted to remain with the euro.
Similarly, it is nonsense to say that Greece is caught in a deflationary spiral. It’s good that the consumer price index is down 1% over the past year. Prices need to come down even further. What Greece requires is confidence, credit growth and investment to produce jobs and economic growth.
It can be argued that the troika is doing Greeks and other profligate debtors a favor, reminding them that being in the euro zone is not cost free when deficits block access to credit markets. An engineer I met on a Thessaloniki bus commented, “There is no question we lived far beyond our means after joining the euro in 2001.”
His remark matches the assessment of Harvard economist Carmen Reinhart who observed that household debt in Greece exploded from 6% of GDP in 2001 to 50% in 2009. Low interest rates in a traditionally high inflation economy arrived in Greece with the euro. Not surprisingly, a borrowing binge was the result.
Reinhart also observes that Greece has been so profligate in public finance that it has been in default for half the 180 years since independence.
Some time ago, a participant in the Greek financial rescue told me, “they have to become poorer.” Well, that happened. They are poorer. But contrary to expectations the government is taking the reform medicine.
Greece has made considerable progress. But more hard work is required. The payoff will be a restructured, more competitive economy with further relief from an overly heavy burden of public debt.
