By MarketWatch — What is the biggest shock that could hit the markets in the coming year? The Federal Reserve not just tapering, but deciding to hike interest rates back to normal levels? Violent protests in China aimed at toppling the government? OPEC deciding to price oil in bitcoins rather than dollars?
Any of these would come as a surprise.
But the most likely shock is something the markets have stopped worrying about — a sudden and dramatic Greek exit from the euro.
True, there were plenty of predictions of Greece getting out of the euro in 2011 and 2012. It never happened. Instead, a modest amount of debt was written off and the Greeks knuckled down to year after year of grinding recession. The markets have stopped worrying about a Greek exit from the euro — the so-called Grexit. Indeed, there has even been some talk of a Greekcovery getting underway. But in fact, the Grexit has not been cancelled, just postponed.
The key point is that it was not possible for Greece to get out of the single currency in 2012 or 2013. It had no way of paying for itself. But by next year, a trade and budget surplus will mean the country can leave if it wants to. The locks will have been taken off the doors — and it would be rash to assume Greece won’t walk out. If it does, the most likely moment will be this spring, and it will rock the markets.
Greece has now been in recession for six straight years, and shows little sign of returning to growth any time soon. It is forecast to finish 2013 with output 4% lower than it was at the start of the year. Overall, the economy is now one quarter smaller than it was when the recession started — for a comparison, the U.S. economy shrank by just over 30% in the Great Depression of the 1930s, so although what has happened to Greece is not quite as bad as that yet, it is getting very close.
Unemployment has hit terrifying levels: 27% of the workforce in total, and up to a grim 55% among young people.
The government might be forecasting a modest recovery in 2014, but the Organisation for Economic Co-operation and Development thinks the economy will still be shrinking next year. In fact the government and the European Union and the International Monetary Fund have been predicting a turnaround every year since 2011. It has not materialized yet, and there is not much reason to think that it will do so in 2014 either.
So far, the Greeks have put up with their fate. And yet in reality, an economic recovery remains as distant as ever.
According to research by Renaissance Capital, for every Greek person who works, there are now two that don’t, the highest ratio in the world (in the U.K. , for example, the ratio is just one to one). To get that back down to more normal levels — or even the 1 to 1.5 rate recorded in slow-growth countries such as France — would require a fantastic rate of job creation.
True, wages are falling in real terms as mass unemployment forces workers to accept lower salaries. But wages are still higher than they are in countries such as Poland or Hungary — and so long as that is true it is hard to see the major revival of exporting industries that would be needed to bring the Greek jobless total down significantly.
And yet, while the economy remains in terrible shape, it has changed over the last two years. Greece now runs a trade surplus. Tourism is the major Greek export, and that is up by 12% this year as the price of holidays fall, mainly because of falling wages in what is a very labor-intensive industry.
At the same time, mass unemployment and shrinking wages means Greece imports far less than it used to. They can’t afford stuff. The net result? The country now pays its own way in the world, and does not have to rely on borrowing money in the global capital markets or bailout cash from the EU to stay afloat.
And by next year the government will be running a primary surplus as well. The cuts in public spending have been brutal, but they have done their job: in the first 11 months of this year, for example, state spending fell to 50 billion euros from 58 billion in the same period last year. Greece won’t be raising enough in taxes to pay the crushing interest on all its debts, but it will be bringing enough in to meet its day-to-day running costs.
