As Greece's finance minister, I am optimistic about the future. In 2014 Greece will return to positive rates of growth after six years of deep recession
By Yannis Stournaras, The Guardian
Greece is implementing one of the most challenging economic adjustment programmes of modern history. The substantial financial support that Greece receives from its European partners and the IMF is combined with the necessary fiscal and structural reforms that the country is implementing in order to return to a sustainable growth path.
Greece has come a long way since 2009. After four years of fiscal consolidation and structural reforms, the Greek economy is beginning to show the first encouraging signs of rebalancing and recovery. Greece now faces the future with more optimism as it develops its new growth model.
The crisis was the result of high fiscal and current account deficits, the so-called twin deficits that had accumulated over the previous decades. The adjustment of both is unprecedented in modern economic history. By the end of 2013, both primary fiscal and current account deficits had not only been eliminated, but turned into substantial surpluses.
On the fiscal front, Greece has achieved the largest adjustment in global financial history. More than 85% of the consolidation needed in the primary balance to reduce debt to sustainable levels by 2020 has already been achieved.
Since 2009 the headline primary deficit has declined by more than 10% of GDP. It is estimated that in 2013 the primary surplus of the general government exceeded 1% of GDP compared with a target of zero.
Moreover, since 2009 Greece's cyclically adjusted primary balance has improved by more than 20% of GDP. Again, there is no other case of such an adjustment in global financial history.
On the external side, the loss of competitiveness in terms of unit labour cost that Greece suffered after joining the eurozone has been fully reversed. This is also reflected in the current account balance. The current account deficit shrank sharply over the period 2008-2012 by 12.5% of GDP, and in 2013 a current account surplus of 0.7% of GDP was registered.
At the same time, the macroeconomic environment is improving: GDP in 2013 fell by 3.9%, which was the result of a continuous deceleration in the rate of decline of GDP throughout the year, while the initial projection for GDP growth for 2013 was -4.2%. According to the latest estimates, in 2014 Greece will return to positive rates of growth after six years of deep recession. In the years to follow Greece is expected to experience robust growth rates that will gradually rise.
Confidence is being restored. The economic sentiment indicator has reached the highest level in the last five years. The spread of the Greek 10-year government bond compared with the German bund has fallen below 550 basis points, whereas at the peak of the crisis it surpassed 3,000 basis points. In January, the purchasing managers' index (PMI) exceeded the threshold of 50, indicating expansion for the first time since August 2009. Two of Greece's four systemic banks have just raised almost €3bn of fresh capital.
The gradual recovery of economic activity is further captured by several short-term indicators including retail sales and industrial production. On the external side, exports of goods and services in 2013 grew by 1.8%. Net tourist receipts rose by 18.1%, while international tourist arrivals exceeded the target of 17 million that was set for 2013.
Greece in 2013 had the lowest inflation rate in the eurozone. Overall, prices fell by 0.9%. Consumer price inflation turned negative in March last year for the first time since 1968 and has remained negative since. This is good news for both real disposable income and competitiveness.
Unemployment shows signs of stabilisation, although it remains at unacceptably high levels, especially for young people. In 2013 it reached 27.3%, despite the substantial improvement in unit labour cost. It is a sad fact that the remarkable adjustment of the economy has come at an extremely high socioeconomic cost. Since 2009, GDP has declined by approximately 25%. Such a reduction has never been experienced by a developed country with the exception of the United States during the Great Depression. Additionally, according to Eurostat, 35% of the Greek population is at risk of poverty or social exclusion. This is partly due to the increased unemployment, but also because real household disposable income has shrunk by more than a third since the beginning of the crisis.
Greece has adopted reforms in almost all areas of economic activity, including the labour market, pension and health systems and tax administration, that helped close the competitiveness gap and create an investment-friendly environment. As a result, in recent years the OECD has consistently ranked Greece as the most responsive of its member countries in adopting its growth-friendly recommendations. In 2014 further structural reforms will be undertaken in the product markets, the services markets and public administration. These are included in the so called OECD toolkit, which is part of the new agreement between the Greek government and the European Commission, the European Central Bank and the IMF. The necessity of such an approach stems from the need to increase the growth potential of the Greek economy. While wages and salaries in Greece have fallen by more than 20% in the time since the crisis began, prices of goods and services have barely changed at all due to various product and services market rigidities.
Greece is in the process of developing its new growth model, which will fully exploit its comparative advantages (geography, climate, culture, natural resources, human skills) and the country's restored competitiveness. It will lay its foundations on sustainable factors such as investment, exports of goods and services, innovation, privatisation and foreign direct investment. On the supply side, the new model is expected to focus on outward-looking sectors and activities such as tourism, energy, food and agriculture, aquaculture, information technology, telecommunications, real estate development and transport. On the demand side it is expected to show a partial shift from consumption into investment and net exports.
Despite recent success there is still considerable effort that needs to be made in order to secure the future of the Greek economy. Economic policy should remain devoted to the development of a new outward-looking growth model, fiscal discipline, structural reforms, modernisation of the banking system and a social policy with an emphasis on those in need.