Dr. Michael Arghyrou from Cardiff Business School on Greece's economic stance

 

I believe that, compared to the situation six months ago, the risk of Greece leaving the Eurozone has somewhat receded. The reason is that Greece went through two general elections. In the second general elections the political parties that support maintenance of the Euro participation of Greece through the implementation of the Memorandum of Understanding emerged victorious. Despite it being a relatively narrowly won general election, it was still a victory for those parties that supported Greece's participation in the Euro through implementing of the reforms agreed within the context of the memorandum. Thus, these were the developments which have somewhat reduced the risk of Greece exiting the Eurozone. Having said that, there are still risks that Greece may leave the Eurozone, and these risks are basically internal and external. 

The internal risk is mainly political. The current government is a three-party coalition government, and by nature this is a relatively fragile coalition. It includes the New Democracy, which is the main coalition party, but there are also two other parties: the social-democratic Pasok and the Democratic Left party. Particularly, these two parties have to implement things that are not exactly consistent with the ideological base. It is always a risk that these two parties will not be able to continue participating in the coalition because of internal strikes. That creates political risk, and if the present coalition government falls, then, of course, Greece may leave the Eurozone. 

Regarding the external risks, there are two main external risks. The first is that there is a significant part of influential policy makers who, for a number of reasons, think that it would be better for the Eurozone if the country left the Euro. They gained a lot of influence and a lot of momentum during the first half of 2012. Now it looks like these external observers that were advocating a Greek exit from the Eurozone did not become the mainstream view in European policy making, but they still remain influential. Hence, if Greece missteps and deviates from its obligations, this may become a stronger view and eventually become the mainstream view. The other external risk has to do with what will happen to other Eurozone countries, like Spain and Italy. If things start becoming shaky in those countries, if the Euro crisis becomes even worse than it is now outside of Greece, you never know what the repercussions will be for Greece. 

 

The disagreement is basically about whether Greece would take an official sector haircut. Greece now has a public debt of approximately 150% of GDP, 17% of which is now held by official lenders, which are European governments and the IMF. The IMF says that this is a very big debt burden and Greece must be given a debt relief on this official sector debt. That is why Mrs. Lagarde says that, in order to effectively bring down the public debt-to-GDP ratio to 120 % by 2020, the debt has to be written down, not completely, but there must be a substantial haircut. On the other hand, there are countries in the Eurozone, mainly the core EU countries like Germany, which say we cannot forgive the debt; however, we can prolong it into the future up to 2022. The Greekse may bring its debt-to-GDP down to 120% on their own by 2022. 

Thus, everybody realises that Greece needs some kind of debt relief, adjustments, and facilitation. 

The issue lies not with the actions that have to be implemented by Greece. It is something that the IMF and basically Germany disagree upon, and the reason for disagreement is that Germany has difficulty in saying to its public opinion they have forgiven so much Greek debt. I think that some kind of compromise will emerge. This is not a deal breaker.

 

A lot of people are wondering why and how a recession in a country can last six years in a row. However, this is not a surprising fact. In economics there are two concepts of income. First, there is the so-called observed income - what you see, what you observe, how much money people earn in reality. Another concept is the so called equilibrium income, that is to say; the amount of spending that is justified by the economy, competitiveness. Greece for a long period of time between 2001 and 2009 had an income which was significantly higher than the equilibrium income. In other words, people in Greece were lending money beyond what the country could produce and the extra income was coming from foreign loans. Between 2001 and 2009 this output gap, as it is technically called, cumulatively was in the order of 40%. Thus, the Greek population was mainly driven by wage increases in the public sector that got 40% more purchasing power in cumulative terms than they should have. As the old economy has gone into this global credit crunch, it is not possible any more to finance these incomes with extra loans. Thus, it is very understandable that Greece went through this very prolonged recession. This is an equilibrium phenomenon. It is basically due to the fact that the economy has now started paying what it can afford, because it cannot borrow any more.  

Hence, there is nothing surprising in this recession as it is an equilibrium recession. It cannot be avoided, but it can be managed. The recent data shows that Greece has now basically returned to the level of incomes and the level of economic activity that is more or less consistent with its production structure. I would say that we are now nearing the end of the recession. Probably this and the next year will be the last years of recession. However, if things go the wrong way, and if Greece mishandles its policy and continues to have uncertainty surrounding it and if people do not know exactly where the country will go, then there might be an even deeper recession, which will not be due to the production structure, but due to uncertainty, i.e. everybody will be waiting to see what will happen, nobody will be spending money. However, there are good reasons to believe that this or the next year will be the last year of the recession.

 

We know that Greece has delayed implementing the reforms demanded by its rescue creditors.  However, in all fairness, we have to admit that the present government has done a lot and, after delays, it passed through the austerity measures. I think Greece has provided the necessary base for the European partners to help it out by means of releasing 31 billion euros of the transfer that the Greeks did not receive in June. I would expect that very soon, maybe it won't exactly be on November 20, but it could be on December 3; hence, within the next four weeks they will agree to provide Greece with extra money, which has not yet been released. I also expect that they will probably reduce the interest rates on Greek loans that other European governments hold. However, I am not sure as to whether this disagreement between the IMF and the European Union will be resolved within the next four weeks. I expect a release of the money and Greece will be given some relief in terms of lower interest rates and later on they will somehow agree on this issue of controversy - should they allow more Greek public debt or should Greece be given extra time. Definitely Greece will be given an extra two years in order to meet some fiscal targets in 2016, not in 2014 as was expected.

Moreover, if there are no accidents in Greece, if they carry on with the present reforms, I would expect that there will be that haircut on the official sector's loans, but it would probably be delayed until after the German elections. I think this is the most sensible scenario for Greece to show that, in practice, they mean business.