The Prodigal Greek

The Greek crisis through a different prism

Greece, heading back to 2002?

with 3 comments

On Friday March, 9 the Greek statistical agency announced provisional national accounts data for Q4 2011.  Measured in 2005 constant prices, the Greek economy contracted by 7.5% in the last quarter of 2011 driven by a significant reduction in final consumption, both private and public, the free fall in investments by approximately 22% and a slow down by circa 6% in exports.  The impact on GDP was partially offset by a substantial decrease in imports by 14.2%.

However, these are not the most worrying signs of this particular release as it was largely expected considering the vice like grip of the austerity measures on the Greek economy.  Most concerning are the implications for the first quarter of 2012.

Given the nature of the Greek economy, largely dependant on tourism, economic activity peaks in Q2 and Q3 with the first quarter of each year being the weakest.  The drop in economic output has intensified significantly since 2008 with a 10.3% decline in Q1 2009, 9.3% in Q1 2010 and 8.6% in Q1 2011 when compared to  Q4 of the previous year. (GDP graph below).

From the EUR49bln of economic output in Q1 of 2007 and 2008, the Greek economy saw a steady decline in the subsequent years with only EUR43.4bln of economic output in Q1 2011.  The signs for the first quarter of 2012 are particularly bleak.

The most adverse development, the employment data announced by ELSTAT last week, with the unemployment rate in Q4 2011 standing at 20.7%, compared to 14.2% in Q4 2010, and the unemployed Greeks breaking the one million psychological barrier.

Add to this the significant reduction in disposable income as a result of repeated pension cuts and tax measures since September last year, with the most notable being the property tax through the electricity bills and the reduction of the tax-free threshold to EUR5’000 from EUR8’000 previously.

With an additional 300’000 Greeks out of job compared to Q1 2011 and with those still in employment seeing their incomes reduced, in particular those with lower incomes and pensions that have a very low propensity to save and almost the entirety of their income is directed to consumption, total final consumption could very well exceed a year on year reduction of 10%.

In the absence of funding, for both the private and public sectors, and the country associated risk remaining, there is nothing to suggest that investment will change its nose dive course.  Exports have slowed down since November last year and it only leaves a significant reduction of imports to correct the trade balance.

Taking all this into consideration, Greece could be heading for a Q1 2012 economic output below EUR40bln, the level of Q1 2002, and in year on year percentage terms this quarter could be the worst in the country’s modern history with a potential decline of over 9%.

The baseline scenario of the troika’s debt sustainability assumes a contraction of 4.8% of GDP in 2012, or a total output of approximately EUR173bln, in 2005 prices.  If Q1 2012 comes below EUR40bln, this suggests that the Greek economy in the remaining three quarters of 2012 will need to generate economic output which is only circa 3.5% lower from the output in the same three quarters of 2011.

Given the current business and consumer sentiment, the reduction in minimum wages and associated benefits across all private sector payrolls – effective from February – the expected downward renegotiation of all sector wage agreements that will expire – per the new MoU – by mid May, the potential further reduction in pensions if contributions – deeply affected by run away unemployment – do not meet the pension fund’s social transfers, unless significant amounts of funds are immediately released for big investment projects that have a high multiplier both for employment and consumption, particularly in depressed economies, there is very little to suggest that the pace of contraction will significantly slow down in the rest of the year.

With the Greek government’s budget – and the troika’s projections – highly dependent on the country’s economic activity it raises serious concerns over the success of the new program.

 Time will be the judge…



Written by Yiannis Mouzakis

March 19, 2012 at 9:50 pm

Posted in Economico

Tagged with , , , , ,

3 Responses

Subscribe to comments with RSS.

  1. It is clear that the situation is as grim as you analyze. At the end of the day, I am sorry to say that this level of contraction is only natural. Although that you are trying not to take a position about the progress of the economy, you are implying that the current targets set are once more virtually unachievable. It seems that apart from the major media and economic analysts around the world, even IMF is openly stating the obvious
    However, for me and I assume for everyone has the slightest respect in the economic science, the big question is what are we doing? In any case, I feel a great relief. The rape of the economic science that was experienced during 2010 and the first semester of 2011 is finally over. And finally, common sense, basic economic understanding and a cynical but thoroughly scientific approach on the outcome and the implications after the implementantion of these economic programms is taking the drivers seat again.


    March 20, 2012 at 12:04 pm

    • Thank you for your comment. In my view, what Greece needs to do is execute without the slightest delay the reforms requested and agreed upon, which is something that the troika has repeatedly used as an argument to justify the shortcomings of the programs and the repeated misses of projections..
      With reforms not just voted but actually implemented, if the economy does not turn around there will be tangible argument to request re-negotiation of the terms and a slow down of the pace of consolidation. Greece may have additional arguments to this respect from the impact of austerity in the core of the eurozone this year resulting from the compliance with the new fiscal pact. France elections also might change the dynamics.
      Equally, we need finally to start absorbing money that are available for Greece from the EU and for a number of reasons remain stagnant with the risk of losing them. I cannot comprehend in such times how absorption of EU funds for co-financed or entirely projects did not become the #1 priority. Some movement seems to be happening on that front now with the Task Force on the ground.
      Most importantly, Greece’s political system, and in particular the two main parties, need to face reality and, irrespective of what the program requires, form – at last – a *Greek* strategy to re-gain competitiveness – not only an issue of unit labour cost – and a development plan to exit this recessionary spiral, unfortunately not very optimistic on this as I don’t think it is within their DNA to do so.

      Yiannis Mouzakis

      March 21, 2012 at 12:00 pm

      • Reforms are indeed needed. But lets face the truth. The major economic thinking besides this economic prgramm is the devaluation. Since there is no currency to devaluate, you have no alternative than to devaluate income. But once you do that, you have no ability to repay your loans. It might sound simplistic but believe it has more economic thinking than everythink that the EU has tried over the past two years

        The issue was never economic. Much of the needed reforms had to do more with logic and anti-corruption than to economic science. In terms of economic science there were only two alternatives in May 2010. Either default on your debt and reach an PSI like agreement or control rigorously the expenditure and finance the deficit. In more general terms, since it is becoming very fashionable in nowdays, the first option would be a Hayek style and the other a Kaynnes style. The option selected was the German /French nationalistic side (i.e push the can forward until we can absurb the loss. Germans were for once more much more prudent and they took much more decisive actions than French and they actually minimized their losses in this period).

        Therefore, I think that we are doing a grave mistake trying to explain the situation in economic terms. I personally think that although Greece is outperforming in stupidity many other countries, its problems are systemic problems. The stupid think of the European Union and the Germans did was that they reminded the world the problems of the european currency apart from making them feeling totally insecure about the future.

        Personally, I think that everybody ( with the exception of KKE and Xrisi Avgi) are making a bet. For those in favor of the economic programm the bet is not its succeess. Nobody is so stupid. The bet is that at some point the EU will somehow write off the majority of the official loans. I sincerely believe that the bet is wrong. If they do so, without requesting the exit from the Euro) they will have to do the same for Portugal and Spain instantly and for Italy in due time.

        Therefore, i agree with you that we need reforms. However, I strongly disagree with the strategy. Sooner than later, the lack of economic growth will affect even the more prudent of the countries in Europe leaving no room for the necessary fnancing of the EU periphery. Then, it will not be a matter of decission for Germany and the rest. Simply put, these countries might not be able to help even if they want it to.

        We are reaching, fast enough, the point of no return. It might be that, as a professional in the private sector, i have small understanding in the way politicians act and think (Thanks God). And I have great belief in the logic and the facts. I think that over the past decades we, the Greeks, raped logic, let alone economic science. But I also believe that we did is no march for what the EU (Germans and French actually) did in 2 years.

        I am a father of twins. They are 9 years old, and i am struggling to remind them that they have always to focus on the facts of each problem. Having to argue against politicians or politicians-like economists I have to remind them that a country with 116% debt and a 15% deficit , and problematic economic structure the one thing that dosent do for sure is harsh austerity. Not until it resolves immediately the debt issue.

        In my professional life, I woulfd nener suggest to an owner of a company to put more assets in a shinking company. Nobody would advise something like that.

        So, sorry Yiannis. I think that we have to demand from our politicians to reform the country and I think that they have done nothing towards that direction so far. I still believe that 90 % of that has nothing to do with ideologies and economics but with pure logic. But I know that reforms takes time and they would have no real effect in the achievement of the objectives of this economic programme. At the end of the day, the funny think is that Venizelos might have the world record in reducing the deficit in a hard currency environment.

        And i am still very very very sorry for my country. And dissapointed. Because 2 years ago, i thought that there were people that could change Greece, After 2 years, I have lost even this hope. However I am happy. Sooner the rape of economic science and logic will stop. And I am feeling much more comfortable in logic and traditional old style economics.Sstarting from there, we can re built everything.

        Thanks for the discussion and sorry for my long speech.


        March 21, 2012 at 11:10 pm

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: