Can the Greek economy ever recover?

Financial crisis: Tragedies like the one in Greece don't have to repeat themselves

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Clemens Fuest is President of the Ifo Institute for Economic Research in Munich. He taught at Oxford University for many years and is a member of the conservative Kronberg Circle of the Market Economy Foundation.

The third rescue program for Greece ends this August. However, the crisis has not yet been overcome. The country will feel the consequences for a long time. There is no telling whether the creditors will ever see their money again. However, through reforms that strike a balance between more financial discipline and more solidarity, the eurozone can prevent the Greek crisis from repeating itself elsewhere.

Like no other country, Greece stands for the horrors of the euro crisis. The crisis broke out there in autumn 2009 when it became known that the budget deficit of the Greek state was much higher than previously reported. The following years were marked by economic decline, rescue programs and growing political tensions both within the country and between Greece and the creditor states. In 2011 it was decided to restructure Greece's national debt. What many thought was unthinkable had become a reality - national bankruptcy in the euro zone.

However, the haircut did not lead to an economic recovery. The losses that the private creditors were expected to suffer were too small. This was undoubtedly one of the most important mistakes in the management of the crisis. The costs of a state bankruptcy (the shocks in the capital markets) have been accepted without achieving the goal of the operation (a sustainable restructuring of the debtor).

In 2015 the crisis reached another high point: the Greek government refused to continue the agreed austerity and reform policies. The country almost left the euro area. A new aid program was agreed at the last minute. It expires three years later, in August 2018. Greece should be financially on its own two feet again. Is this realistic?

Economy stabilizes, but debt is slowing

Greece has certainly had some success. The state budget deficit in 2009 was 15 percent of the gross domestic product. In 2017 the state budget was balanced. So the rise in public debt has been stalled. The same applies to foreign trade: in 2009 the current account deficit was 12 percent of gross domestic product, and the country lived above its means. Today exports of goods and services roughly correspond to imports. However, these adjustments were painful for the Greek population. Economic growth collapsed, between 2009 and 2016 economic output fell by 23 percent. The economy has now stabilized: in 2017, growth of 1.4 percent was achieved again. The unemployment rate, which was 27 percent in 2014, is expected to fall below 20 percent for the first time in 2018.

These are all important improvements. But to say that Greece is out of the crisis is very optimistic. The national debt is more than 180 percent of the gross domestic product. This level of debt is incompatible with stable economic development. The creditor states have promised Greece aid in the form of loans with low interest rates for decades - Greece currently pays only around 1.5 percent interest on its debts. Nevertheless, it will take a long time to pay off the mountain of debt and cost money that is missing elsewhere.

The creditor states expect a permanent primary surplus of 3.5 percent of the gross domestic product from the Greek financial policy. With permanently low interest rates of 1.5 percent and nominal economic growth of three percent, the debt ratio would fall to 124 percent within ten years. First, that is still too much for a small country without its own monetary policy. Second, the question arises whether Greece can and will actually generate such high primary surpluses over such a long period of time. Since there will also be economic fluctuations and crises in the future, the surpluses would have to be even higher in good years.