Greece: From Depression to Stagnation

We have heard it before: the tide is turning in Greece. Just one more austerity package, and things are finally going to get better. As I have explained repeatedly, and correctly, these predictions of better times have been nothing but hot air.

Over the weekend the EU Observer published another story predicting macroeconomic sunshine in Greece. This time, though, there is a grain of truth in the rhetorical optimism. But just a grain.

Here is what the EU Observer reported:

After six consecutive years of recession, the Greek economy might finally be allowed to leave its life support machine this year. The country’s debt burden should start to fall in 2014. So should unemployment. It may even post economic growth by the end of the year. Both Greek and EU officials insist that the tide is finally turning.

First of all, this is not a recession. When a country loses one quarter of its GDP in five years, and when more than half of its young are unemployed, it is in a depression.

That said, a look at some economic data from Eurostat indicates that for the first time since the crisis started, Greece may actually be seeing the end of its multi-year decline. More on those numbers in a moment. First, back to the EU Observer:

But if the Greek economy is no longer on the precipice of one or two years ago, it is hardly in good health. At 27 percent, Greece has the highest jobless rate in the EU. Its debt pile is also Europe’s highest at around 180 percent of GDP. More than a quarter of its economic output has been wiped out since 2007. The Greek government has forced through a programme of spending cuts, tax rises and labour reforms of unprecedented severity. … [Greek finance minister Stournaras] points out that in three years Greece’s primary budget balance has been transformed from being in deficit to the tune of 14 percent to a surplus of 6 percent.

The transformation of a deficit into a surplus has taken place while the fundamental tax base – GDP – has shrunken by one quarter, while poverty has skyrocketed and unemployment has turned into an epidemic. This means that the budget deficit has been wiped out not by means of sound, growing private-sector economic activity, but by a total recalibration of the Greek welfare state. In other words,

  • The eligibility criteria for entitlements have been totally revamped, primarily by severely cutting what people are eligible for (such as health care, unemployment benefits and subsidies for medical drugs);
  • The taxes that pay for the significantly smaller government spending programs have gone up in order to compensate for the revenue loss that follows when the tax base shrinks.

Austerity as applied to Greece and other EU member states is really nothing more than a massive recalibration effort. To see why, consider the following example. Government spends 100 euros and pays for it with 100 euros worth of taxes. GDP is 1,000 euros.

A recession hits, shrinking GDP to 950 euros. At constant tax rates – and with a very simple tax system – tax revenues fall to 95 euros.

Government now wants to close its budget gap, but not by encouraging GDP growth. Its method is instead that of traditional European austerity, combining tax hikes with spending cuts. It decides to cut spending by 2.50 euros and increase revenue by 2.50 euros. In order to accomplish the latter, government raises tax rates by 0.26 percent.

As the higher taxes and the lower spending impact the economy, GDP will continue to contract. The process can go on for years, as demonstrated in, e.g., Greece.

The recalibration is aimed at making government spending – the welfare state – fit into a tighter tax base. This is in fact the overarching purpose with austerity, a fact we should never forget when we analyze the European crisis. It explains why the EU and the Greek government have decided that one quarter of the Greek GDP is a perfectly acceptable sacrifice: their welfare state is more important than the jobs and the future prospects of more than 25 percent of the Greek workforce, and more important than the jobs and future prospects of six out of ten young Greeks.

Consider this for a moment while we hear a bit more from the EU Observer:

Labour costs have also seen a 25 percent reduction. Stournaras also says that average incomes have fallen by 35 percent in the past four years, signifying a huge drop in Greek living standards. … [Finance minister Stournaras] commented: “In economics there is no black and white but I am confident that there is going to be growth this year.” However, the pain is by no means over. Exports increased by 5.4 percent in the first eight months of 2013 to €18.28 billion but, if you exclude petroleum products, the figures are much less impressive – an overall drop of 2.6 percent worth €293.8 million. … Although an export surplus has long been a key target for the European Commission and Greece, it does not necessarily translate into a boon for the economy. Anaemic exports alongside declining consumption is a recipe for a spiral of deflation rather than growth.

Which brings us to some Eurostat numbers for Greece:

Changes over same period previous year; adjusted for inflation
2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3
GDP -7.9 -4.0 -7.9 -6.7 -6.4 -6.7 -5.7 -5.5 -3.7 -3.0
Private consumption -6.5 -2.5 -7.1 -9.6 -8.8 -7.5 -9.9 -8.5 -4.5 -3.9
Government debt, pct of GDP 159.0 163.7 170.3 136.5 149.2 151.9 156.9 160.5 169.1
Unemployment, 15-64 16.6 17.9 20.9 22.8 23.8 25.0 26.3 27.6 27.3 27.2
Unemployment, 15-24 43.1 45.0 49.9 52.7 53.9 56.6 57.8 60.0 59.0 57.2

There is a slowdown in the decline of GDP, but it is still declining. The same is true for the contraction of private consumption. Both unemployment measures show jobless rates plateauing, with a possible beginning of a decline on the youth side. Government debt, though, has continued to rise just as before, a fact I discussed at length back in September.

Undoubtedly, there is a convergence of indicators – GDP, private consumption and unemployment – which could be interpreted as the beginning of the end of Greece’s long, depressive decline. Under one important condition, I am willing to predict that these indicators are right, namely that the slight downturn in youth unemployment is the result of an actual, microscopic but still real increase in employment among the young.

This is a hugely important condition. If the decline is instead the result of young Greeks emigrating, then we have to exclude that variable, and open for the possibility that the plateauing of general unemployment is also due to emigration.

The slowdown in private-consumption decline could indicate that the end of unemployment rise is in fact not caused by emigration. However, the downward trend in consumption is still pretty solid, continuing at levels that we normally see in economies in serious recessions. This means that the economy as a whole is still on the depression track. Furthermore, the decline in private consumption during the depression has been so massive that what remains at this point of people’s regular spending is the bare-bones deemed quintessential for life in a poor, but still industrialized country. In other words, there is not much left for people to cut down on.

One explanation does not exclude the other. The fact that consumption is down to its bare bones could mean that households will be flattening out their spending. This stabilizes the economy at its “survival core”, where all the extras outside of mere, industrial-life survival, are cut away. As this happens, the job loss trend also flattens out, as there fewer and fewer businesses remain in the non-survival sector of the economy. As a result, there are fewer and fewer jobs to cut away.

This is the most probable explanation. It goes well with what the OECD said in November, namely that Greece will not at all recover in 2014. It also fits well with my analysis of the European crisis as a structural transition from prosperity into industrial poverty (more on that in my new book Industrial Poverty, tentative publication date July). Under this explanation, what Greece has to look forward to is not a recovery, but a stagnation that in theory can last forever. Consider life under communism in Eastern Europe a good indicator.

I wish I could be more optimistic, but so long as the ideological preference behind the fiscal policy of both the EU and the Greek government is to preserve the welfare state at all cost, that is where Greece – and eventually the rest of Europe – is heading.


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