Greek Lessons for Britain and Europe
The remarkable renaissance of the Greek economy is proof that there is life after populism. But also that there is no ducking hard choices
Last week I was fortunate to escape the miserable London weather to enjoy a few stimulating days at the Delphi Economic Forum, an annual gathering of political, economic and business leaders held in the spectacular setting of what was once the centre of the ancient world. It was a joy to be back in Greece, a country that I got to know well on frequent visits during the country’s protracted debt crisis that brought it to the brink of bankruptcy and ejection from the euro. When I was last in Athens in 2018, the country may have already been three years into its third and final bailout program, but growth was still weak, unemployment sky-high and the left-wing government at seemingly permanent loggerheads with its creditors.
What a difference five years makes. The turnaround in Greece’s fortunes since 2018 has been remarkable, all the more so given that it has taken place against a backdrop of a global pandemic and an energy crisis that has hobbled its most important trading partner, Germany. This year, Greece is forecast to grow by 2.3 per cent, well above the eurozone average of 0.8 per cent. Since 2018, Greece’s GDP has grown 14 per cent, compared to 3.6 per cent in the eurozone. Unemployment is down from a peak of 27.5 per cent to 11 per cent. Debt to GDP has come down from a peak of well above 200 per cent to a forecast 152 per cent this year. Last year, Greece regained its investment grade credit rating. Its cost of borrowing is now lower than Britain’s.
Much of this turnaround has been driven by a frenetic pace of supply side reforms, which accelerated since Kyriakos Mitsotakis became prime minister in 2018. These include a drive to digitise the payments system and the public administration in an attempt to improve tax collection and increase public sector efficiency, reforms to the pensions and social security systems and product and labour market reforms. Greece has seen the biggest improvement in its business environment of any country in the last five years, according to the Economist Intelligence Unit. Foreign direct investment has soared, fuelled in part by post-pandemic EU recovery funds; exports have risen from below 20 per cent of GDP in 2009 to above 50 per cent last year.
Of course, Greece is not completely out of the woods yet. Many of the old pathologies continue to hold the country back, including bureaucracy, tax evasion and cronyism. Domestic investment remains weak, while savings remain low. The banking system has been cleaned up, but banks are extending little credit. In response, Mitsotakis, re-elected last year with a substantial majority, is promising to keep up the pace of reforms. Priorities include measures to speed up the judicial process, further progress on digitisation and improving access to finance. These are all essential to improve Greece’s investment appeal and underpin future growth potential.
True, it is an open question how much of the recovery has simply been a cyclical rebound from a deep depression. Many also question whether Greek voters and political and business elites have really abandoned their attachment to clientelism, or whether something so deeply rooted in Greece’s political economy will reassert itself as memories of the crisis fades. Fiscal discipline will need to be maintained for many years to keep debt to GDP on a downward trajectory. Recent political scandals, not least concerning the government’s illegal wire-tapping of political rivals, raise troubling questions about the independence of the judiciary.
Nonetheless, it is a mark of Greece’s political metamorphosis that Syriza, the erstwhile radical left-wing fringe party that was catapulted to power in 2015 with a mandate to resist the bailout, last year anointed a former Goldman Sachs banker with no prior political experience as its leader. Meanwhile Alexis Tsipras, the former Syriza prime minister who fought last year’s election on a left-wing manifesto of big social spending rises and nationalisations, is now seeking to take credit for the post-bailout recovery. That bodes well for Greece’s continued transformation into a beacon of political stability and economic dynamism in a troubled corner of the continent.
Meanwhile there are lessons in Greece’s experience over the last decade and a half for the rest of Europe. One is the importance of supply side reform as the key to delivering improvements in productivity. That is particularly true of course in a currency union where the possibility of devaluation as an easy path to boost competitiveness does not exist, but it is no less true of countries such as Britain with their own currencies. After all, devaluation only changes relative prices; without moves to improve productivity, those supposed gains in competitiveness are purely illusory as the country simply becomes poorer, as Britain is discovering.
What Greece’s experience also shows is the difficulty that government’s face in undertaking deep reforms in the absence of extreme external pressure. Other than Germany’s labour market reforms in 2004, it is hard to think of any major economy in recent years that has delivered significant supply side reforms absent a crisis. Instead, as in Greece, the reaction of voters and politicians to deteriorating economic conditions is likely to be a retreat into populism. The rise of right-wing populist parties across Europe, not least in France, Germany and the Netherlands, does not bode well for domestic reform needed to address their sluggish growth rates.
What is true of individual countries is true of the EU as a whole, given that this is the level at which many of the most urgent supply side reforms are needed. As Mario Draghi, the former Italian prime minister and European Central Bank president who is undertaking a review of European competitiveness of the single market, said in a hard-hitting speech this week, “radical change” is needed if the continent is not to fall further behind. That includes measures to deepen integration in areas such as defence, energy, digital services and capital markets. Rising support for populist parties makes securing consent for such reforms far harder. Will the EU learn from Greece? Or will it take another crisis to force its hand?
Good points about how the supply side forms, often painful for many, can work for most when brought in alongside technological advances that, presumably require some investment somewhere. Basically, they could have gone for more Shock Therapy but it doesn't look like they have. Also, I suppose some credit should go at some point to the EU for not actually ejecting Greece from the Euro when for a time it seemed inevitable, a bit of evidence that fudging is better than failure.