Yesterday in a move which woke me from a seasonal slumber Greek financial markets lurched downwards. The initial trigger for this was the failure of the current leadership to win sufficient parliamentary votes in the Presidential elections meaning that an election was required under Greek political rules and will now take place on the 25th of January. This poses more than a few questions especially for a bailout process which ahem, in the Euro area has developed a habit of avoiding the democratic process via for example the appointment of a technocrat in Italy. Even worse than this for the Eurocrats is the fact that SYRIZA is ahead in the polls currently and its criticisms of the bailout and austerity are vocal. It’s views are shown below.
The impact of the austerity on the Greek economy and Greek society has been devastating. The austerity measures included cutting wages and pensions, reducing the cost of public utilities through privatisation, imposing extensive labour reforms and making cuts to health and welfare services. These led to an unprecedented unemployment rate of almost 30% (among young people it is more than 60%!), widespread poverty with a 98% increase in poverty rate, over-indebtedness of households, closures of many small shops and businesses and an economic recession which has exceeded 20% of GDP in the past five years. The government debt has further increased…… Young people are leaving the country thus reducing the potential for future economic growth.
That is a list which is hard to argue with although the unemployment rate has improved in 2014.
What is the state of play in the Greek economy?
The official view has been one summed up by the use of the word Grecovery. However the last six years or so are best summed up by this from Talking Heads.
We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride
No doubt some will be considering that these two lines of the lyrics from that song apply to the bailout process.
They can tell you what to do
But they’ll make a fool of you
If we switch to looking at the actual economic output or GDP numbers then we see that the Greek economy peaked in the third quarter of 2007 with an output of 65.2 billion Euros (reference 2010). Back then economic growth was recorded as being at an annual rate of 4.5%. However matters deteriorated so quickly that an annual growth rate of -10.4% was recorded at the beginning of 2011. In spite of the recorded improvement in 2014 the third quarter saw economic output of 49.8 billion Euros or 23.7%. Each time I calculate that number it has a shock impact. Who thought that what was considered to be a first world country could see such a decline? Also proponents of the Euro in Greece with any heart should find their breakfast porridge tasting like gruel. The boasts of the decade of the noughties have turned to what looks like dust to me.
What about wages?
Here is a similar story which provides plenty of food for thought for proponents of Grecovery. Here is the latest data.
The seasonally adjusted Index of Wages of the 3rd quarter 2014 recorded an increase of 2.1% compared with the corresponding Index of the 3rd quarter 2013, while a decrease of 2.2% had been recorded when comparing the corresponding quarterly Index of 2013 with that of 2012.
So 2014 has again been a better year but any improvement needs to be looked at in the light of the previous decline. On a seasonally adjusted bases wages are 14.2% lower than they were in 2008.
Real wages have fallen more heavily in spite of the fact that the Euro area measure of consumer inflation or HICP has seen negative annual numbers since the beginning of 2013. The reason for this is that the initial impact of austerity was to boost consumer inflation in Greece as indirect taxes such a Value Added Tax (VAT is a sales tax) were raised as part of the austerity measures. The plan was to reduce the fiscal deficit via raising revenues which often backfired as the economy then contracted. However I note that compared to the annual average for 2008 prices in November 2014 in Greece were some 7% higher. This means that real wages have fallen by around 21% in the Greek crisis as the credit crunch impact fed into the Euro area crisis.
What about employment?
So has the substantial cut in the price of labour or wages seen a boost to employment? Again we need some perspective as initially the 2014 numbers do show this.
The number of employed persons increased by 1.4% compared with the previous quarter,and by 1.5% compared with the 3rd Quarter of 2013.
Even that does seem a bit measly doesn’t it when we consider the falls in real wages? Well if we now take an overall perspective we see that a calamity has taken place here.
The improved numbers for the third quarter of 2014 show that some 3,586,900 Greeks are employed whereas the same quarter of 2008 saw some 4,639,600 employed. So rather than a lost decade we have lost a million workers in round numbers. And of course those that remain are paid on average considerably lower wages. Put like that it is perhaps a surprise that the Greek economy has not contracted further.
Greek national debt
This has become an awkward area as three-quarters of it is now to official sources such as the Euro area support mechanisms and the International Monetary Fund. So we need to take care with the impact of numbers such as government bond yields as they apply to a relatively small proportion of the debt. Be that as it may the Greek ten-year bond yield is now 9.47% compared to below 6% in the autumn of this year. If Greece was like the other peripheral Euro area countries that bond yield would be 5% or lower now. Although on the other side of the coin Greece officially has only two months of the bailout to go and that assumes a new elected government does not make such a move unilateral.
I am one of those who have consistently argued that Greece should default and devalue along the lines of the sort of programme that the IMF used to apply before it switched from plans based on economics to ones based on (French) politics. Back on the 10th of December 2012 I suggested this.
As you can see my fears of a 1930s type economic depression in Greece have come ever more true as 2012 has progressed. The worst part of this is that there is an exit door. It would not be what economists call a “free lunch” as there are dangers such as the risk of inflation from the currency devaluation but rather than the hopeless future that Greece now faces it does offer hope. Rather than being a bankocracy Greece would have the opportunity to regain control over her own destiny.
In essence what Greece has to do is explained well by these lines from the song Hotel California.
Last thing I remember,
I was Running for the door
I had to find the passage back
To the place I was before
Back then there were plenty of critics of such a strategy who argued that inflation would be the problem. Were the Greek situation not so grim I would have a smile at a group which mostly seems to argue these days that we will never have inflation again. Oh well!
The upcoming public holidays would give a chance to make the necessary preparations….