Standing on your own feet again may be a success, but what if you cannot walk? Bail-out programs may end for Greece, but austerity may not.
This week brought the official end-date of an eight-year period of bail-out programs worth EUR260bn ($310bn) for Greece.
In theory the Greek economy is self-reliant now, but it is still the captive of an enormous debt that demands high primary surpluses for its service, undermining future growth potential.
Moreover, with the Greek economy tied to the single currency and unfavourable demographic trends, austerity may not end for many years to come.
The enormous debt preserves Greek austerity by dictating high primary surpluses for its service
The Greek government debt amounted to 181.9% of GDP in 2017 – the highest in the Euro Area, and the second highest in the world – and is set to reach 191.3% in 2018, according to IMF estimates.
Long-term projections are even gloomier; the debt to GDP ratio is not expected to be below 140% in 2060, as per OECD estimates, while most developed economies – except of Japan and Italy – currently have a public debt lower than 120% of their GDP.
Even these estimates are too optimistic, as the government expenditure for servicing that debt deprives the economy of resources, eventually stemming growth which is vital for getting debt under control.
With the recent debt relief agreement reached on June 2018, which includes a 10-year grace period for interest or principal repayments on European loans, granted at the cost of reaching primary surpluses (fiscal surpluses excluding interest payments for servicing debt) of 3.5% of GDP until 2022, and 2.2% thereafter until 2060, fiscal conditions are not going to improve.
These high surpluses could only be met with (further) high taxation and by cutting public investments, as was the case for achieving the record primary surplus of 3.7% of GDP in 2017, with household consumption marginally declining and GDP growing weakly at 1.4%.
In this regard, taxpayers’ exhaustion due to over taxation ultimately comes at the expense of consumption – and, by extension, of economic growth.
In fact, according to OECD estimates in 2017, an average single-income couple with two children household in Greece pays 39% of their income in tax and social security contributions, the second-highest tax wedge among 35 OECD member countries.
This shows that there is no room for tax revenue growth, while wages remain suppressed after a brutal squeeze of 24% on average since 2010, unable to increase consumer spend and tax revenue, and drive economic growth.
The external sector of the economy provides limited growth potential for ending austerity
As domestic consumption is hindered by high primary surpluses, the Greek economy could source growth from incoming investments and exports.
However, as Greece is condemned to retain its competitiveness by keeping labour costs low – due to incapacity of currency depreciation within the Euro Area – gains for the national income can be limited.
Moreover, setting aside all other factors, investors would rather stay away from a country with high tax rates and weak domestic demand.
Unfavourable demographics add to the bleak outlook
Finally, the reduction of the Greek population by 3% since 2011 – due to both a brain drain occurring in the early years of the crisis and low birth rates, eventually leading to a rapidly ageing population – are additional impediments for economic growth.
What seems worse in this case is that these unfavourable demographic trends could only be reversed by ex-post economic growth.