By Vassilis Kostoulas
[email protected]
When trying to analyze the implosion of the Greek economy, beginning in late 2009 and continuing into the present, along with its painful political and even societal repercussions, the phrase "when the symptom becomes the problem, then the solution lies in the cause," often comes to mind.
An extended period characterized by a spendthrift state sector and low competitiveness in the wider Greek economy ballooned the public debt from the already high 108 percent of GDP in pre-euro 1997, to the even more excessive 148 percent in 2010 and up to the stratospheric 178 percent of GDP in 2016.
As most mainstream economists have pointed out, even if the Greek debt eliminated to the last euro, a significant increase in the production of goods and services for export, including the tourism and shipping sectors, for instance, would be crucial for a country that has experienced "4+1 defaults" since the Greek War of Independence commenced in 1821.
Fiscal adjustment fuelled by increased tax revenues - the current "recipe" - merely shifts structural problems faced by the private sector in Greece to the future. Instead of the current "tax tsunami", a greater emphasis, at least in the short term, should be on spending cuts. Additionally, and just as importantly, long-delayed and oft-cited "institutional reforms" to boost production and competitiveness are essential, as the latter will directly contribute to an increase in per capita income.
Nevertheless, a country's creditworthiness is often unrelated with the nominal value of its public debt, but rather depends on a variety of factors, such as real growth rate; the rate of savings as measured by bank deposits; public and private investment; the inflation rate; production indexes; exports; interest rates by which the country and enterprises borrow; the quality of institutions; as well as an attractive framework and environment for foreign investments.
In terms of a country's debt sustainability, the significant factor is the annual servicing costs.
Looking back on recent history, the 1994-2008 period witnessed extremely favorable conditions for the Greek economy - compared with other eras since the establishment of the modern Greek state in 1830. A high annual growth rate, substantially lower interest rates, high primary budget surpluses until 2001 and significant revenue from privatizations characterized the 15-year period until 2008. Yet the average level of Greece's external debt still hovered at 100 percent of GDP throughout this period.
What fueled the debt increase, besides repeated budget deficits, was the deficit in current account balances, something which attracted foreign capital but also increased the external debt as a percentage of GDP.
"The first year of the default, in 2009, the government at the time borrowed 36 billion euros, of which 12 billion went towards amortization," former Athens Economics University rector Constantinos Gatsios told "N".
"The rest, 24 billion euros, was used to pay (public sector) wages and pensions, in other words, towards consumption. Nevertheless, GDP dropped. Why? Because incomes were transformed into demand for imports," he adds.
