Greece: the agreement will not create the necessary impulse to boost growth

This is an addendum to my yesterday’s post on Greece.
What do we have to keep in mind after the agreement (see the press release here)
This agreement is the end of the financial rescue program that started 8 years ago
Greece will receive €15bn and the total amount of the rescue program is €96bn.
Therefore the cash reserves is now at €24.1bn which is perceived as sufficient for the next 22 months. In other words, Greece will not have to go on the market before 22 months.
In order to ensure debt sustainability, Greece will have to respect a constraint on its budget: a primary public surplus at 3.5% of GDP until 2022 and 2.2% on average from 2023 to 2060.
Its gross financial needs (public deficit + funds required to roll over debt that matures in the course of the year) has to be 15% in the medium term and 20% thereafter.
Repayment of the EFSF debt has been postponed by 10 years to 2033 and maturities have been extended.
Therefore, debt repayment will be limited until 2030.
The profit done from the ECB portfolio (SMP) will be reversed to the Greek budget (€1bn)

In other words, Greece will receive new cash, will postpone its debt repayment but will have to follow strict rules on primary public finance balance. We can imagine lower long term interest rates.
That’s pretty fine but the question that remains is the source of impulse after 10 years of recession. Greece will not be able to use a Keynesian type fiscal policy due to constraints on its public finance. So even if institutions converge to a more efficient framework, the question is on the possibility to change the growth trend. It could have been efficient in a “normal” economy not in one that has suffered a 10 year recession.
Greece doesn’t have strong fundamentals that will allow to recover endogenously. This is not the last episode for Greece.

Greece, the future remains bleak

After years of recession, the Greek economy is back to growth as the first graph shows. But the 2017 figure is very low while the rest of the Eurozone was in a strong expansion. Despite this improvement, the GDP level remains, at the end of 2017, 25% below the 2007 peak. The adjustment, almost 10 years of recession, that has been imposed by the troika (IMF, European Commission, ECB) was extremely strong, persistent and brutal. It has broken the capacity of the Greek economy to recover endogenously.
An historical comparison shows that the duration of the Greek depression has been longer than that witnessed by the US during the great depression in the 30’s. Ten years after the start of the US depression the US economy was back to its pre-crisis level. After 10 years, the Greek economy is still 25% below this peak. That makes the difference and show how deep and strong was the adjustment. Continue reading