Greece: Can It Get Even Worse?

27/08/2013 by Ronald Janssen

Ronald Janssen

While the German public opinion, courtesy of the debate in the run up to the next political elections, is discovering the fact that Greece will be needing a third bail out, a team of economists from the US – based Levy Institute describes how things look like from the side of Greece.
The Levy Institute economists start by observing that the changes in government revenue and expenditure which are projected for the next years in the latest troika reports are far too optimistic. The key problem is that the internal devaluation of wages is not working and will not produce export growth any time soon. This implies that the scenario the troika is counting on will not materialise: Employment and unemployment trends will not turn the corner shortly and the public deficit will not be reduced down to near zero by 2016.
In a next step, the Levy economists use an econometric analysis to see where the Greek economy is actually heading when following the existing program of austerity and internal devaluation. The results are that GDP will grow more slowly, employment will decline further than the corresponding troika projections and public deficit targets will not be met. This is called the baseline scenario (the black line) in the graph below.

In this ‘baseline’ scenario, the government deficit does not fall sharply but remains hovering above and around 6% of GDP. The authors therefore calculate a scenario where additional austerity is imposed on Greece to achieve the initial deficit targets (the red line in the graph above). In this ‘deficit target’ scenario, Greece continues to remain stuck in a deep recession up until 2016, losing an additional 300.000 jobs (on top of the 600.000 jobs already lost between 2010 and 2012).
What the latter scenario would imply for unemployment, one can imagine. The Levy report itself tables on a further increase in the rate of unemployment, from 27% now to almost 35% by 2016, and this in their baseline scenario (see graph below, again the black line). In the ‘deficit target’ scenario, one would probably need to add at least another 100.000 of unemployed.

Finally, note the blue line in the first graph above called the Marshall Plan scenario. This scenario estimates the effects of injecting 2 billion euros each quarter into an increase in public investment using European funds and this for a grand total of 30 billion.  GDP starts growing again, 200.000 jobs are created and the public deficit falls to reach a bit over 4% of GDP.
Of course, the ‘Austerians’ over here in Europe will argue that this Marshall plan is not realistic, that there is no willingness from the other part of Europe to pay for such solidarity, that after Greece, many other countries will claim similar help. This however does not take away the fact that their policy of austerity and deregulation is resulting in an economic and social catastrophe. Time for politicians around Europe (whether they are ‘austerians’ or not) to face this and come up with solutions reflecting the ideas of the economists of the Levy Institute.