Athens, Greece – On June 22, at 3am (01:00 GMT), eurozone finance ministers meeting in Brussels declared a victory for the eurozone’s last intensive care patient after eight years of public spending cuts, and cleared Greece to borrow from markets after August 20.
Austerity has brought some important results. Greece balanced its budget, so it is living within its means, perhaps for the first time.
Its exports are rising, bringing in much-needed foreign revenue. The assurance of creditworthiness from the IMF and the European Stability Mechanism – the sovereign distress fund that now owns most of Greece’s debt – is an important signal to markets.
That should mean that Greece can start to rebuild its credit history and refinance its debt.
Other aspects of the deal are less reassuring.
Bank of Greece Governor Yannis Stournaras, who balanced the budget as finance minister in 2014, warned of the challenges ahead: “Important problems remain, such as the high public debt, the country’s low credit rating, the high rate of non-performing loans, high unemployment and the investment gap.”
Greece’s debt stands at $329.8bn – almost twice the size of its economy, and this month its credit rating was upgraded by Fitch to BB from B – a far cry from the AAA rating it enjoyed before 2008.
Its official unemployment rate is 19.5 percent, but the Labour Institute, a think-tank attached to the General Confederation of Greek Workers, believes real unemployment is closer to 27 percent.
In other words, the Greek economy is still fragile – one reason why supervision of public spending will persist for the next 40 years.
As economist Plamen Tonchev pointed out, “monitoring” is now replaced by “enhanced surveillance”. During those two generations, Greece must set aside an average of 2.2 percent of its economy to repay its creditors – a rare feat. Even if it succeeds, it is likely to remain encumbered by high taxes.
According to the Center for Liberal Studies “Markos Dragoumis”, a think-tank, Greeks worked 198 days – from January 1 to July 26 this year – to pay taxes.
That represents an increase of 50 days during the eight-year crisis, putting Greeks on a par with Germans among the most highly taxed Europeans.
Unlike German taxpayers, however, Greeks register the lowest rate of satisfaction from public services – especially healthcare, education and the delivery of justice – in the developed world.
Greece’s competitiveness rankings tell the story. Despite lowering its labour costs dramatically, Greece still ranks below all its EU partners for productivity in the World Economic Forum’s competitiveness survey.
It beat only Romania, Bulgaria and Hungary in Transparency International’s corruption perception index.
In short, after eight years of unprecedented reform and belt-tightening for a developed economy, Greece underperforms countries that have had the benefits of democracy, market economies and EU membership for a fraction of the time Greece has had them.
Banks would normally be relied upon to finance a private sector recovery and boost consumption, but $105.5bn of their capital is still tied up in non-performing debt.
The banking system plans to recover $28.5bn of its money by the end of next year by collecting or selling loans and liquidating collateral.
Some of that money should go to new lending, but much will be needed to refinance $16bn in write-offs.
Greece’s ageing demographic enhances over-taxation. Its labour force is just 4.8 million in a population of 11 million, and only 3.8 million of those people are working.
The crisis contributed to this as hundreds of thousands of public servants in their late 50s and early 60s rushed to retire, rightly judging that the retirement age would rise (it is now 68).
Greece cannot even afford to pay out pensions for all those who have applied. Some 300,000 are on a waiting list. Once they are approved, Greece will have about three million retirees – a third of the population.
At the same time, the birth rate has plummeted by a fifth, as young people shrink from the cost of a second child. In 2011, it dropped below the death rate.
Measured together with the emigration of young people to healthier job markets, Greece is losing an average of 75,000 people a year – 0.7 percent of its population.
Both the rush to retirement and the loss of new blood suggest a narrowing tax base for the foreseeable future.
Most economists agree that it is unlikely that Greece can achieve high rates of growth under these circumstances. Greece failed to meet the 2.5 percent growth last year, gaining only 1.4 percent. This year, it is expected to achieve a little below two percent.
They also agree that a fast-growing economy is the most effective way to reassure markets about the manageability of its debt.
When Greece was forced out of markets in 2010, its debt was about 130 percent of its economy. Today, it stands at 177 percent, because austerity caused its economy to shrink by a quarter – the worst depression in any developed postwar economy.
Unless that process is reversed, some economists say, Greece could go bankrupt again in under a decade.
The crisis may have paved the way for future success by changing attitudes. Realising how much they are paying for poor services has awakened Greeks out of their statism, argued Alexandros Skouras, who heads the Center for Liberal Studies.
“The crisis has shifted the climate of ideas in Greece from support for big government to support for entrepreneurship and innovation,” he said.
“[This] replaces what I call the formerly Greek dream … a seat in the public sector, job security forever, vastly better benefits than in the private sector. Every parent wanted their kid to join the public sector. That’s no longer the case.
“Three years ago the majority of Greeks wanted more government programmes, even if it meant more taxes. Now, the situation is reversed. Sixty percent of Greeks want lower taxes and only 35 percent of Greeks want bigger government.”
Others disagree that Greece is on the right path. Former finance minister Yanis Varoufakis still believes that Greece would have been better off ditching the euro.
“For the most part of this past decade Greece has lived through the biggest peacetime economic catastrophe since the Great Depression,” he said.
“It is, therefore, absolutely necessary that the country be prepared to return to its national currency.”
Varoufakis famously confronted his eurozone colleagues in early 2015 with a challenge to reschedule Greece’s unsustainable debt and lower its annual repayment costs to between one and 1.5 percent of GDP.
Led by Germany, they refused and the newly elected Syriza government, unwilling to return to the drachma, was forced to accept more austerity measures, overruling 62 percent of the electorate which voted against austerity in a referendum.
Claus Regling, who heads the European Stability Mechanism, believed that through his stance, Varoufakis was responsible for between $77.6bn and $228.3bn in increased costs.
The debate over whether austerity was the right policy for Greece – and the rest of the eurozone – is likely to continue while low growth and high unemployment persist.
Greece may have been saved from profligacy and official bankruptcy, but it has yet to find prosperity and confidence.