Greece: Contraction or Collapse?

I am currently on a trip to Greece run by Nicholas Wood of Political Tours. The aim of each tour is to get below the skin of a country in the political limelight. In the case of Greece, the critical question is, of course, how the country is coping (going to cope) with its bone-crunching economic downturn, and whether the extent of the recession/depression will lead to an unravelling of its existing political and social fabric.

The chart below (click for larger image) is put together from the International Monetary Fund (IMF) database, updated with the latest projections made for Greece in the IMF’s April 2013 World Economic Outlook. I’ve looked at the data back to 1970 to get some perspective; this period takes in the end of the so called Regime of the Colonels and the return to democracy in 1974, the joining of the European Union in 1981 and the entry into the Eurozone in 2001.

Greek GDP, Constant Prices jpeg

As you can see, four distinct economic phases are visible. First, a period of rapid growth in the wake of democratisation. Second, a period of slow growth stretching through into the early 1990s; this period saw two devaluations of 15.5% and 15% in 1983 and 1985, respectively. Third, an era of turbo-charged growth both before and after euro entry. Finally, a collapse following the unfolding of the global credit crisis and the domestic implementation (at the urging of the Troika: European Commission, European Central Bank and IMF) of an aggressive austerity programme.

Real GDP is now back to the level seen in 2001 when the country entered the euro. Further, while the IMF is forecasting a bottoming out of the economy in 2014, its growth forecasts to date have been woefully optimistic, so we could go lower.

A key concern is whether Greece’s policy of adopting an internal devaluation within a fixed exchange rate mechanism can lead to a stabilisation of the economy, from which growth may return. Or will the austerity being imposed on the country be such as to undermine the social and political fabric of society, with all the dangers that this could entail (as we saw in the 1930s). I am also interested in how Greece’s terrible demographics and complete energy dependency enters into the policy mix.

Nonetheless, I was in central Athens yesterday and it certainly did not look like a city on the verge of collapse (no dystopian images of the type Zerohedge loves to report). Athens most swanky hotel, the Grande Bretagne on Syntagma Square, looked on to bustling cafes rather than rioters last night. Indeed, the upmarket and tourist-dominated Plaka district felt like one giant party. Over the next few days, I hope to find out how much pain is being felt elsewhere.

Hotel Grande Bretagne

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