At the latest since the euro crisis, Greece has been considered the problem child of the EU – a state bankruptcy seemed inevitable. It turned out differently. The economy has now recovered. But the Greeks are paying a high price for their recovery.
By Max Borowski
This article first appeared on ntv.de
It was completely impossible, they said: “The country’s debt would never be sustainable, it was impossible to achieve a budget surplus, and the banks would never be able to reduce their mountain of bad loans,” recalls Fokion Karavias, Head of the Greek bank Eurobank, remembering the years of debate about the Greek debt crisis. From the then left-wing Greek government to conservative German politicians and financial experts, many agreed: Greece, which had been in a long-term financial crisis since 2009, could not be saved even with billions in aid, drastic austerity measures and reforms. A national bankruptcy including leaving the European common currency is unavoidable.
Greece: From problem child to economic miracle child of the EU?
But “in the end”, bank boss Karavias sums it up in the “Financial Times”, “nothing is impossible”. Within just a few years, Greece has developed from a hopeless problem case into Europe’s model student. Investors, analysts and business media are cheering the economic development of the last few years. Rating agencies have continuously upgraded the country’s creditworthiness and assume that the upswing will accelerate. In a recent analysis, Bank Barclays even predicted an imminent “third mega cycle” for Greece, a phase of long-lasting economic growth after the two major boom phases in recent Greek history in the 1950s and 1960s and in the first decade of the 20th century.
Greece’s economy has recently been growing at rates that have long been known in China, but hardly in any European industrialized country. Gross domestic product (GDP) increased by 5.9 percent last year, compared to 8.4 percent the year before. For this year, the EU Commission expects economic growth of at least 2.4 percent. Greece is thus far above the EU average and many times above the German growth rates: they were 2.4 percent in 2021 and 1.8 percent in 2022. Growth of just 0.2 percent is expected for the current year.
Thanks to the high pace of growth, Greece has already been able to significantly reduce its debt burden, which is considered unsustainable. At its peak, government debt totaled over 200 percent of GDP. This ratio has now fallen to a good 170 percent. Although this is still the highest value of all euro countries, the experts from S&P expect that Greece will be able to further reduce the debt ratio by around ten percentage points per year thanks to continuous budget surpluses and a simultaneously growing economy. The Greek banks were also able to reduce the proportion of bad loans in their balance sheets from more than 40 to less than 10 percent.
Hardly anyone foresaw the development – but it is not a miracle
Even if hardly anyone foresaw this development, it is not an inexplicable miracle. Many experts had warned that Greece could not reduce its crushing debt with drastic austerity measures, as economic growth would then also collapse or come to a standstill. That was also the case at first during the crisis years. The fact that the Greek economy is now growing rapidly again is mainly due to the enormous price that the Greeks have paid in the form of a large loss of prosperity. While the economy collapsed by more than a quarter during the crisis, the government massively cut social benefits, pensions and the minimum wage. Unemployment jumped to around 30 percent. In the course of this, wages and salaries fell by almost 30 percent – and have hardly risen again to this day.
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These painful cuts have made Greece’s export economy competitive again. Greek exports have roughly doubled over the past ten years, making a key contribution to the upswing. This dearly bought success has by no means paid off for the Greek population. Prosperity in Greece is not only a long way from reaching the pre-crisis level of 2008. In terms of GDP per capita, Greece is still the second poorest country in the EU, ahead of Bulgaria.