Macro Weekly On track to where?
Group Economics
Han de Jong +31 20 628 4201
26 June 2015 This is the last Weekly Comment before our summer break. Other commentaries will continue. Service of the Weekly will restart 31 July. You may need a magnifying glass to see it, but talks between Greece and its partners are still making progress. Movement in the global economy is a little more convincing and is in the right direction. So we are on track. The only thing we need to figure out is: where to? A couple of observations about the Greek saga
reduction. The institutions are unwilling to give it to them.
At the time of writing, talks between Greece and the institutions
This is largely for political reasons - a debt reduction is hard
had not reached a final conclusion. There has been some
to sell to the electorate in other countries. An alternative can
progress all the same. The Greek government has recently
be found easily, at least in theory. While the debt is
made concessions in areas which they had declared taboo.
unsustainable at market conditions, the partners can
But the institutions want Mr Tsipras to move further.
alleviate the burden very significantly by lowering the interest rate and lengthening maturities or even applying grace
I cannot look into the heads of the Greek government, but it
periods. That has already happened, but the institutions
seems to me that the accelerated outflow of bank deposits has
could go further. This really makes the issue of debt
forced Mr Tsipras's hand. The ECB reviews how much
reduction a symbolic one.
additional liquidity support Greek banks need on a daily basis. That is an indication of the pressure on the system. This cannot go on for very long.
• The average Greek has suffered tremendously in recent years. True, Greece has lived beyond its means for a long time, but the average Greek is not to be blamed for that, nor
We are being inundated by news and commentary about
does this admission make it easier to cope with the income
Greece, so what can I add? Perhaps just a couple of
losses the Greek population has endured. What the country
observations I feel are not getting the attention they deserve.
desperately needs is economic growth. It is shocking that hardly anybody seems to be talking about that. The Greek
• While Greece is threatening to run out of money, one needs
economy started to recover last year. Experience in Spain
to realise that its financing needs largely reflect debt service
and Ireland shows that it takes a while for a recovery to
payments. Excluding debt service payments (the 'primary
spread sufficiently for large numbers of people to feel it, but
budget' in the jargon of economists) Greece is actually close
Greece was on its way. Unfortunately, the change of
to balance. So it is not as though the government will run out
government and the unsuccessful talks between Greece and
of money if it were to default. When the crisis reached a peak
the institutions has pushed the economy back into
in 2011/12 we argued that defaulting on debt was not likely
submission. It is also regrettable that the institutions are not
at that time as the government needed large borrowings to
sweetening their proposals with an investment programme
fund its day-to-day running of the economy. We also
which could provide stimulus in the short term and increase
asserted that a real default would be more likely once the
Greece's growth potential in the longer term.
government was running a primary surplus. So that would be now.
• There appears to be a perception that no progress was made in recent years in terms of strengthening the Greek
• The snag here is the banks. If the Greek government were to
economy. That is plainly wrong. The World Bank publishes
default, the ECB would, most likely, have to stop the liquidity
an annual ranking of countries called "Ease of doing
support to Greek banks and that would be the end of them in
Business". Between 2008 and 2015, Greece has risen from a
their current form.
dismal 108th position to the 61st. For the sort of country
• Greece's public debt is unsustainable and something has to happen. The Syriza government wants a formal debt
Greece is, that is still a poor ranking on a list of 189 countries, but it shows improvement. The same is true for the