Emerging economic recovery depends on urgent policy action

Ersi Athanassiou is Senior Research Fellow at the Centre of Planning and Economic Research (KEPE), Greece

During the extended period of crisis and recession which has eroded more than a quarter of its gross domestic product, Greece has gone a long way towards correcting its severe macroeconomic imbalances and implementing the structural reforms necessary to achieve economic stability and growth.

During 2016 fading fears over a possible Greek departure from the euro, or ‘Grexit’, and the easing of capital controls have helped release the growth potential generated by the adjustment process, bringing the country closer to what seemed like a turning point towards recovery. In the third quarter of 2016 a strong rebound in private consumption, investment and exports pushed the country’s rate of change of real GDP to an eight-year high – up 2.0% against the corresponding quarter of the previous year. Substantial improvements were recorded across indicators related to industrial production, retail trade, business and consumer expectations, and labour market conditions.

Although these developments suggest that Greece is moving towards recovery, more recent trends in both GDP and key indicators underline persistant fragility. Current provisional GDP data points to a fall-back to negative growth during the fourth quarter of 2016 while the latest economic sentiment, consumer and retail confidence indicators show signs of weakening, in reaction to the uncertainty induced by delays in the completion of the second review of the Greek bailout programme. Nevertheless, recent official forecasts from domestic and international institutions agree on a positive outlook for the Greek economy, with the European Commission estimating GDP growth at 2.7% in 2017 and 3.1% in 2018. Some of the requirements to fulfil these prospects are already in place, including improved competitiveness and considerable opportunities for investment and exports. But other crucial pre-conditions are yet to be satisfied, with decisive policy action urgently required from both Greece and Europe.

There are immediate policy changes that could curtail uncertainty and provide a much-needed liquidity boost to the economy, such as completion of the bailout review and the inclusion of Greek sovereign bonds into the European Central Bank’s quantitative easing programme. Progress with structural reforms and major privatisation projects could promote investment and signal positive change.

Finally, the importance of deciding on a set of medium-term debt relief measures cannot be emphasised enough. This will be crucial for restoring confidence in the Greek economy and adjusting primary surplus targets to levels compatible with a sustainable economic recovery. Although debt relief will undoubtedly require some difficult decisions to be taken, it will ultimately be in the interests not only of Greece but of Europe as a whole, enabling Greece to safeguard the interests of Europe in a volatile region.