The outlook for Greece

#CriticalThinking

Picture of Vicky Pryce
Vicky Pryce

Joint Head of the UK’s Government’s Economic Service (2007-2010) and lead author of the CEBR study “The economic costs of physical inactivity in Europe”

What a difference just a week makes. Over the weekend, it was announced that Greek banks that had been closed for a fortnight to prevent a run on them were to open again this Monday, July 20. This follows the decision of the European Central Bank to increase Emergency Liquidity Assistance to Greece by €900m. Earlier last week the Greek government had voted tough austerity measures through the parliament along with a package of reforms imposed by the creditors, thanks mainly to support from opposition parties. More legislation is scheduled to go through this coming Wednesday.

So after weeks of drama, some semblance of normality seems to be returning. Mario Draghi, the head of the ECB, is hinting that subject to a proper bail-out being negotiated and Greece paying the €3.5bn it owes the ECB, Greek government bonds may be allowed to join the ECB’s Quantitative Easing (QE) programme.

In the short term, there can be no doubt that the package of austerity imposed on Greece will lead to a further decline in output

This has been a rollercoaster of a crisis. One could be excused for thinking that the last five months of negotiations since the Syriza-led coalition came to power in a snap election on January 25 had been a complete waste of time. The European creditors hardly budged at all, leaving the Greeks to perform humiliating U-turn after U-turn. Now the austerity measures, along with a mix of further tax increases and spending cuts for the next couple of years, look tougher than what had been on offer before. Some of the details will become clearer in further talks with the creditor institutions over the next month or so, so we won’t get a definitive picture of the impact until then.

There is no clear understanding of where Greece will be in a year or two, although the reform process should help. But the episode has shaken Greece politically.  Prime minister Alexis Tsipras, who despite everything is still seen by most Greeks as the only credible leader, has sacked those left wing ministers in his government who opposed the package, including his popular finance minister, Yanis Varoufakis.

New elections are being rumoured for the autumn to enable Tsipras to consolidate his position. A more centre-left coalition seems the likely result, which would at least ensure a measure of stability. But his priority will have to be the economy.

The Europeans talk about lack of trust in the Tsipras government, but Greeks whose incomes have been slashed over the last six years feel they can’t trust their fellow Europeans

In the short term, there can be no doubt that the package of austerity imposed on Greece will lead to a further decline in output. Instead of a forecast 3% GDP rise this year, the likelihood is of at least a 3% fall. Tourism receipts which had looked set to overtake last year’s levels have been hit by cancellations, with would-be tourists worried about access to banks and ATMs and even the availability of basic items.

Trade has been hit by capital controls, and more businesses have gone to the wall. It still isn’t clear what Greece’s European creditors had in mind when they failed to support the previous centre-right government’s policies last autumn, and thus helped to bring about the country’s  political and existential crisis. In any case, the result has been that the recovery process started last year has suffered a serious setback.

The Greeks feel badly treated – worse, humiliated. The Europeans talk about lack of trust in the Tsipras government, but Greeks whose incomes have been slashed over the last six years and who now face a serious humanitarian crisis in terms of poverty levels and lack of basic health provision feel they can’t trust their fellow Europeans.

Whatever eventually happens, Greece’s debt is certain to remain the subject of serious debate. For those people who have been leaving the country in droves, the worry is that Europe as a whole has shown itself to be short of much-needed vision, low on empathy, lacking in solidarity and its member states still as divided and inward-looking as ever.

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