After a Decade of Austerity the Greek Economy was Bouncing Back

By August of 2018 Greece was finally leaving behind a long grim period: eight years of grave austerity measures and continuous bailouts. The consequences of these years have been devastating for the Greek economy, with youth unemployment rising well over 50% at the peak of the crisis and GDP to debt ratio almost doubling within a decade. The summer of 2018 signaled — at least in theory — a new era for the Greek economy. It marked a turning point when Athens would not need to be any more under severe monitoring and the country could be self-funded by the tax revenue and government bonds traded in the global markets.

The Growing Optimism About Greece’s Economic Rebound in 2019

Predictions for the growth of the Greek economy became even more optimistic after the July 2019 elections, when the robust majority of the now ruling party of New Democracy indicated the termination of a prolonged period of political instability and the concluding marginalization of the in-country Euroscepticism and populism. Indeed, this optimism has been apparent in the Greek stock index that has reported an almost 30% rise since May 2019 in the aftermath of the EU elections. It was the first indicator of the major upcoming changes in the Greek political landscape — until February 2020, when the COVID-19 threat emerged.

Suddenly the decade-long efforts to revitalize the Greek economy seemed to be collapsing overnight.

COVID-19’s Impact on the Greek Economy So Far

Greece has promptly taken strict measures against the COVID-19 crisis and this strategy has proved to be fruitful so far. Shortly after the first reported case of COVID-19 in the city of Thessaloniki on February 26, the Greek government started imposing restrictions across all sectors — from education and public services to restaurants and commercial stores. The measures have been gradually escalating leading to a country-wide lockdown which started March 23. It should also be noted that commercial exchanges and day-to-day activities have been already dramatically reduced before the official imposition of the governmental lockdown. Even though the death toll in Greece remains quite low in Greece, 99 reported deaths as of the April 13, the implications about the impact on the economy are certainly worrying.

The Hellenic Federation of Enterprises (SEV) has assessed Greek business sentiment and concluded that approximately 90% of the entities under review have been already impacted by the crisis in one or the other way. The blow has been cross-sectoral and has overturned in less than a month the optimistic outlook that took years of rigorous measures and austerity policies to be achieved.

The Greek manufacturing sector fell to 42.5 points in the Purchase Manager Index (PMI) a sharp monthly drop of 13.7 points, the highest one since July 2015, when Greece has been on the verge of leaving Eurozone; the annual turnover expected to decrease by 60% by the end of the year. The real estate market will be also significantly affected; during the financial crisis, this was one of the most severely impacted sectors with numerous properties losing up to 50% of their market value in the peak of the crisis, compared to the pre-2008 levels.

Since 2016 the Greek property market has been gradually gaining the lost ground, with an approximate 7.5% growth in 2019 alone. The outlook for 2020 has been even more optimistic, as several lucrative investments in the construction and property sectors have been pre-announced. The COVID-19 pandemic has not only frozen those ambitious projects, but also created a vacuum in the property market, as the SMEs forced to shut down due to the counter-measures against the virus are not able to afford the running costs -including rent expenses- since they are not generating any revenue. Even though the Greek Government has already taken a series of measures to support business owners, the knock-on effect on the property market in the long term is almost certain according to industry experts. But further to the experts’ estimation, a simple walk around Athens historical center could be even more enlightening. In a matter of weeks, there has been a sharp increase in the number of flats to rent across some of the most sought-after districts of the country.

After this generic review, our analysis will now focus on two further fields, the most sensitive parameters of the Greek economy and those probably most affected by the ongoing global crisis: the tourism industry and the banking sector.

Tourism: the Heart of the Greek Economy is Facing Dire Threat

Should the economy of a developed EU country be based first and foremost upon the tourism industry? It’s a rather obvious question with an even more obvious answer. Greece has traditionally been famous as a unique and attractive tourist destination. The long-term austerity in the past decade has minimized even more the already limited industrial activity across Greece.

An overall restructure in the Greek professional and workforce landscape made the national economy even more dependent on tourism. Tourism provides a positive example of a sector that managed to survive and get stronger during the financial crisis but also showcases the lack of heavy industry and cross-sectional infrastructure across the Greek business framework. The tourism revenue has risen by 67% from 2010 to 2018, according to a report from the Bank of Greece.

The Greek Tourism Confederation (SETE), declared that the tourism sector in Greece contributed directly and indirectly to 30.9% of the GDP and covered the 25.9% of total employment in 2018, while the direct revenue from tourism reached 16 billion EUR on that year. This figure has been even higher in 2019, exceeding 18 bn EUR. This data indicates the significance of tourism for the Greek economy and it should be understandable why the COVID-19 outbreak could have devastating financial effects on Greece.

Now let’s have a look in the current impact of the pandemic. Athens International Airport reported a dramatic — though not surprising — 62% decline on international passengers compared to last year. This huge downturn took place in March, a month that normally the numbers on international traffic start rising significantly, pointing that the figures in April will be much lower. With the high-tourist season in Greece starting from April, many hotel and tourist property owners in some of the most attractive Greek destinations consider this season already lost. The revenue downturn due to the virus across the tourist sector will be unprecedented for Greece, as will be the consequences on the country’s economy.

Banks: the Nightmare of Non-Performing Loans Rises Again

Non-performing loans have probably been the Achilles’ heel of the Greek economy. Between 2016 and 2017, non-performing loans (NPLs) in Greece have been moving close to 50%, an unparalleled figure which indicates the extreme exposure of the Greek largest banks and the ensuing systemic risk for the Greek economy. Therefore, NPLs have been one of the top priorities for Greek administrations and the international supervisory mechanisms involved in the Greek financial landscape. Through extended write-offs and sales, the Greek systemic banks managed to lower the aforementioned figure close to 40% — approximately 70 billion EUR in real numbers — until the end of 2019 still an unacceptable amount of NPLs considering that the EU average is approximately 3%.

The Greek government has launched the ambitious so-called “Hercules Plan” aiming to massively sell further the huge amount of NPLs through securitization, in order the four systemic Greek banks could get rid of these “bad loans” and write them off their balance sheets. Even though the target to reduce the NPLs to 15 billion EUR has been exceptionally optimistic, the “Hercules Plan” could be seen as the only viable solution to sustain the Greek banking system within the Eurozone. The optimistic outlook and ambitions of the scheme have been swept away once the virus appeared. The time frame for the gradual decrease of the NPLs and specific operational procedures of the scheme will undoubtedly need to be streamlined, however, the risk of Heracles’ utter failure is increasing amidst the COVID-19 pandemic.

COVID-19 Countermeasures: a Shocking and Unforeseen Burden

The Greek government has announced a series of supportive actions to help the businesses and individuals affected by the COVID-19 countermeasures. Among these actions, there is an 800 EUR allowance to people who were forced to abstain from work, and numerous facilitations in terms of tax payments and social contributions. The measures adopted so far would require over 6 billion EUR in expenses, or almost the 3.5% of GDP according to the pre-crisis 2020 budget. The longer the country is hit by the crisis and remains in lockdown, the more this figure will rise reaching exponential levels on a monthly basis, considering the extended state expenditure to contain the crisis and the reduced revenue due to the limited business and commercial activity and the tax relief measures.

Insufficient European Response and the Looming Political Upheaval

When the scope and severity of the COVID-19 threat first started becoming evident, nine EU members (Belgium, France, Greece, Italy, Ireland, Luxembourg, Portugal, Slovenia and Spain) have proposed a plan to save the EU economies that would eventually be put at risk by the pandemic. A mutual bond to be supplied by the European Investment Bank and backed by all 19 Eurozone countries as a common entity. Such a decisive move would be the most appropriate and sufficient response to this unique challenge that the EU is currently facing. However, the “Frugal Four” have promptly rejected the only plan that could secure the integrity of the Union and the long-term fiscal sustainability of all the Member States. Greece would be most affected by another financial crisis across the EU, as the country was allegedly about to start getting back to normal after the year-longausterity.

Let’s remember that back in 2012, once the grave signs of the Greek financial crisis started becoming apparent, the International Monetary Fund questioned the viability of the Greek debt and declared that the only way for the debt to be sustainable in the mid-term would be to reach a 120% GDP-debt ratio until 2020. In the first months of 2012, IMF doubted that this target could be met and in a more realistic prediction suggested that by 2020 the ratio would be closer to 130%. Here we are now in 2020, with the Greek GDP-Debt ratio estimated to be approximately 167% by the end of the year, according to the pre-Covid-19 ambitious predictions. Such a comparison highlights where Greece is currently standing. We should also stress out that the present status quo could change if and when a vaccine or an efficient medicine against COVID-19 becomes widely available to the public; however, such a development should not be perceived as a panacea, considering the highly unpredictable nature of the virus, the likelihood of relapse among former patients and the expert warnings for a potential upcoming second wave of COVID-19 cases.

The 500 billion EUR rescue package approved in the latest Eurogroup is just a fraction of what EU currently needs. Instead of a pivotal plan to tackle an extraordinary crisis, the leaders of the Eurozone have decided to implement the same old -and failed- strategy of accumulating further debt to the Member States. Unless a diametrically different approach is adopted promptly, the build-up of external debt of several members, with Greece being the spearhead, will become non-viable in the mid-term and the very existence of the EU will be then put at risk. The 2008 financial crisis has brought radical changes in the Greek political landscape. The electoral power of the main establishment parties has been drastically decreased, reaching an almost 40% decline during the years of the crisis. At the same time political entities that were perceived to be at the extremes of the political spectrum, from left-wing to far-right parties with Euroscepticism being their mutual characteristic, managed to gain considerable power at a glance and played a significant role in the developments of the country.

Since 2019, as the hope of returning to some sort of normality has been building up, the political landscape has been gradually fitting again in the traditional Greek context. Political stability loves the feeling of economic prosperity – even if it is over-stressed or just a perception. After a decade of austerity Greek people have finally started being optimistic about the future; another more violent and definitely more unpredictable economic crisis right at that moment — due to the outbreak of a novel virus and the inefficiency of the European Institutions to appropriately manage this challenge — could have a shocking impact on society and lead to entirely restructuring the political landscape in a matter of months.