THE Greek economy is having a torrid time and there is no end in sight. Unemployment is over 25%, GDP has fallen by about a quarter since 2007, and the latest purchasing managers’ survey of manufacturers shows the economy plummeted as the banking system shut down.
The Greek government is reluctantly applying the reform and austerity measures stipulated by its creditors. Despite an anti-austerity referendum vote, Tsipras has chosen the least bad of two options: accept the creditor conditions, or leave the euro. The government has concluded that Greece needs to stay in the euro to maintain any economic stability. That means the country has to accept the terms and conditions necessary to avoid a “Grexit” and a damaging debt default.
Greece faces difficult years ahead, while it implements the policy measures needed to turn its economy around. There must probably be a further write-off of government debt, which is now mostly held by other European governments, the ECB and the IMF. But Greece’s partners will not countenance a further write-off until they see evidence of restructuring and reform. It is not clear the current government will carry this through, so further elections may be necessary before Greece gets on the right economic track.
For Greeks, these are worrying times. But elsewhere in Europe, prospects are brightening. The population of Greece is just over 11 million, about 2% of the total for the EU (now above 500 million). Its GDP is just over 1% of the EU total. It ranks 18th out of 28 in its contribution to the EU economy. Greece is not big enough in its own right to change the economic dials across the EU.
A big worry in 2011/12 was that there would be a domino effect, with problems in Greece affecting other economies – Spain, Portugal and Ireland. But the situation is now different. Ireland has rebounded with GDP up 6.5% on a year ago in the first quarter of this year. The Spanish economy is projected to grow by 3-3.5% this year and unemployment is falling faster than in any other major European economy. Growth in Portugal is less strong, but it should grow by 1.5-2% this year.
And other sources of strength are emerging. The UK economy is performing well, with GDP up 2.6% on a year ago in the second quarter. It could be the best-performing G7 economy this year. German growth prospects are positive; we are projecting 1.7% growth. But in the post-crisis New Normal, anything close to 2% growth is a good performance in a major western economy.
Eastern Europe is powering ahead. In the past year, GDP has risen by 4.1% in Romania, 4% in the Czech Republic, 3.7% in Poland, 3.3% in Hungary, 3.1% in Slovakia and 3% in Slovenia. If we add these together, their combined GDP is more than $1 trillion. They are also home to 85 million people, more than Germany. Eastern Europe is a market and a potential powerhouse for growth.
There are other bright spots. Swedish GDP is 2.6% up on a year ago and the output of the Dutch economy has risen by 2.5%. Two substantial European economies are underperforming: France and Italy. But there are some signs of improvement. Last month, the purchasing managers’ survey of Italian manufacturers showed the best results for more than four years.
Three main factors are driving the economy: a weaker euro, which aids competitiveness; a boost to consumer purchasing power from a lower oil price and near-zero inflation; and stimulatory polices from the European Central Bank, which has recently embarked on quantitative easing.
The problems in Greece are likely to take a few years to resolve, but that should not be a surprise. The good news is that the broader EU economy is looking stronger and should not be dragged down by the crisis. We should stop talking about the euro crisis; the euro appears to have survived. The challenge now lies with the Greek government: to implement long overdue economic restructuring and find a path back to economic growth.
Andrew Sentance is senior economic adviser at PwC and a former member on the Bank of England’s Monetary Policy Committee