Greece's Bleak Future

Having finally emerged from a six-year depression that saw its economic output shrink by nearly 30%, Greece ended 2014 with the hope that its long national nightmare was coming to an end.  Thanks to a strong year for the country’s tourism sector in 2014, Greece even managed to record positive, if meager, economic growth last year (0.8%) and many economists expected the Greek economy to record economic growth rates of near 3% this year.  However, the creation of a radical government led by the far-left Syriza party and its leader, Prime Minister Alexis Tsipras, poisoned relations between Greece and its international lenders.  Given the fact that Greece cannot raise funds in capital markets, Greece is entirely dependent upon the good will of its international lenders and this good will appears to have been exhausted by the tactics used by Greece’s left-wing government.  This has put Prime Minister Tsipras in an impossible position, as he cannot agree to implement the reforms being demanded by the international lenders without alienating a large chunk of his party’s members and supporters.  However, without these reforms, lending to Greece will be cut off.

As was mentioned, the Greek economy has contracted by nearly 30% since 2007, an unprecedented fall for a developed economy since the aftermath of the Second World War.  To put this in perspective, consider the fact that, in 2007, Greece’s per capita GDP at PPP level is 40% below that of the United States and 21% below that of Germany, while they were 52% above that of Turkey.  This placed Greece squarely among the world’s developed economies, even if it was on the poorer end of this category.  Today, Greece’s per capita GDP at PPP level is 54% below that of the United States and 42% below that of Germany, while its advantage over Turkey’s per capita GDP level has shrunk to just 26%.  In fact, Greece’s place among the “developed” world in terms of economic development and wealth is already in question, with many economists now grouping Greece together with emerging markets such as Poland or Mexico.  Furthermore, many of Greece’s most talented people, particularly younger educated Greeks, have left the country in search of brighter futures, having given up hope of a Greek economic revival.

While there is little doubt as to the scale of Greece’s economic decline in recent years, there is much uncertainty over Greece’s financial and monetary future.  On the financial side, Greece is facing a default on its debts that can only be avoided if the country’s Syriza-led government adopts the austerity measures that it has vowed now to implement.  Without these reforms, Greece’s international lenders will cut off all funding, leaving Greece in default on its huge debts.  On the monetary side, Greece faces the prospect of having no choice but to drop the euro as its currency without a last-minute deal on its debts being reached.  Undoubtedly, this will cause great hardship for Greece and will lead to another deep recession that could last for years.  However, as an economy that looks more and more like an emerging market economy, the long-term impact of leaving the Eurozone is likely something that is necessary for Greece to have any hope for growth in the future, as this will dramatically boost Greece’s export competitiveness and its attractiveness as a tourist destination.