The dust has yet to settle after the referendum in Greece and making any longer term predictions is next to impossible, other than stating the obvious that the next days and weeks will bring capital controls and issuing of IOUs to meet public sector payments, similar in form to the ones that the State of California issued in 2009.
Why the “no” vote?
Some observers and analysts are apparently surprised that the “no” vote came largely from the young Greeks while the older generation (those aged 55+) voted in favor of accepting the creditors’ proposal (www.keeptalkinggreece.com). This is, however, less of an enigma, if you consider it from the inter-generation contract perspective, a concept put forward by the historian Niall Ferguson. Greece is an extreme example of a broken intergenerational contract where the older ones have benefited greatly at the expense of destroyed prospects for the young generation. To give just some examples, pensions in Greece have been among the most generous in the EU while youth unemployment is now at 50%. Thus, even given an agreement with the creditors, the young generation in Greece would inherit a pile of debt while an improvement in the economic conditions and job prospects is nowhere near guaranteed. Looking from this perspective, a “no” from the young is understandable.
The Greek debt burden: high, but below that of some other EU countries
At the same time the Greek public debt is not the key problem facing Greece. It is true that Greece’s debt to GDP ratio remains among the highest in the world even after significant debt restructuring a few years ago. At the same time debt servicing costs are moderate due to most of the debt being from institutional lenders at highly subsidized rates. In fact, the debt service burden in Greece last year was below that in Italy, Portugal or Hungary – all countries with significantly lower public debt levels (see below). The paradox of the situation is that even if Greece manages to reduce its public debt burden significantly, but has to start servicing it at market rates, it will end up paying interest that is as high as or even higher than what it paid last year.
A relatively closed economy
One of the key issues in Greece is the relatively closed nature of its economy (see the chart below). Greece is among the least open economies in the EU while being relatively small. Without a significant increase in openness Greece cannot hope to “export itself out” of its current predicament. In one of our previous posts we analyzed the new competitive situation in the EU after enlargement in 2004 and 2007 and concluded that most new member states have successfully increased their exports, some of them by becoming suppliers of intermediate goods to Germany. Some of the old member states such as Greece appear to be “stuck in the middle” – they have not been successful in unlocking global export opportunities themselves while at the same time they have failed to establish themselves as suppliers of intermediate goods in the global value chains (Strazds and Grennes). Raising the degree of openness in Greece would most probably mean that new export-oriented companies or even whole new industries would have to emerge and that could only be a gradual process. At the same time explanatory power of the longer term correlation between ULC deflated REERs and export performance is low. Other aspects of competitiveness are more important.
In the longer term the income levels that a country can enjoy are strongly dependent on the competitiveness of its economy. The chart below shows a very high correlation between the World Economic Forum’s Global Competitiveness Index (GCI) and the GDP per capita among EU countries. We can see that currently the competitiveness metrics of Greece are the lowest in the EU while its income per capita level is roughly at the level of Portugal, which has a higher GCI score. Thus, there are only two options – a significant reform package to boost competitiveness or reduced income levels to bring them down in line with the current level of competitiveness.