The five challenges for the Greek economy

By Tasos Dasopoulos

In a “vise” that forms, on the one hand, the need to support households and businesses and, on the other hand, Greece not to deviate from its fiscal targets this year, is the financial staff watching the international environment is deteriorating rapidly.

The recent decisions taken by both the European Commission and the Eurogroup form a suffocating framework. The decision to extend fiscal flexibility to 2023 will be implemented under conditions: Highly indebted countries such as Greece, Italy, Spain, Portugal and others with debt over 100% of their GDP (e.g. France or Belgium) will be allowed to increase their spending but not above the real growth rate of their economy.

At the same time, both the Commission and the ECB continue to review both inflation and EU growth. and the Eurozone. The downward revision by 1.5% (from 4.3% to 2.8%) for 2022 that the Commission proceeded last week, according to diplomatic sources from Brussels, is considered not to be the last. Asked whether Europe was facing the spectrum of recession, the same sources stressed that everything would depend on how the war in Ukraine unfolds, which now threatens Europe’s energy efficiency. On the other hand, despite the unfavorable situation, Germany returned to the EU fiscal situation. and demanded that the expediency of extending the overall escape clause for 2023 be reconsidered in September. At the same time, the Commission estimates European inflation at 6% for this year, while sources within the ECB consider 7% to be just as likely.

The five challenges

Given these developments, the executives of the financial staff are called to make decisions for further support of the economy, having to face five serious challenges:

1. The level of inflation. The official forecast for inflation to rise to 5.6% can be revised upwards if there is a serious problem with the supply of energy products and / or food due to the war in Ukraine further gnawing on disposable incomes. The first crash test will be the final decisions , for the detoxification of the EU from Russian oil.

2. The continuing slide of the euro. The Fed launched the intervention rate hikes earlier than the ECB, which resulted in the dollar falling to 1: 1. This, in addition to being an additional factor in increasing prices for fuel, raw materials and food, is a challenge for importing countries such as Greece for their external deficit. Given that for us the value of imports is twice the value of exports, a devalued euro will result in the widening of the external deficit (ie the current account deficit). The Commission forecasts for Greece a deficit of over 8% of GDP in 2022 and over 6.5% of GDP for 2023.

3. The increase of interest rates by the ECB. The increase of interest rates by the Central Bank of the euro from July, may mitigate the slippage of the euro and inflation, but will create other problems for Greece. Along with the increase in government borrowing costs, we will also have increases in the lending rates of commercial banks to households and businesses. This will double (along with the high inflation) the consumption but also the investments that have started in our country and will leave its “imprint” on the growth rate of the EU. and Greece. Especially for our country, the forecast for growth this year at 3.1% from conservative can become optimistic.

4. Adherence to budgetary targets. The involvement and informal supervision that Germany and its satellites will have in the fiscal course of countries with high debt such as Greece will be another pressure for the financial staff. The primary deficit target has already been revised from the budget’s 1.4% of GDP to 2% of GDP to accommodate the 3.2 billion intervention in electricity tariffs. Debt is expected to fall to 180.5% of GDP this year from 193.3% of GDP in 2021. The upward revision of these targets will cause in addition to the criticism of our partners in the EU. and reactions from the market in a particularly sensitive period during which Greece is claiming the investment grade.

5. The need to support the real economy. The spectacular recovery of the economy in 2021 with growth of 8.3% is largely due to the support measures that reached 43 billion euros in the two years 2020-2021. With the explosion of inflation, Greece has taken the lead again and is implementing support measures much higher than the European average. The challenge is to continue to support the real economy if we do not want to see a new private debt boom.

Measures by measure

With regard to support measures, the decision is not to affect the fiscal targets set, ie debt reduction. This means two things: The first is that the measures will be financed by the excess of tax revenues and not by new expensive borrowing (this would increase the debt) and secondly the margin for cost increase will come from any savings that already exist announced measures. A competent source of YPOIK stressed that the large, retroactive 3.2 billion intervention that has been announced for electricity is based on the fact that the price of natural gas will be around 100 euros per megawatt hour. Today the price of natural gas has fallen to 85 euros per megawatt hour. If he stays there, there will be a savings of around 450 million euros in the money that had been calculated and new interventions can be made to mitigate the increases in the prices of liquid fuels and there will be some financial aid for the most financially vulnerable.