London - Entering the fifth year of recession, Greece is
writing its name in the book of unwanted records for one of the deepest
economic slumps of modern times.
The Greek economy shrank 6.8% in 2011, leaving the level of
output an estimated 16% below its pre-crisis peak. Unemployment has soared to
more than 20% from 7.7% in 2008.
Argentina suffered a 20% peak-to-trough drop in output as it
defaulted on its debts in 2001, while Latvia's economy contracted by 24%
because of the 2008 global financial crisis.
With more belt-tightening in store in return for a proposed
€130bn ($172bn) international bailout, Athens is on course to join their ranks
and possibly overtake them, said Uri Dadush, an economist with the Carnegie
Endowment, a Washington think tank.
"On the current path - which is not sustainable in my
view - we may very well see Greek GDP (gross domestic product) go down 25-30%,
which would be historically unprecedented. It's a disastrous crisis for
them," Dadush, a former senior World Bank official, said.
For ordinary Greeks, the outlook is dire. Some civil
servants have seen their salaries cut by half. Retirement before the age of 65
is a fading dream for those still in work. Some drugs are now in short supply.
Couples with children are being forced to move back in with their parents to
save money. And across Greece, businesses are closing every day.
A long nightmare
World Bank figures show that Russian output dropped 44%
between 1989 and 1998, dwarfing the 29%t drop in the United States during the
Great Depression.
But since Russia's economic reversal was compounded by the
breakup of the Soviet Union, analysts tend to exclude the episode when
examining recent recessions.
Comparing crises is like comparing apples and oranges. Every
country is different, economically and politically.
However, Greece stands out in one important respect: its
downturn has already lasted twice as long as the average crisis and yet there
is no end in sight, according to Mark Weisbrot, co-director of the Center for
Economic and Policy Research, a think tank in Washington.
"They're suffering. It's nasty," said Weisbrot,
who has studied the lessons to be learnt from economic crises in Latvia and
Argentina. "If you could say with a reasonable probability that the worst
was over, then that would be different. But you can't say that. They're in for
a long nightmare."
Athens has repeatedly frustrated the European Union, the
International Monetary Fund (IMF) and the European Central Bank - the troika -
by failing to implement the reforms it promised in exchange for its first
bailout for €110bn in 2010.
Apart from missing targets for reducing its budget deficit,
Greece has dragged its feet on laying off workers from its bloated public
sector, privatising state assets and opening up closed trades and professions
to competition.
Yet one critical measure, the primary budget balance, which
excludes interest payments, shows Athens has made serious adjustments by
raising value added taxes and cutting pensions, salaries and public services.
The primary balance was in deficit in 2009 to the tune of
10.4% of GDP. This year, it is projected to show a surplus of 0.2%.
"Although they're not given much credit for what
they've done, there are not many countries that have brought their primary
deficit down as quickly as Greece has," said Andrew Kenningham of Capital
Economics, a consultancy in London.
Running faster to stand still
And yet Greece will still have an overall budget deficit of
4.7% of GDP this year because of a huge interest bill.
This is estimated at 4.9% of GDP, rising to 6.3% of GDP in
2013, even assuming that a deal is clinched to write down the bonds owned by
Greece's private sector creditors by 70%.
To reduce the overall deficit, the EU and IMF are
prescribing an increase in the primary budget surplus to 5.0% of GDP in 2014
and 2015.
"What the troika is effectively working into its plans
is an adjustment in Greece that will go on for many years," Dadush said.
Weisbrot said the planned interest burden was the highest in
the world, except for Jamaica: "These guys are going to squeeze them
forever. There's no light at the end of the tunnel."
Figures compiled by Reuters show that government expenditure
and real disposable incomes in Greece have already fallen much further since
the onset of the crisis than in fellow euro members Portugal and Ireland, which
have also received EU/IMF bailouts.
Private consumption has also declined more steeply than it
did in Ireland. Yet the IMF and the EU have built into Greece's economic
programme an assumption that consumption will drop by a further 4.7% in 2012
and 1.4% in 2013.
Unemployment will still be at 18% in 2015.
And the risks - acknowledged by the IMF in its December
review of Greece's progress - are on the downside. If austerity crimps growth
and squeezes tax revenues, the budget deficit will be forced higher, requiring
a fresh round of belt-tightening.
That is what happened in 2011. The 6.8% drop in GDP reported
on Tuesday exceeded the 6.0% fall that the IMF had pencilled in as recently as
December. Which itself was a revision from an earlier forecast of a 4.5%
contraction.
To stay in the euro or quit?
Countries typically break out of such a vicious circle by
devaluing. Output and employment initially fall hard but recover rather
quickly, as the examples of Argentina, Russia and the countries hit by the
1997/98 Asian financial crisis showed.
Indonesia's currency fell by more than three-quarters after
it devalued. Swathes of the banking system were wiped out. Millions were
plunged into poverty. Yet its peak-to-trough drop in output was milder than
Greece's. Today, the country is thriving and enjoys, unlike Greece, an
investment grade rating.
These and other examples are keeping the question alive
whether Greece should quit the eurozone and devalue.
Ireland and Latvia, whose currency is pegged to the euro,
have shown that devaluation is not the only way out.
Competitiveness can also
be regained through budget and wage cuts, a so-called internal devaluation.
Portugal, Spain and Italy are ploughing the same furrow.
But Weisbrot believes Greece's plight is now so serious it
should take the risk and abandon the euro.
"My prediction is that if Greece left they would do
quite well, just like Argentina. They would have a brief crisis and would come
out of it and grow very rapidly," he said.
Zsolt Darvas, a researcher at Bruegel, an influential think tank
in Brussels, acknowledged that Greece could be facing one of the deepest falls
in output on record.
But he said the chances of Greece's quitting the euro were
low because of the chaos that would ensue.
Not only would the government go bankrupt as international
lenders withdrew aid, but banks and most of the private sector would collapse
as a steep devaluation of the "new drachma" would make it impossible
to service huge euro-denominated liabilities.
"So from a purely economic perspective, for Greece it
is still preferable to say inside the euro even if the suffering continues for
another five years or even longer," Darvas said.
Ultimately, though, he added, the question is one for the
Greek people and their politicians. How long will they put up with austerity?
Economic comparisons cannot answer the question.
Dadush, reflecting on the running battles between police and
rioters on Sunday as flames engulfed downtown Athens, said Greece had stared
into the abyss at the weekend.
"A lot of people were ready to jump. They didn't. But
give them another year or two of rising unemployment and so on and the
political configuration will move in that direction," he said.