Greece faces a difficult task in minimizing effects of global crisis
The Greek economy has navigated the troubled waters of the international financial crisis much better than its peers in the eurozone and elsewhere but it will feel the impact more than estimated a few months ago, as growth momentum is receding. Still, much depends on the success of the US Treasury’s new plan to avert a credit freeze, which could have brought the largest economy in the world to its knees, causing havoc in world financial markets and the global economy. History teaches that even if the US Treasury is successful this time around, it will take months before the economy can pull out of its doldrums. For the economies of Europe and the rest of the world, this means their biggest trading partner, the USA, will continue to be a drag on world growth. Even the relatively small Greek economy, which exports less than 5 percent of its goods and services to the USA, will be affected. Some 60 percent of Greek exports head to European Union countries which have felt or have started feeling the fallout from the global financial crisis and the weakness of the US economy. In addition, receipts from tourism and shipping will be hit. There is no question the effect will be severe if the US Treasury’s new plan fails and the largest economy in the world slides into recession, pulling the rest of the world with it. A potential source of relief may be the slide of the euro against the dollar but the effect is going to be very little for two reasons. Perhaps the only favorable effect on the Greek economy, namely on the trade balance and inflation, is the sharp drop in the international price of oil to below $100 from $146 per barrel in mid-July. Assuming this is maintained, that is going to lower the country’s oil bill and contribute to a decline in inflation. It is also going to have a dampening effect on eurozone inflation. This gives greater freedom to the European Central Bank to lower its key interest rates, assuming the 10-trillion-euro economy slows further in the months ahead, as many economists predict. However, unless the financial crisis recedes fast enough for money and bond markets to normalize, Greece will continue to pay an elevated premium vis-a-vis core eurozone countries to borrow medium- and long-term funds. This is because the crisis has increased risk aversion, prompting investors to ask for greater compensation when lending to small, peripheral countries such as Greece with a sizable budget deficit. This means the budget’s interest expenses are more likely to rise than stabilize or fall in 2009. The same is true of banks and other Greek corporations. They will continue to borrow at higher interest rates even if wholesale markets open following the US Treasury’s new plan to restore confidence among lenders. This means they will try to apply tougher criteria for lending and pass on the higher cost to borrowers, especially corporations and in new mortgages. This, coupled with tax measures to boost budget revenues this year and next, should hold consumption spending to less than 3 percent in the next two or three quarters. Other factors point to this as well, such as the negative sentiment from the international financial crisis, the negative wealth effect from the falling bourse, a stable to easier property market and the adverse impact on consumer psychology by the tax measures the government recently unveiled. This spells trouble for Greek economic growth moving forward, especially since there may be no help for the gross domestic product from net exports. Of course, we are not talking of the something close to 1 percent growth predicted for the eurozone as a whole in 2009. However, taking into account the fact that the Greeks have become accustomed to growth rates of 3.5 percent or better for the last 12 years, even a respectful 2.8 percent growth will look and feel like a recession to many. Still, there is one ray of hope for the economy which could end up growing by more than 3 percent next years even as the effects of the world financial crisis are being felt more and more. This is investment spending. Greece could count on investment expenditure, assuming many projects, some of which are co-financed by the EU, get off the ground. This could take up part of the slack left by consumer spending. Undoubtedly, the financial crisis is going to weaken the local economy more than thought a few months ago, even if the latest US plan for stabilizing the markets succeeds. The key to the degree of weakness will be the country’s ability to boost investment spending.
