An incredible turnaround

Greece's decade of recovery vindicates austerity

The recent elections in Greece, in which the conservative New Democracy Party was re-elected, have underlined how far the country has come over the past decade. It was the most vulnerable of all the eurozone countries when that currency union drifted into crisis. It was the target of a massive — and controversial — bailout from the International Monetary Fund. Between 2010, at the onset of the crisis, and 2013, one-third of Greece’s gross domestic product (GDP) was wiped out. It might be more accurate to say that this one-third of GDP was, in fact, imaginary — driven by borrowings, a real estate bubble, and unrealistic expectations of the future. The country was then wracked by extremist left- and right-wing politics, the rapid decline of the moderate left-of-centre socialist party Pasok, and a rigorous austerity programme.

It is worth noting that this traditional recipe for a country in crisis — bailouts, austerity, restructuring, and business-friendly policies — have worked remarkably well in Greece’s case. Private investment is still relatively low. Only last month did the minimum wage return to pre-crisis levels, and many Greeks are out of the job market. But the latter, at least, is not out of line with the rest of the euro zone. The other macro numbers, however, are startling to those who have not been paying attention. Growth in Greece is 3-3.5 per cent, as compared to a eurozone average that is below half a percentage point. Its fiscal deficit is a full two percentage points below the rest of the euro zone. Inflation is the fourth-lowest in the euro zone, and falling rapidly. The government has painstakingly rebuilt the country’s reputation in the broader markets.

Borrowing costs are still high but lower than expected. After the election results, analysts noted that some Greek bond yields dipped below the United Kingdom’s equivalent paper. Incredibly, many expect that the country’s debt could return to investment grade over the course of this year. This is a remarkable turnaround, and a complete vindication of traditional macro-economics and for the structural adjustment programmes that were so harshly criticised a decade ago. The notion that the euro itself was a poorly designed programme condemned to inevitable failure has also been revealed to be nothing more than unjustifiable pessimism.

That New Democracy somehow managed to return to power — albeit without a majority, after a change in the electoral mechanism — is, therefore, not entirely surprising. The government has stayed the course, and even managed to reduce taxes in order to stimulate consumer spending and investment. Yet that is not the entire story. The government has also introduced illiberal policies inspired by Hungary and Turkey, squeezing non-governmental organisations and other sources of dissent. Press freedom in the country is ranked as being among the poorest in the European Union. And harsh measures have been taken against migrants and refugees. The government says such criticism is overstated, and outside investors assume that this is a small price to pay for a return to stability in what was once Europe’s basket case. But it is never wise to replace an economic tinderbox with a political one. The biggest threats to Greece’s recovery today are political.