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Greek unproductivity is a threat to the whole euro area

6 Aug 2018 17:40|Marcin Lipka

“There is practically no chance that Greece will embark on a path of sustained economic growth. This will mean endless problems with debt service, the prospect of another bankruptcy and further impoverishment of the population. No budgetary savings or emergency aid will stop this process, as the Greek problem is completely different,” writes Marcin Lipka, Conotoxia Senior Analyst.

A report on Greece, published by the International Monetary Fund at the end of July, shows that the country managed to reduce its current account deficit to practically zero and significantly reduced its annual gap in public finances. However, the fundamental problem for Greece is not debt, but the complete lack of prospects for long-term GDP growth, as was confirmed by data from the past 50 years.

Dramatic half-century

Three main factors influence economic growth. The positive long-term contribution of two of them (capital expenditure and people) has less and less impact on GDP growth. Prosperity can only be provided by a third factor, Total Factor Productivity (TFP) growth.

TFP is defined in many ways, but it is mainly the result of technological and organisational development and innovation. Innovation does not just have to be about developing new services or products. This can be, for example, effective use of technology from abroad or improvement of current production processes.

The growing added value of higher TFP is also the result of better education, infrastructure or a legal framework. Unfortunately, over the past 47 years, according to the IMF, TFP has been growing at an alarmingly slow rate in Greece. The average annual growth rate was only 0.25%, which is a dramatic result. Average results in the euro area (excluding Greece) were slightly above 1% and in Ireland, 2.3%, almost 10 times higher than in Greece.

In view of the shrinking economy

Not only is TFP growing extremely slowly in Greece, but the Greek working-age population is also going to shrink by more than 30% between 2020 and 2060. The low productivity growth and the annual decline in labour resources of around 1% cause, that without reforms, the Greek economy will contract by 0.7% per annum in the scenario for the long term.

However, the IMF's basic forecasts sound optimistic. They say that in the next 40 years the labour force participation rate will increase by as much as 6 percentage points and will exceed the average in the eurozone, while TFP growth will reach 1% (four times more than in the last half century). If these incredibly positive assumptions were to come true from a historical point of view, the Greek economy would theoretically be able to recover.

In fact, it is extremely unlikely that these conditions will be met. Greece is characterised by weak institutions and unsatisfactory human capital performance (both OECD youth - PISA and adult - PIAAC tests). There is no reason to hope for foreign investment, especially as Greece is already relying on privatisation as much as it can. The extensive bureaucracy and a lack of willingness to carry out tax and labour market reforms also do not help.

Available data suggest that Hellada's economy will remain in permanent crisis, which will deepen especially in times of global economic slowdown. It will also pose a systemic threat to the euro area, regardless of whether creditors cancel part of their debt or just extend the period of free financing for Athens.


6 Aug 2018 17:40|Marcin Lipka

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