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The Globe and Mail

Greece still feels the pain, with no end in sight

In spite of Brexit, the rise of Marine Le Pen and her armies of euroskeptics and the threat of Donald Trump-inspired trade wars, the euro zone, if not on fire, is chugging along rather nicely. Well, most of the euro zone. Greece is the glaring exception.

In the euro zone as a whole, annualized growth, at 2 per cent, is stronger than that of the U.S. On Monday, we learned that the European economic sentiment indicator was at its highest level since the height of the crisis, while loan growth to households was up 2.2 per cent in January, year on year. Companies are hiring again.

And Greece? While not all of the economic numbers are dire, most are, and the big one – gross domestic product – is going in reverse again. According to Elstat, the Greek statistics office, GDP shrank 0.4 per cent in the last quarter of 2016 compared with the previous quarter. The economy is shedding jobs again and the banks' tally of non-performing loans is climbing.

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Nine years after the financial crisis that mutated at lightning speed into the debt crisis that sank Greece, the country is still under water. On Monday, the bailout monitors from the European Union and the International Monetary fund parachuted into Athens to figure out what Greece needs to do to hit its fiscal surplus targets and qualify for bailout funding that would allow the government to make a €7-billion ($9.7-billion) debt payment in July.

Greece doesn't need more austerity to qualify for more debt to make payments on debt that it can't afford to repay. Even the IMF agrees that Greece's debt has become unsustainable. Greece needs a massive debt reduction or it needs to exit the euro – Grexit – with the latter looking increasingly attractive.

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To be sure, the crisis that led to Greece's collapse was largely self-inflicted, but the pain has gone on way too long and both sides are at breaking point. Greece seems to be the embodiment of Albert Einstein's definition of insanity – doing the same thing over and over again and expecting different results. The endless cycle of austerity and bailout loans has been a catastrophe.

By now, 18 years after the introduction of the euro, it is clear that the common currency has been manna from heaven for only one country – Germany – moderately successful for several others, including the Netherlands, and a disaster for the Mediterranean countries, notably Greece, Portugal and Italy. The euro has acted as a devalued German mark, turning Germany into an export juggernaut.

Italy's per capital GDP has actually fallen by 0.4 per cent since 1999, according to calculations made by Bloomberg based on Eurostat figures. That's why the Five Star Movement, the main Italian opposition party that is polling roughly equally with the centre-left Democratic Party, has vowed to hold a referendum on the euro if it wins the next election.

Greece's experience with the euro has been miserable because it deprived the country of the traditional economic shock absorber – currency devaluation – giving Greece no choice but to inflict a direct devaluation on its citizens. That meant austerity – lower salaries, pensions and overall government spending and higher taxes. As the economy lost more than a quarter of its output, investment euros and dollars fled, banks had to be propped up and capital controls put in place.

How much of Greece's misery can blamed on the euro? A lot. We can deduce this by comparing Greece's postcrisis recovery (or lack thereof) to the recoveries of other countries that went through their own crises at various times in recent decades, among them Turkey, Thailand, Indonesia, Argentina and Brazil. They all recovered, often strongly – no pain, no gain. Greece did not. Its pain is intact, its gain elusive.

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According to IMF figures, the Greek economy boomed in both real terms and dollar-denominated terms in the precrisis years, when money was cheap and Greece was able to sell outlandish amounts of bonds with apparently no fear that its debt would become unsustainable. Greek governments had fudged the numbers for years, and the crisis exposed the sham that was Greece's economy. Between 2007 and 2013, Greece's real GDP per capita fell 26 per cent. The other crisis-struck countries experienced an average downturn of only 12 per cent.

As the Financial Times noted recently, on average, the economies of Turkey, Thailand, Indonesia, Argentina and Brazil outperformed Greece by an astounding 40 percentage points in the nine years after their own crises. Their relative outperformance is almost certainly due to currency depreciation. Unlike Greece, those countries did not see their consumption and investment spending get slaughtered, and their devalued currencies boosted exports.

What should Greece have done? In 2010, when it received the first of its three bailouts, its debt – now at a crushing 180 per cent of GDP – should have undergone a massive debt restructuring. Or it should have left the euro. German Finance Minister Wolfgang Schaueble recently said Greece would have to exit the euro if it wanted a debt "haircut," an apparent suggestion that Grexit is not unthinkable even though the European Central Bank insists the euro is irreversible.

Grexit probably would be economically gruesome. But what's worse – another decade of misery or a lot of pain now for the opportunity to use currency devaluation to restore growth?

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