JENS BASTIAN – Don’t Forget the Real Economy

Published in BUSINESS PARTNERS / MARCH-APRIL 2010 /page 6, OBSERVATORY

WHILE THE POLITICAL AUTHORITIES IN GREECE CONTINUE TO SEARCH FOR SOLUTIONS TO THE COUNTRY’S FISCAL AND PUBLIC DEBT CRISES, THE EFFECTS OF  THE DOWNTURN ARE INCREASINGLY BECOMING VISIBLE IN THE REAL ECONOMY
Indeed, the focus on spending cuts, allowance reductions and wage restraint places a high degree of attention on the immediate challenges and possible solutions to the current crisis. But what about the real economy, its performance during the past year, and the outlook for 2010?
A number of economic indicators point to the severity of the emerging situation and the depth of the challenge. Greece is consistently losing economic competitiveness in key economic sectors. While it may be possible to achieve some level of fiscal deficit reduction and bring down debt ratios in the course of 2010/11, the country’’s economy could risk ending up confirming the medical assessment: “operation successful,patient dead”.
There are serious underlying problems in the economy, which have only magnified in reaction to the fiscal and public debt crises. Consider five indicators for 2009:
- Greek exports declined by 17.8 percent
- The current account deficit reached 11.2 percent of GDP
- Foreign direct investment in Greece dropped by 21.3 percent
- Receipts from tourism declined 13 percent, from shipping by 7.8 percent
These indicators have considerable impact on the government’s fiscal revenue raising capacity, employment levels in sectors such as tourism and shipping as well as their overall contribution to annual GDP performance for 2010 and beyond.
Any country having to confront the magnitude of fiscal and public debt burdens as Greece does would try to limit the adverse consequences on the real economy. But the numbers for 2009 suggest that this is proving almost impossible to achieve. And the outlook for 2010 does not offer any consolation or a prospective turnaround.
Furthermore, the absence of resources for stimulus spending in areas most needed—higher education, green technology and public infrastructure investment—leaves the country’s real economy at a crossroads. Existing imbalances in the labor market cannot be corrected and corporate investment is delayed because government resources cannot supplement specific private sector initiatives.
Most alarmingly are the consequences on a younger generation of labor market entrants and business innovators in Athens, Thessaloniki and elsewhere. What prospects can they expect? What conclusions should they draw from the fact that, for months, every evening news bulletin suggests more cuts, rising costs and higher debt? Should they stay and get involved or vote with their feet, using the exit option to explore opportunities elsewhere? The risk of contributing to a brain drain of highly educated, motivated and talented young people is real and has already begun.
These developments in the real economy could initially escape the radar of public attention. But over the medium term they cannot avoid being addressed by the political authorities and economic elites. Fundamental issues are at stake: the nature and configuration of two contracts (i) the social contract, and (ii) the inter-generational arrangements in Greek society.
Moreover, regaining economic competitiveness rests not only on sound fiscal policy making and disciplined public debt management. It also entads targeted and efficient investments in minds and bricks, roads and business infrastructure as much as in universities and start up finance for young entrepreneurs.
Does the Papandreou government have the resources and strategic focus for such endeavors? Only time will tell. But there is no time to lose to start focusing on the challenges at hand for the real economy in Greece.