Greek anger at downgrade reflects enormity of task
By Ian Campbell
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
LONDON — It’s hard not to sympathise with Greece following Moody’s latest downgrade of the country. Like Sisyphus, the government has been pushing a heavy rock uphill. It has got somewhere, as Athens asserts. The fiscal deficit is 6 percentage points of GDP lower than it was. But the debt burden will probably prove too heavy and roll Greece back down into a crisis. The market quite rightly views a restructuring as highly likely. But while that would fix Greece’s debt problem, it would not in itself solve the country’s competitiveness and growth challenges.
Greece’s problem is that it needs a further fiscal adjustment of the same magnitude to that already made just to get close to balance. Even that would not really be enough. Greece needs to be recording fiscal surpluses so that savings can permit the country to reduce its debt burden of 150 percent of GDP.
But the inevitable side-effect of government cuts is that the economy will contract further. It shrunk by 4.5 percent in 2010. But this year the administration aims to implement further fiscal tightening to cut the deficit by 4.5 percent of GDP. As huge cuts eat into employment and domestic demand, the economy will get smaller and weaker, and the debt burden relatively heavier.
The only way to achieve Greece’s Sisyphean task is through rapid export growth. World trade made a strong recovery in 2010, facilitating that. But Greek exports did not participate much in the revival. Export earnings improved but volumes stagnated.
What Greece requires is a huge improvement in competitiveness which was lost in the early euro zone boom years as wages advanced. Devaluation isn’t an option, so wages must be cut. But that, in turn, will harm domestic demand, weakening growth and fiscal revenues still more.
This explains why there is still a broad expectation that the Greek debt burden is unbearable and must be lightened. Moody’s latest downgrade, and the market’s blasé reaction to it, reflects this. But even a debt restructuring would not bring the economy the competitiveness and growth it needs. Greece’s task is enormous, harder than it can accept.