Searching for silver in Greece’s storm clouds

April 29, 2010

Greece and the euro zone are still very much in the midst of a debt and deficit storm, with not just Athens but possibly Portugal and Spain at risk of being swept up in the maelstrom.

But that hasn’t stopped economists and political analysts looking for a silver lining in this unprecedented meltdown.

One positive is the impact the uncertainty is having on the euro, which has weakened sharply against the dollar and the British pound this year. That may not be very good for those in the United States or Britain holding euro-denominated assets, but it’s good for European exporters, whose goods become relatively less expensive for importers.

As Jennifer McKeown, a senior economist with Capital Economics, pointed out in a research note on Thursday, euro zone export orders are sharply up (by some counts they are now the highest in 10 years), while in April, euro zone manufacturing expanded at its fastest rate since November 2006, according to Markit.

That’s clearly a positive for the euro zone. The EU is the world’s largest trading bloc by value and exports are a key component of growth, particularly for the major economies such as Germany, France and Italy. Accountancy firm Ernst & Young said in a recent report that it expected net trade to contribute 0.7 percentage points to euro zone growth in 2010 — thereby accounting for three-quarters of the rise in overall GDP.

It is therefore perhaps not so surprising that economic and business sentiment in the euro zone rose strongly in April, despite the chaos in Greece and the volatility in financial markets across the region. 

But there is also a broader positive shakeout that could ensue from this crisis. It may take several years — at best — but economists and political analysts think it will force profound structural adjustments in several EU economies, including Greece, Portugal, Spain and possibly Italy.

If those countries are to improve their finances and protect themselves against the threat of future crises, they will essentially need to cut debt and structural deficits, tighten government spending, overhaul their state pension systems and labour policies, raise the retirement age, improve tax collection (to bolster the primary surplus) and generally follow a more U.S.-style neo-liberal economic model.

As Hugo Brady, an analyst with the Centre for European Reform, said this week: “The (EU) tried for 10 years on the basis of peer review to make structural changes to the EU economy and no one really listened… Now that simple message might get through.”

Such adjustments are dramatic and painful and don’t take place overnight. In the long-run they may produce sound and enduring economic benefits, but in the short-run they are likely to provoke a great deal of discomfort, not least among unionised labour — as the demonstrations on the streets of Athens and Lisbon have shown.

The crisis is far from over — even if it may be closer to its end than its beginning — and any positives may take years to emerge. But that doesn’t mean it’s not yet time to look for any filaments of silver in the still brewing clouds.

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