The EU’s trade deal with the US may not be its finest hour, but that doesn’t mean Europe is without success stories. Take Greece, for instance. Near bankrupt in 2010, the country is now one of the eurozone’s strongest growers. Unemployment has fallen sharply, and earlier this year, rating agencies upgraded Greek government bonds back to investment grade. Greece is once again deemed investable.
In both 2022 and 2023, The Economist named Greece the best-performing economy among a group of some 35 countries, based on metrics such as growth, inflation, employment and stock market performance. By contrast, the Netherlands hovers around 20th place. A remarkable comeback story, right?
Living beyond its means again?
Greece fell into crisis in 2008 after years of living well beyond its means, consuming far more than it produced. When foreign lenders stopped financing those deficits, a financial collapse became unavoidable. The IMF, EU and ECB stepped in, but long-term recovery required Greece to improve its productive capacity and align spending with its economic output. It’s not rocket science.
Yet the post-crisis recovery was painfully slow. Growth only exceeded 2 percent in 2018 and that from a very low base. This suggests that Greece’s earning power had improved only marginally. Post-pandemic, however, things suddenly picked up. Why?
Three drivers of the recovery
In my view, Greece’s recent success is underpinned by three key factors:
1. Tourism: European tourism rebounded strongly, benefiting Greece disproportionately. However, future growth is constrained by physical limits.
2. Debt restructuring: During the crisis, Greek government debt was heavily restructured. The average maturity is now around 18 years, and the interest charged by EU rescue funds is artificially low. Greece’s debt still stands at around 150 percent of GDP, far too high under market terms, but those terms don’t apply.
3. EU Recovery Fund: Greece is a major beneficiary of the EU’s post-pandemic recovery fund, eligible for up to EUR 36 billion, roughly 16 percent of GDP. In contrast, the Dutch allocation is just 0.5 percent of GDP. Over the past three years, Greece has received about EUR 6 billion per year in grants and loans, equivalent to 2.5 to 3 percent of GDP annually. If an external party were to inject EUR 25 billion per year into the Dutch economy, our growth would be higher too.
But this is demand-side stimulus. Is the supply side, Greece’s productive capacity, also improving?
Supply side still weak
That’s far less clear. I would argue that Greece is once again living beyond its means. The country still runs a current account deficit of about 5 percent of GDP. That’s smaller than in 2008, but still too large.
The long-term question is whether projects funded by the EU Recovery Fund actually boost Greece’s supply side. I remain sceptical. The funds are mainly used for government digitalisation and the energy transition. While more efficient public services are welcome, energy transition projects mostly involve replacing one system with another, not increasing productivity. If anything, early experience suggests the new energy system may raise structural costs.
A familiar risk for Europe
I don’t mean to be a pessimist, but I believe Greece will face renewed difficulties unless it changes course. Stimulating demand is easy. But in the long run, earning power is everything. It is the difference between output and consumption.
Unfortunately, this distinction still seems lost on many European policymakers.
Han de Jong is a former Chief Economist at ABN Amro and writes weekly for Investment Officer on economics and markets. More of his insights are available at Crystal Clear Economics.