Dionysis Chionis: The heavy shadow of deficits and the end of insouciance

After the second lockdown it seems that the recession will last much longer than originally predicted. The sudden deterioration of the outlook is expected to drastically change the “platform” of economic policy. Until a few weeks ago, the dominant narrative of economic policy was the formulation of policies to accelerate growth. Today more than ever we all realize that we need to focus on recession management policies.

However, immediately after the submission of the draft budget for 2021 and the “closing” of the economy, a completely different climate began to form. In principle, the starting point for economic activity in 2021 is much worse than we thought, as the estimate for a recession in 2020 will be revised on hand, approaching double digits. The Covid-19 pandemic managed to hit the EU hard and turn a cyclical crisis into a lasting crisis, highlighting institutional shortcomings.

Deflation re-emerged and showed that the liquidity trap in the European economy was here to stay. The resources of the Recovery Fund could be a substantial bulwark. However, the bureaucratic entanglements of the EU and the reluctance of the most important Member States do not allow the Fund to be disbursed, at least until 2021.

But even if we see the resources being disbursed very soon, it cannot be considered a panacea for the Greek economy. To make a comparison, let us consider that the pre-crisis public investment program amounted to 12.5 billion a year. The resources of the Recovery Fund and the NSRF 2 will be a total of € 70 billion, ie at best 10 billion per year for the next seven years.

The Greek economy is in a difficult position to have an interest-bearing payment program underway, most of which would be covered by the budget surplus. For example, in 2020, 2021 and 2022 a budget surplus of 5.7%, 6.7% and 7.3% of GDP were projected respectively. In other words, a budget surplus was projected to range from 10-14 billion per year. Instead, the Greek economy (at least for 2020 and 2021) will show a deficit of several billion.

Economic policy is on the table

So the question that arises is simple: who will cover the mixed financing needs of the Greek state that will exceed 20 billion per year? And let’s not hurry to say that the “cushion” of thirty and a half billion can be used, because of these, about 15 billion are under the control of the European Stability Mechanism (ESM) and relate exclusively to debt service . In addition, the grace period for managing public debt seems to be ending in 2022.

It should be noted that Greece, in the last 12 months has raised about 14 billion from the “markets”. The only buyer was the European Central Bank (ECB). Current low government interest rates from the markets and banks from the ECB cannot be sustained in the medium term.

All of the above call for an end to carelessness and the beginning of difficult questions, but also for an immediate change in the direction of economic policy both domestically and at EU level. Green growth and digital reform are good, but interest arrears must be paid. .

For those who made the predictions for the Greek economy during and after the memoranda, Kenneth Galbraith’s categorization probably applies. Galbraith distinguished “predictors” into two categories: those who do not know and those who do not know that they do not know. I want to believe that there is a third category of PSI inspirers who knew.