From 2001 to 2007, year of the outbreak of the global financial crisis, the Greek economy grew by 4.3% on annual average, more than 1% above the Eurozone average growth rate. However, this growth, led by private consumption and infrastructure projects largely funded by the European Union, proved unsustainable over time.
Essentially, from 2001 to 2010, Greece compounded a budget deficit of 9% of GDP p.a. with a current account deficit of the same magnitude*. Shielded by its Euro membership, the country initially found it easy to finance these twin deficits by borrowing on the international capital markets. Unfortunately, the 2008 recession drove lenders to reassess the credit risk of a country combining fundamental structural weaknesses (poor productivity and macro-economic management in a fixed exchange rate regime) with a massive debt burden of 160% of GDP.
To work out its problems, Greece cannot devalue its currency and the prospect of its exit from the Euro is a leap into the unknown that few in Europe are-for the moment at least- ready to contemplate. The only option left is therefore the internal adjustment strategy currently pursued. This option is going to be all the more brutal and longstanding that it has been postponed for so long. The goal will be to (i) compress domestic demand, (ii) improve the country’s international competitiveness, (iii) carry out the necessary structural reforms and (iv) work out the debt burden.
The similarities of the Greek situation with the years preceding the Franc CFA devaluation of January 1994 are startling. For the Franc zone countries, this crisis brings back to the fore a number of fundamental questions, that high commodity prices and a strong Asian demand may have overlooked of late:
- Do we focus on the quality of growth as well as on its absolute level?
- How can we make the most of the fixed exchange rate regime of the Franc CFA?
- What is the roadmap for lifting the productivity of our economies?
- Is the debt being taken funding projects generating new and additional financial resources?
- How can we stay in control of our economic destiny and avoid our fate being dictated tomorrow by our creditors?
Providing answers to these questions today will ensure we are not taken by surprise, as Greece was in 2008, when the next economic headwinds rise.
* IMF World Economic Outlook 2010.