Greece’s transformation from economic basket case to European growth tiger has been quite something to behold for anyone whose nightmares still feature Yanis Varoufakis playing the piano.
Earlier this week MainFT wrote about Greece’s turnaround, which has taken it from the world’s biggest debt default in 2012 to the cusp of an investment grade credit rating. Even The Economist is now calling it a European success story.
Not to be outdone by the media, Barclays analysts today published a big report on Greece arguing that it is on the verge of a “third economic megacycle”, irrespective of who wins next week’s general election:
Greece is not a typical economy that goes through 7-8 year cycles, at least not in a way that is impactful for observers outside Greece and investors. Instead, its post-WW2 economic history has been marked by two megacycles, deeply linked to structural forces and political choices.
Here’s Barclays’ telling of the broad brushes of Greek economic history since WWII, and its reasoning behind predicting another golden era:
The first megacycle . ..
The first megacycle took place between the 1950s and the mid-1970s. In 1950, Greece was coming out of its bloodiest decade in history. What with World War 2, an interwar famine and a protracted deadly post-war civil conflict, Greece lost one of the largest shares of its population during the 1940s globally.
In the aftermath, the Greek economy was devastated. In the months before the civil war had even started, former US Emissary to Greece Paul Porter wrote: “Today an almost forgotten American mission has got to perform a miracle . . . The miracle is to save Greece from economic disintegration . . . The whole country, from top to bottom is in the grip of a grey, unrelieved, profound lack of faith in the future . . .”. Even after the end of the civil war, Figure 1 shows that life expectancy in Greece was low — a result of economic strain and poor healthcare and sanitation conditions.
The arrival of foreign aid — mainly as a result of the Marshall Plan — coupled with protectionist industrial and foreign exchange policies, as well as foreign economic supervision, produced an economic miracle: Greece, albeit from a low base, posted years of growth rates seen mainly in rapid growth emerging economies of the time such as South Korea. It is estimated that Greece received a sum of $700mn, the sixth largest beneficiary of the ‘European Recovery Program’.
Greek living conditions had started to resemble those in modern western societies as early as the mid-1970s.
. . . then a protracted slump preceding the second megacycle
This first megacycle was followed by a protracted slump in activity, which lasted until the early 90s. Despite improved living conditions, politics were exceptionally unstable and democratic institutions frail. After the collapse of the Greek military dictatorship in the aftermath of the Cyprus crisis, Greek politicians decided to accelerate Greece’s EU entry, despite clear economic fragilities. The thinking was deeply political, as the EU was seen as a long-term anchor for democratic institutions (which indeed it became).
The lifting of industrial policies and protectionism (coupled with global oil and inflation shocks) led to a process widely known as ‘premature de-industrialisation’. The tradeable sector had grown mostly to attend the needs of the rapidly growing domestic economy and by no means was ready to compete in international markets. The combination of shocks led the traded sector into crisis — parts of it shrinking and other parts nationalised as part of a broader rescue plan.
Equally, however, this period laid the ground for Greece’s second megacycle. The arrival of structural funds from the EU, depreciation of the drachma, deep infrastructure investment and convergence policies soon led to the resumption of growth. Starting intermittently from the mid-80s but accelerating in earnest after the signing of the Maastricht Treaty in 1992, the Greek economy had grown more than five-fold as a share of the German economy by 2008.
At the end of this second megacycle, Greece had built substantial imbalances. Reliant on increasing amounts of government borrowing and external funding, operating at an uncompetitive cost level and consuming an unreasonable share of potential income, the economy was setting itself up for the 2010-2019 collapse, which is a relatively fresh market memory.
Again, as a share of the German economy, the Greek economy almost halved over a decade, including in nominal terms.
A potential third megacycle
Today, we think Greece has the opportunity for a third megacycle given three key dynamics:
1. Global services are becoming more tradeable, giving Greece a good chance to build an internationally competitive sector for the first time in its post-war history. Specifically, global trade in services are increasingly tradeable and are outperforming goods in terms of global trade growth (particularly if we exclude the one-off COVID-19 boom in goods trading).
2. This trend accelerated during the years of the Greek crisis and Greece is now catching up to it. Services constitute a good 75-80% of GDP for Greece. Greece is hence much more likely to be competitive in its areas of comparative advantage (tourism, real estate, transportation, IT, clean energy, healthcare) than to build a new auto manufacturing industry.
3. The issues facing Europe as a whole (energy security, energy transition, protectionism from China and the US) are reducing the focus on intra-European budget frictions and introducing a new focus on cross-EU policies set to address the challenges ahead.
4. Greece is starting from a low level of activity (a large output gap), with much fewer imbalances than in the past, benefiting from structural reforms and infrastructure investment and in receipt of NGEU funds, which in their current form will be levered to reach up to €60bn — which is extremely large in the context of the size of the Greek economy (c.€200bn).
Can Greece capitalize on these dynamics, given its many institutional and cost disadvantages? . . . FDI in both manufacturing and services [have spiked] in the last two years. There is clearly a sense that Greece is directly investable to a greater extent than in its recent past, and certain big deals in the technology and payments sector are pointing that way. In consequence, there seems to be more than just COVID-related growth base effects in Greece’s rapid post-pandemic recovery. Sustaining this momentum will be key to entering yet another multi-year high-growth megacycle.
The incumbent government should also be credited for this surge in investment — market confidence is a sign of investor-friendly policies. It is thus no accident that many rating agencies are waiting for the election result and its implications for political stability and reform momentum before a critical potential upgrade to investment grade.
As we discuss below, the election is not risk free, but we believe the risks are not too likely nor unmanageable. Overall, we still see Greek convergence to other highly rated peripheral bond markets (eg, Portugal) as a key investment thesis for 2023.
At this point a lot of people often point out (not unreasonably) that a bounce for Greece’s economy after getting annihilated for the better part of a decade is nothing to celebrate. Incomes remain far below where they were in 2010, and life expectancy has fallen.
But tbqh 2010 is arguably a fake starting point.
Not to relitigate old debates, but is there is no plausible, real-world scenario where the consequences of Greece’s economic, political and financial decisions leading up to that point (and many afterwards) wouldn’t have been painful anyway.
For now, let’s just be happy that Greece appears to be on the mend?
Further listening:— FTAV meets Varoufakis (Alphachat, 2019)
