Bank of Greece: Recession Getting Worse, More Cuts Needed

ATHENS – Bank of Greece Governor George Provopoulos has given another dire warning about the country’s economy, foreseeing that the Gross Domestic Product (GDP) will shrink 5 percent this year and urged whomever wins the May 6 elections to make even more cost-cutting measures, although international lenders providing rescue loans have already said Greece needs at least $15 billion in savings.
He said the country’s deep recession, with 21.8 percent unemployment and the closing of more than 111,000 businesses because of austerity measures demanded by the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) is going to worsen.
Greece’s political landscape is fractured, with as many as nine parties expected to win seats in Parliament because of public fury against the harsh conditions set by the Troika in return for two bailouts of $325 billion to prop up the country’s failed economy. The major ruling parties of the PASOK Socialists and their otherwise bitter rivals in the New Democracy Conservatives, whose alternating rule over the past nearly 40 years has pushed Greece to near-ruin because they hired hundreds of thousands of unneeded workers in return for votes, have seen their popularity plummet because of their support for pay cuts, tax hikes, slashed pensions, cutting the minimum wage and the slated firing of 150,000 public workers.
New Democracy and PASOK are currently sharing power in an uneasy hybrid government overseen by former ECB Vice-President Lucas Papademos. They are still expected to finish in the top two parties in the vote but without enough support to win outright, which means they would either have to form another coalition or another election would be called. Both New Democracy leader Antonis Samaras and PASOK’s new leader Evangelos Venizelos, have rejected another coalition and have said they will adhere to the Draconian measures they supported but want to revise them. That drew a warning from the Troika that any attempts to tinker with reforms would lead to the money pipeline being shut off.
“Domestic and overseas conditions do not allow for the slightest complacency or relaxation … full readiness is required the very day after the election campaign ends,” Provopoulos told the bank’s annual general assembly. The EU had recently predicted a 4.75 percent reduction in Greek economic output this year but the austerity measures have led to worse-than-expected revenues, contracting the economy even further, making it tougher for the government to reduce the deficit.
Provopoulos urged parties to stick to Greece’s punishing austerity measures after the elections, warning that political uncertainty would have “particularly harmful” consequences for the economy. “If after the elections, the slightest doubt is cast on the will of the new government and society to carry out the (reform) program, today’s positive prospects will be reversed and the country will rapidly find itself in a particularly harmful situation,” Provopoulos said.
The expected 5 percent decline in the GDP is more than the 4.5 percent forecast just a month earlier. The economy shrank 6.9 percent last year. Provopoulos warned that Greece’s Eurozone membership was at stake if it failed to follow through on its pledges, especially after national elections. “If following the election doubts emerge about the new government and society’s will to implement the program, the current favorable prospects will reverse,” he said.
He projected that Greece’s current account gap, a key indicator reflecting eroded economic competitiveness, would shrink to 7.5 percent of GDP this year from 9.8 percent in 2011. In March the central bank forecast the gap would drop to 7 percent of GDP this year. “The expected drop in unit labor costs in 2012-13, coupled with the projected price trends will lead to a marked improvement in competitiveness, contributing to a rise in exports and import substitution,” he said.
Consumer inflation is seen slowing to 1.2 percent this year and may fall below 0.5 percent in 2013. Weak domestic demand, combined with downward wage pressures, have shrunk the country’s inflation differential with the other 16 countries in the Eurozone that use the euro. The central bank estimates that by the end of this year the economy will have regained up to three-quarters of competitiveness lost during 2001-09. Greece joined the euro in 2001 and enjoyed a consumption boom on lower borrowing costs.
Provopoulos said the fiscal shortfall had come down markedly but remained high. Last year Greece shrank its budget gap by 1.2 percentage points to 9.1 percent of GDP and aims for a 6.7 percent deficit this year. Austerity measures including income and property tax increases, a rise in value-added tax rates and cuts in wages and pensions, helped reduce the gap from 15.6 percent of GDP in 2009, when its debt crisis erupted. “The sought attainment of primary surpluses from 2013 is now achievable,” he said. Provopoulos also said private sector bank deposits had declined by more than $92.4 billion since the end of 2009, a sum equivalent to about one third of the country’s GDP, in a blow to the banking sector’s lending capacity. [Reuters]
(Sources: Kathimerini, Business Week, Reuters)