Greek Economy Shrinks Another 6%



Greek Finance Minister Yiannis Stournaras
Greek Finance Minister Yiannis Stournaras

Coming on the heels of news that the country’s unemployment rate hit a record 27 percent, the Greek government got more bad news: the economy shrank 6 percent in the fourth quarter of 2012, according to the Hellenic Hellenic Statistical Authority (ELSTAT).

The data showed that the country’s recession, now in a sixth year, isn’t recovering, despite rosy projects from the government of Prime Minister Antonis Samaras that Greece will turn the corner by the end of the year and start getting out from under a crushing economic crisis and $460 billion in debt.

The preliminary data from ELSTAT confirms that 2012 was another year of deep recession for Greece, with the year’s three other quarters all showing the economy had contracted substantially. However, the rate of contraction in the fourth quarter was slightly slower then earlier in the year. In Q1, the economy shrank by 6.7 percent, in Q2 it was 6.4 percent and in Q3 it rose to 6.7 percent.

Combined, the data suggests that the Greek economy contracted by 6.4 percent in 2012, its fourth consecutive full year of recession. The Finance Ministry had forecast a contraction of 6.5 percent for 2012. The Troika of Greece’s lenders, the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) had expected the economy to shrink by 6 percent.

Since the country’s crisis began three years ago, Greece has lost nearly 25 percent of its GDP. Looking for good news anywhere, Finance Minister Yiannis Stournaras said he would ask the Troika whether its errors in estimating the effects of austerity, so-called “fiscal multipliers” that determine how much pay cuts, tax hikes and slashed pensions would be counter-productive, would let him change some of the tax rates.

In January, chief IMF economists Olivier Blanchard and Daniel Leigh, in their report Growth Forecast Errors and Fiscal Multipliers, said the agency badly miscalculated how much austerity would hurt the Greek economy instead of helping it. They said the agency’s figures were as much as 300 percent off target.

Stournaras said that acknowledgement of error might justify some adjustments to the debt-hit country’s austerity program. “The IMF must not get caught up in academic analyses,” Stournaras said in a press briefing following a meeting of Eurozone finance ministers in Brussels. Reports said that the Greek finance ministry was considering the possibility of proposing a reduction of indirect taxes because tax revenues were far less than expected despite big increases in the rate.

Stournaras was quickly shot down by European Commission finance chief Olli Rehn, who wrote to EU officials that Greece will be forced to stick to austerity even though the numbers show it is largely backfiring. “Recent studies on fiscal multipliers are of particularly limited use when it comes to the case of Greece,” said Rehn of the IMF report.

He told the newspaper Kathimerini that it was a “fundamental misreading of historical record” to suggest the Greek program had veered off track because it was badly designed, suggesting the IMF economists didn’t know what they were talking about. Rehn said that other factors affected the Greek program, such as “persistent uncertainty and problems with implementation” blaming successive Greek governments for failing to implement reforms faster, such as privatization.