It will take the Greek economy a long time to recover from the dislocation of the past week
By C.R. and S.N. | LONDON AND ATHENS
AFTER the party in Syntagma Square celebrating the landslide victory for the "no" campaign in Sunday's referendum comes the hangover. They went wild "because we are tired of everything, from all the lies, from paying for the rich, and from years of austerity, especially for young", as one partying Athenian told us. To be fair, with youth unemployment rates of over 50%, many have had little to celebrate for a long time. Young Greeks support the aggressive stance taken towards the country's lenders by Syriza and its leader, the Greek prime minister Alexis Tspiras, whose position in domestic politics has been strengthened as a result of the referendum.
But two days after the close of the polls the fact remains that Greece's real economy is in a mess. Capital controls imposed after Mr Tsipras called the referendum on June 26th have kept banks closed. Ordinary Greeks have been limited to cash withdrawals from ATMs of just €60 ($67) a day (which is now in effect down to €50 as smaller notes have disappeared from circulation). Many cash machines in Athens have run completely out of money.
Firms have also been hit particularly hard. Foreign bank transfers have been banned by the Greek government, with few exceptions. Greek credit is no longer accepted outside the country. That has hit firms that rely on foreign credit to import goods, as well as the Greek tourists who found themselves stranded when their credit cards stopped working. Supplies of food and some medicines are running short (see picture); a black market for cancer drugs has even emerged. As we reported on Sunday:
Greece relies almost entirely on foreign imports for its pharmaceutical supplies. But since capital controls imposed last Sunday brought the country’s banking system to a sudden halt, some suppliers have stopped delivering key medication because they cannot get paid...As things stand, she has another week’s worth of insulin in stock for diabetics but will then have to start turning her patients away. “Do you know what that means?” she asks, trying to keep a proud face, “Do you know what insulin does?”
Unsurprisingly, as a result, Greek economic growth—which began to falter shortly after Syriza came to power in January—has collapsed. Consumption has slumped by 70% since capital controls were imposed, according to the National Confederation of Hellenic Commerce, a business group. Individuals and firms are hoarding cash at the same time that essential goods are becoming unavailable—a toxic mix for any economy. The decision taken yesterday by the European Central Bank—to keep in place the cap on emergency lending to Greek banks, and to increase the discount applied on Greek bonds accepted as collateral—will tighten the short-run financial crunch.
Greece is running short of time; in the next few days either a new deal will be done that allows the ECB to reopen the liquidity spigots or bank failures will lead to Grexit. In either case, the damage done by this period of uncertainty and financial drought will be severe.
Economic history suggests that economies can be surprisingly resilient when hit by shocks, such as the temporary imposition of capital controls or a reduction in the supply capacity of the economy. The Cypriot economy, for instance, started to grow again just one year after it imposed capital controls in 2013. And as Britain's experience of general strikes indicates, temporary one- or two-week supply disruptions do not tend to have much impact on output after about a year. Leaving a single currency may also not be a complete disaster; countries such as Ireland (which left the British pound in 1928) have managed it before. And many countries ditching fixed-exchange rates—such as Britain in 1931 and 1992—exited long recessions almost immediately after they bit the bullet.
But there are three main reasons why economists think that the Greek economy will be wounded for far longer than other unfortunates. First, current uncertainty is probably damaging future demand as well as current demand; future tourist bookings have fallen by around a third since capital controls were imposed, for instance, which matters greatly given that the sector produces almost one-sixth of the country's GDP. And with summer bookings so vital, the likely conclusion of the crisis in early July could not have been timed worse. Second, most countries that experience fast recoveries from supply-side shocks and fixed-exchange rate exits are able to count on a solvent and liquid banking system, which is needed in order to fund investment and growth through loans.
But Greece's, which is about to collapse because of capital controls and deposit flight, is in a less comfortable position. The speedy introduction of new economic reforms post-Grexit, combined with capable macroeconomic management, could nonetheless cushion the Greek economy against the worst effects of exit and lead to a rapid bounceback. Yet few outside Greece reckon that the Syriza government has the inclination or competence to execute the transition smoothly and responsibly. Whatever Greece's political fate, its economy is bound to get much worse before it gets better.
