It is now eight years since Greece went into recession and six since it adopted a bailout strategy engineered by the IMF, the EU and the ECB. The SYRIZA government, elected in January 2015 with great hopes of rejecting austerity, has capitulated and is now applying the bailout policies. The economy is showing no signs of sustained recovery and has indeed returned to recession in 2015.The condition of the country in 2016, nevertheless, has been immeasurably exacerbated by a wave of refugees and migrants. Greece is essentially a transit country for people coming from Turkey and seeking to move to northern Europe; perhaps 800000 refugees and migrants came through in 2015. In February 2016, after pressure from Austria and other EU countries, the Greek borders were effectively sealed and camps of destitute people have begun to appear. Unless a humane and rational European solution is found in the coming few weeks, the social, economic and political pressures on exhausted Greece could prove intolerable, threatening its relationship with the EU.

State of the economy

The poor state of the Greek economy is apparent in the data released by ELSTAT, the Greek Statistical Authority, on 29 February. Setting aside an astonishing adjustment for the last quarter of 2015, which showed an extraordinary jump of 20% in fixed capital investment on a quarter-to-quarter basis, the Authority confirmed that Greek GDP had contracted by 0.3% in 2015. Consumption has strengthened a little in 2015, but investment has declined further, despite the extraordinary jump in the last quarter. Strikingly, exports have also declined in 2015.

Taking a longer term perspective, shown in figure 1, the country’s economy fell off a cliff in 2008, the fall accelerated in 2010 as catastrophic bailout policies were applied, and output stabilised in 2013. Since then the Greek economy has been effectively prostrate.

Figure 1.


Source: ELSTAT

The reasons for the collapse are perfectly clear, particularly following the application of bailout policies. Domestic demand was crushed as, initially, state expenditure was reduced and, subsequently, taxes were increased. The imposition of deep cuts in real wages compounded the decline of demand by reducing consumption. Enterprises responded by cutting investment, thus exacerbating the contraction of demand. The collapse of investment has been dramatic: in current prices, gross fixed capital formation fell from a peak of 63.2bn euro in 2007 to 17.3bn euro in 2016. The result has been enormous damage to the productive structure of Greece and a tremendous escalation of unemployment, currently standing at 25%. Finally, and contrary to much optimistic talk, exports failed entirely to take the mantle of demand. The current account has, nonetheless, recovered as the collapse of income has crushed imports.

Further austerity

In the midst of these disastrous conditions the lenders (EU, ECB and IMF) are insisting that Greece should continue with austerity policies and “reforms”. The aim is to ensure primary surpluses – rising to 3.5% in 2018 – thus being able to service the country’s national debt currently standing at 321.3bn euro, or 182% of GDP. To this purpose the SYRIZA government has already imposed substantial increases in VAT and is planning further cuts in public expenditure and further increases in taxes. To achieve the expenditure cuts the government has announced reductions in pension spending of 1.8bn, or 1% of GDP, in 2016. At the same time it is proposing a pension reform that would impose substantial increases in contributions on farmers and the self-employed.

Further complicating the picture is the recapitalisation of Greek banks in in November 2015, effectively selling them for a pittance to a variety of hedge funds and other speculators. Currently the banks hold perhaps 100bn euro of poorly performing loans that need to be dealt with, if credit is to start flowing again. A large proportion of the poor loans are owed by powerful enterprises that took advantage of close relations with banks and politicians to borrow with little screening and monitoring. Substantial volumes are also held by households and individuals who have been hit badly by the recession of the last eight years. Dealing with non-performing is an explosive issue, first, because household debt is often attached to housing thus raising the possibility of auctioning homes and, second, because restructuring enterprise debt would inevitably mean changing the balance of power in several sectors of the economy.

The combination of fresh austerity and weak banks has made attenuated the prospects of growth in the foreseeable future. Marginal tax rates for small and medium businesses at present could be as high as 50-60%. With high interest rates, poor credit availability and weak demand, it is unlikely that sustainable growth will resume. It is clear that Greece needs a targeted boost to domestic demand, but that is precisely what the bailout conditions prevent.

Indeed, the lenders are insisting on fiscal surpluses, “reforms” and reducing non-performing loans. The IMF is proving the hardest, but also the most lucid, among the lenders to Greece. In an article on the Fund’s website on 11 February, Poul Thomsen, who has effectively managed the Greek programme for years, has argued that pension reform is absolutely paramount, if the country is to make a primary surplus of 3.5% in 2018. Indeed, Thomsen seemed to think that for the surplus target to be met Greece would need far tougher austerity measures, possibly amounting to 4-5% of GDP by 2018. The country could avoid further austerity only if the target was dropped, which would mean receiving substantial debt relief. However, even the mention of debt relief is anathema to the EU, and especially to German politicians.

Urgent programme review

The hard position of the IMF and the reluctance of the EU to contemplate debt relief has afforded little option to the SYRIZA government but to push with austerity in 2016 and beyond. The government is under enormous pressure to implement austerity measures quickly since that is a condition for the successful review of the bailout programme by the “troika”. If the review is not satisfactory, bailout funds will not be released, thus making it very difficult for the government to service its debt, and possibly leading to a repeat of the crisis situation of 2015.

The debt payment obligations of the Greek government in the coming months, using the calculator of the Financial Times, are as follows:

Fig. 2 Debt repayments by the Greek government, bn Euro

Month Mar Apr May Jun Jul Aug Sep Oct Nov Dec
5.5 2.7 1.4 2.3 4.4 0 0.5 0 0 0.3


The bulk of the payments are for Treasury Bills typically funded by the Greek banks; they generate liquidity pressure for the economy but are normally easy to handle. However, the repayments in July include substantial amounts to the ECB, which would be impossible to cover without external funding. Therefore, the review of the bailout programme must be completed well before the beginning of the summer, if yet another Greek debt crisis is not to raise its head.

The possibility of another crisis is precisely what the international markets fear and hence the spread of Greek ten year bonds has been above 10% since early February, up from 7% in November 2015. Furthermore, the parlous state of the Greek banks has contributed to pronounced volatility of the Athens Stock Exchange since the beginning of the year. The index stood at 631 on 31 December 2015, fell to 440 on 11 February and has recovered to 517 on 1 March. Uncertainty and fear have come to dominate the Greek financial sector once again.

A new phase of the Greek crisis

This is the context in which the refugee and migrant crisis has escalated threatening the country with catastrophic implications. To be sure, Greece was slow to respond to the rising tide of refugees/migrants from Syria, North Africa, Afghanistan and elsewhere in 2015. However, the real fault lies with the EU which has been incapable of formulating a coherent strategy to ensure safe passage and allocate refugees/migrants on a rational basis within the union.

The effective closing of borders by several EU members in early 2016 is at the point of turning Greece into a large camp of refugees and migrants that do not wish to remain in the country. It is conceivable that there would be 100000 and even more refugees/migrants in camps within a short period of time. Greece does not have the resources to manage such numbers in a humane and efficient way. In a country wracked by recession and disastrous economic policies that could prove the final straw.

The SYRIZA government currently finds itself in an impossible position: it is forced to apply further austerity measures, but fears the political and social implications. Its credibility among the electorate has collapsed and there is widespread disillusionment among young Greeks in particular. The refugee/migrant issue could prove the decisive catalyst in the mix since it raises social and political pressures across the country. Yet, there are no obvious political solutions: neither a government of national unity, nor fresh elections are immediately viable options for Greece.

In view of profound political instability and as the Greek economy continues to stagnate, it is far from inconceivable that the issue of the country’s membership of the EMU will come to the table once again. From a macroeconomic perspective it is apparent that Greece should have exited the EMU years ago, giving it space to recover and restructure its economy. Political cowardice has kept it within the monetary union at tremendous cost to economy and society. After six years of disastrous policies, the condition of the country has become far more complicated and even more parlous. Now the very relations of Greece with the EU are at issue as Euroscepticism is growing fast. The never-ending Greek crisis appears to be entering a new phase that could prove even more damaging to the country and to Europe as a whole.