The Greek “Great Depression”

Looking at the economic data for Greece over the last few years, it is shocking to say and a tragedy for the Greek people, but it now resembles the Great Depression of 1929-33 in the US. Unemployment has skyrocketed, GDP decreased substantially and the stock market has been decimated. Along the way, social unrest has mounted and the country has now become very unstable with the rise of far right parties – a script we have seen before in the 30’s in Germany that didn’t quite end well….

The origins of the crisis are actually very similar too, with the toxic combination of high consumer debt and ill-regulated markets permitting over optimistic lending. This was a key factor in the US depression albeit the credit provision being centred on stocks as opposed to real estate. What’s certain is that Greece is embroiled in a severe crisis, much more pronounced than other Eurozone countries including Spain, Italy & Portugal.

The table below shows GDP real (inflation adjusted) growth rates for the seventeen countries that comprise the Eurozone. The data is sub-divided into three periods: the main recession period between 2008-2012; the forecast year of 2013 which will still be negative for some countries and the quadrennium 2014-2017 – a period when many European economies should be recovering from the crisis. The last two columns just aggregate the crisis period between 2008-2013 and the full period under analysis, 2008-2017.

The data clearly shows the Greek economy skidded of the rails much more than any other. GDP dropped an astonishing 18.4% during the 2008-2012 period. Portugal, Italy, Ireland, Spain, and Estonia all endured a tough crisis, but it was just one-third of the problem that Greece has suffered. In 2013, Greece is expected to again continue its downtrend with GDP yet again falling another 4%, in contrast to most other Eurozone economies which are already heading north. Over a 6 year period, Greece is expected to have fallen an astonishing  21.7% from peak to trough in GDP, a value that resembles the 30% drop in GDP experienced by the US between 1929 and 1933.

If we look at employment data, the bare cruelty of the facts confirms the poor state of the Greek economy. In May 2008, the unemployment rate was hovering around 7.3% and now it currently sits above 25%. In 1929 before the onset of the Great Depression, the unemployment rate in the US was around 3% and it rose to 25% in 1933. The large rise in unemployment Greece is experiencing is almost a mirror image.

Looking at the stock market, during the Great Depression stocks dropped 90%. If we look at the FTSE/ATHEX 20 index (one of the main Greek indices) for the period between June 2007 and June 2012, a five year period, we’ll see the exact same 90% loss in value.

Crises have happened regularly throughout the course of history. In pretty much all cases, a period of sharp recovery is usually commencing at this point. In Greece, this is being stifled because of the increasing austerity measures that are being forced upon it by the Northern European purse string holders – led by Madame Merkel. At some point, the Greek politicians are going to  have to bow to the will of the people and end the draconian cuts. Simply re-floating the drachma for such a tourist orientated country would create a real boon in GDP.

In the US in 1934, a large expansionary period was underway, created by President Hoovers “Real Deal” program. Real GDP grew a tub thumping 43.6% between 1934 and 1937. This is where the Greek crisis and the Great Depression comparisons sadly diverge. The Greek crisis, while the economy is tethered to the Euro straight jacket, is forecast to last for another six years – substantially longer than the Great Depression. According to the IMF, expected growth for Greece is around 10.4% between 2014-2017. Adding this recovery period to the 21.7% real loss in GDP thus far and the Greek economy will still be down 13. at the completion of the 2008-2017 period. Even in the case of Portugal and Italy, countries that will still endure negative growth rates over the full period, the declines are relatively modest when compared with that of Greece.

The European bailout model has completely failed in fighting the financial crisis by creating tough conditions for indebted countries and which seem to do anything but promote growth. It is interesting to note that the worst years for Greece were not in the depth of the financial crisis but during the ultra harsh austerity measures implementation period of 2010 and 2011. The bailout has only delayed a recovery and created an additional drag on GDP. It is interesting to compare the situation of Greece to Iceland since this last country opted to let the banking system default on its credits instead of asking for bailouts. The chart below depicts the divergent GDP and unemployment rate paths for both countries.

Iceland certainly had a tough time of it in 2009 and 2010, with GDP decreasing 6.8% and 4.0% respectively but a recovery taking hold in 2011. If we consider the period 2008-2013, Iceland experienced a drop of just 1.5%, and is expected to actuall post a 9.4% GDP growth rate in the full 2008-2017 period. In terms of unemployment, it hit 8.1% in 2010 and is expected to drop to just 4.0% in 2017. It is true Greece and Iceland were in very different economic situations before the crisis but it is also undeniable that the default model is better than the bailout one, less for creditors, off course. The sooner Greece defaults and refloats the Drachma the better for its people and likely Europe en-bloc.

Editor & Filipe R Costa