The results of the European Commission’s thrice-yearly soothsaying exercise were published this morning and the tea-leaves don't look good for Greece. Growth was down, borrowing was up and, worst of all, the recent woes are judged to have caused lasting damage to the Greek fiscal position -- scope for improvement as the economy recovers now looks smaller than previously thought. All this makes Greece’s negotiating position worse and means there may be less scope for budget sweeteners to accompany unpopular reforms.
The lower cost of oil, loose monetary policy, stable fiscal policy and improving confidence all bode well for the economic recovery in Europe and the Commission’s forecasts reflect that. Growth has been revised up both this year and next for the EU as a whole, though not all countries are expected to benefit from broad economic tailwinds to the same extent -- Greece is looking worse.
Since the Commission’s winter forecasts, negotiations between Greece and its creditors have stalled and the delay in reaching a deal has cost Greece dearly. The banking sector is more stressed than it was three months ago, uncertainty is rife and confidence has evaporated. What previously looked like a gradual recovery has now morphed into another bout of economic malaise -- the Greek recovery has stalled once again.
Growth Has Been Revised Down
Importantly, the commission sees a hefty chunk of the bad news since the winter as having a lasting impact on the Greek economy -- the sustainable growth rate of the economy, as well as the headline rate, have been revised downward. That means, in the commission’s judgement, that the Greek economy is expected to be smaller not just this year but in the medium term too.
Things look even worse for the public finances. In the winter, the commission expected a primary budget surplus (revenues less non-interest spending) of 4.8 percent of GDP in 2015. Now that figure is forecast to be 2.1 percent. Almost all of the deterioration in the public finances is expected to last, meaning weaker receipts now won’t be made good by stronger receipts later on as the economy recovers.
Bad News on the Public Finances
A key aspect of the negotiations, beyond structural reforms, has been how big a budget surplus to run in order for Greece to service and pay down its debts. The downward revisions don’t help the Greek negotiating team and may have eliminated one path for an easy win.
The surplus pencilled in by the Troika always looked too ambitious and meeting in the middle could have allowed Greece to spend a bit more while both sides claimed a victory. The deterioration of growth prospects and tax revenues means there is unlikely to be scope to loosen the purse-strings once a deal is agreed -- the absence of sweeteners will make the reform pill taste all the more bitter to the Greek electorate.
This post is courtesy of Bloomberg Intelligence Economics.