By Kensuke Nakazawa / Yomiuri Shimbun Deputy EditorThe eurozone has experienced positive growth for 16 consecutive quarters since the April-June 2013 period. Will it overcome and recover from the debt crisis that was particularly severe in 2010? One focal point is Greece, where the crisis began.
Real gross domestic product in the eurozone showed solid growth for the 2017 January-March quarter, with a 2.3 percent annualized increase compared to the previous quarter. Since the debt crisis settled in 2013, strong consumer spending has improved corporate earnings, which has led to increased capital investment — a virtuous cycle that has stimulated the economy. The unemployment rate in April was 9.3 percent — the lowest level in the eight years since March 2009.
These economic indicators show that, on the whole, the eurozone has shaken off the aftershocks of the debt crisis and is recovering. The European Central Bank is considering reducing its policy of quantitative easing.
Gaps in recovery
Nevertheless, the extent of the recovery varies by country. This can be clearly seen by looking at unemployment rates: Germany 3.9 percent, France 9.5 percent, Italy 11.1 percent, Spain 17.8 percent and Greece 23.2 percent. The economic gap between the north and south is still evident.
In the debt crisis, which flared up in 2010, north-south economic disparity led to the rise of anti-European Union forces. Creditor countries demanded debtor nations adopt harsh austerity policies, resulting in divisions within Europe. The fundamental cause of this trend was Greek’s debt crisis.
Although the Greek economy constitutes just under 2 percent of the eurozone, the debt problem has repeatedly threatened to destroy its economy and shaken global financial markets. For the eurozone to maintain a stable growth rate, it is imperative to solve this problem.
The Greek economy shows signs of having bottomed out, with its gross domestic product for January-March this year up 0.4 percent compared to the previous quarter. However, the country’s debt has reached 179 percent of its GDP (see chart 1), and the long-term interest rate — an indicator of the interest rate for new loans — remains high in the 5 percent range, annually.
Greece’s fiscal balance, which determines whether the country will be able to pay its debt in the future, constituted a surplus of 0.7 percent of GDP in 2016. However, if the economy falters, tax revenue will decrease and easily lead to a deficit.
The Greek economy has shrunk by 26 percent due to the debt crisis (see chart 2). The gravity of the situation is comparable to the negative growth experienced by the United States during the Great Depression around 1930.
The unemployment rate has risen from 10 percent before the crisis to over 20 percent, while youth unemployment (24 and younger) is nearly 50 percent (see chart 3). The number of suicides in 2014 increased to 1.6 times the average seen between 2000 and 2007.
People continue to emigrate in search of work, and the population decreased by about 340,000 between 2011 and 2016, or 3 percent of the total population. For a country with Japan’s population, this is equivalent to 3.8 million people. This outflow of the young and brightest will hinder Greece’s growth for a long time.
Raising revenues key
Given Greece has lost credibility in financial markets, there is no doubt it was necessary for the nation to find ways to achieve expenditure cuts and tax increases and improve its fiscal balance while receiving assistance. However, considering the serious shock the Greek economy has experienced during this time, the question of whether stringent austerity measures should continue needs to be rethought before future reforms are undertaken.
Prospects for growth are also badly needed, because they lead to more tax revenue and a sense of trust that finances will stabilize sustainably. Assistance from the eurozone and the International Monetary Fund lacked this outlook.
Including the €226.7 billion (¥29 trillion) in assistance the eurozone and IMF provided between 2010 and 2014, as well as money raised by Greece, 51 percent (€131 billion) of the overall €254.4 billion went to repaying debt and interest, while only €27 billion (¥3.4 trillion) could be spent on government administration — just 11 percent of the total, according to the Greek research institute MacroPolis. There was almost no room to use the funds for growth strategies (see chart 4).
The Greek debt problem was caused not only by the scale of its expenditures, but also by poor revenue. Greek expenditures were, on average, 45.9 percent of GDP between 1995 and 2007 — 1.7 percentage points lower than the eurozone’s 47.6 percent. The annual revenue scale was 39.2 percent, 5.7 points lower than the eurozone’s 44.9 percent.
Until now, expenditure reduction measures such as pension cuts had been promoted. Going forward, it is important that reforms raise revenue through economic growth.
A symbol of unity
The eurozone still faces the risk of an economic slowdown triggered by political turmoil. Although pro-EU Emmanuel Macron won the French presidential election in May and the anti-EU trend has subsided, the situation remains unstable. Germany will have a general election in September, and Italy will have one by next spring.
Many of the previous Greek administrations were “anti-austerity” but “pro-eurozone” in wanting to remain within the union. It must not be forgotten that this barely prevented the collapse of the eurozone.
The eurozone should ease the stringent austerity measures imposed on Greece and lighten the country’s financial burdens as a symbol of regaining the unity lost amid the debt crisis.
To steadily reduce Geece’s debt, it is imperative that interest be lowered and the repayment deadline extended. This will increase investor confidence in growth and fiscal sustainability and pave the way for independence.
Can the eurozone economy be revived by overcoming political instability? It depends on whether the unity of the economic zone can be reflected in concrete measures, taken under the favorable mood that has been boosted by the economic recovery and the results of the French presidential election.Speech