A year ago many analysts anticipated that a Greek default and exit from the euro area was almost inevitable. Today, such aneventuality is significantly reduced and the economy can look forward to a gradual exit from the crisis.
The turnaround in sentiment has been due to a number of factors, which helped the Greek economy to avoid the risk of collapse and get back onto the track of rebalancing and stabilisation.
The first among these factors was the affirmative answer of the Greek people to the historic dilemma concerning Greece’s continued participation in the euro area. The coalition government explicitly stated its determination to safeguard the country’s European path… On the domestic front, pessimistic expectations have dissipated considerably and confidence is improving… Abroad, the climate as far as Greece is concerned is also turning around. Negative references to Greece are less frequent, while EU officials express unequivocallytheir desire to support Greece.
The second factor, which has contributed to this improvement is the progress made in the implementation of the adjustment programme, particularly in addressing the twin deficits — fiscal and external. This progress is a sign of incipient rebalancing and restructuring in the economy.
• In the fiscal domain, deficit reduction has been remarkable. Between 2009 and 2012, both the general government deficit and the corresponding primary deficit were reduced by 9 percentage points of GDP, while the fall in the structural deficit, at 15 percentage points, was even larger.
• Regarding the external sector, the current account deficit shrank to 2.9% in 2012, down from a peak of almost 15% of GDP in 2008. More importantly, between 2010 and 2012, Greece recovered more than 75% of the loss in cost competitiveness incurred over the 2001-2009 period.
A third crucial factor was the success in safeguarding financial stability and confidence in the banking system. Today we would not be talking about the prospect of recovery, had the banking system collapsed making Greece’s exit from the euro area inevitable. This risk was averted. In a period marked by record levels of uncertainty, not one depositor suffered the slightest loss. Not only was systemic stability fully preserved, but the groundwork was also laid for a robust banking system.
The fourth factor behind the improvement in confidence has been the continued financial support from official lenders, which gives Greece time for the structural transformation of its economy to proceed smoothly. This support, provided on favourable terms, is unprecedented by international standards.
A fifth factor that also bolsters confidence are the steps being taken towards supplementing the institutional architecture of both the European Union and the euro area. The ongoing discussions and decisions taken in this direction have helped to turn the international climate around; in turn, this affected sentiment in Greece favourably. For instance, the adoption of the proposal to move to a banking union will lead to a deepening of economic and monetary union. The announcement of “Outright Monetary Transactions” by the Eurosystem in September 2012, which by itself helped to restore relatively normal conditions in euro area financial markets, was of particular importance.
In conclusion, the risk of collapse has been averted, the possibility of a Greek exit from the euro area is now significantly reduced, and confidence is gradually being restored. Yet, these encouraging developments leave no room for complacency.