July 7, 2015
“Why can’t Greece be more like Ireland?” has been cried over and over again in recent days. After all, they went through imposed austerity and yet have grown 1.9% annualised since the end of 2009 (in real terms) while Greece has contracted at a 4.9% annualised rate.
The following charts offer an explanation and illustrate why more austerity – in the form of the demand for large structural budget surpluses in Greece – may not be the answer.
Chart 1 shows the change in the Cyclically Adjusted Primary Budget Balance (this is the part of the budget that is structural and thus cannot be explained by strong/weak growth – it cannot be grown out of) and excludes debt interest repayments versus Annualised Real GDO growth over the last 5 years.
The line runs right through the data the correct way – a strong correlation between the degree of fiscal tightening (approaching 20% points of GDP in Greece) and realised Growth.
Austerity policies do appear to depress growth rates.
It is import to note that Ireland sits a little off the line. It has done slightly better than one would have expected given an 8% points of GDP swing in the primary structural balance.
If we exclude Ireland, the relationship is much stronger; austerity and growth are exceptionally linked.
Then what is so special about Ireland?
Take a look at Exports of Goods and Services as a % of GDP for those countries above. At the end of 2009 Greek Exports were just 18% of GDP, the lowest in the bloc. Going forward to today, exports now account for 33% of GDP (GDP has dropped by 25% and exports have held up with a weaker Euro).
But… look at Ireland. Irish Exports at the end of 2009 were almost 100% of GDP.
With the Euro declining (20% in broad, real, trade weighted terms from the end of 2009) and Unit Labour costs also declining, it is little surprise that Ireland has fared better. Especially when it has also experienced less than half the cumulative austerity that Greece has been subjected to. Austerity has been smoothly/steadily applied most everywhere, with Greece given a more front-loaded and larger dose than anyone else.
There is a message in this for the UK as well. Austerity, to date, has been comparatively modest, with virtually no tightening in the structural budget balance since 2011. A more aggressive stance would suggest that the much lauded performance of the UK economy could look a lot less exciting without some Sterling weakness to offset the impact.
MONOGRAM CAPITAL MANAGEMENT