When I attended a major economics conference in Athens this time last year, I was struck by the mood of cautious optimism about the prospects for the Greek economy among the participants.
After six years of brutal recession – the size of the economy had shrunk by a quarter, the unemployment rate had soared to 27 per cent, and government debt had jumped to 175 per cent of GDP – there were signs of economic stabilisation. Real GDP rose in the first two quarters of that year, driven by an increase in tourist arrivals and a rise in consumer spending.
Greece recorded the fastest rate of GDP growth in the euro area in the third quarter of last year, even outpacing the Irish economy. Indicators of business confidence were rising for the first time since 2009 and the unemployment rate had been ticking down for several months.
Financial indicators were also suggesting grounds for optimism. The Greek government had reaccessed markets in April for the first time since the crisis, amid improved investor confidence. Bank deposits had stabilised and banks had returned to market funding. Economic forecasters were busily revising upwards their forecasts for the economy, with the IMF, for example, projecting GDP growth of nearly 3 per cent for 2015.
Some Greek economists I spoke to were pencilling in an even faster recovery.
The Greek economy had undergone a remarkable macroeconomic adjustment over the previous four years. The budget deficit had declined from an eye-popping 15 per cent of GDP in 2009 to about 3 per cent in 2014. Excluding interest payments on government debt, the primary budget balance had moved into surplus. The deficit on the current account of the balance of payments had dropped from 11 per cent of GDP to zero.
Greece was no longer borrowing from abroad to live beyond its means, as it had done for decades. Government debt had reached very high levels relative to GDP, though the burden of that debt was no greater than before the crisis. European lenders had already made significant concessions to help Greece service its debt, with very low interest rates, long maturities on loans, and deferred interest payments.
Fast forward to today and optimism about a recovery in Greece has evaporated. The economy is back in recession and confidence has been shattered. The banking system is largely closed and will probably remain so well beyond the promised reopening date next Tuesday. Over-indebtedness, unemployment and poverty are worse today than they were 12 months ago.
The plunge back into recession is all the more disappointing given the improved performance of the other crisis-hit economies in the euro area over the past year. The IMF now expects the Spanish economy to grow 2.5 per cent this year, with 1.5 per cent projected for Portugal and 4 per cent for Ireland. The drop in global interest rates and in the value of the euro against sterling and dollar resulting from the ECB's programme of quantitative easing should have put wind in the sails of the Greek economy.
The potential benefits from the improving external environment, however, were swamped by the depressing effects of political uncertainty.
In the run-up to the general election in January, Syriza’s campaign platform contained some sensible proposals, not least the pledges to reform the country’s clientele-dominated political system and crack down on tax evasion. At the heart of Syriza’s manifesto, however, was a promise to the Greek people of a silver bullet to restore prosperity.
In reality, no such silver bullet exists. Notwithstanding efforts over the past few years, the Greek economy still requires profound structural reforms. Syriza could have made a start over the past six months on building a proper system of public administration and on plans to develop the private economy. Sadly, there is no evidence of progress on any of these fronts.
In addition, Syriza failed to engage with the international community in a serious way, sapping trust. Anecdotes abound about officials from the creditor institutions sitting in hotel bedrooms in Athens twiddling their thumbs as they waited in vain for the Greek government to share its plans for the economy. Co-operation with creditors is crucial, because one way or another, Athens will need substantial financial assistance in coming years if the country is to avoid a humanitarian disaster.
Finance minister Yanis Varoufakis has said he'll resign if Greece votes Yes on Sunday. If so he will leave behind an economy in worse shape than when he took over. It's hard to avoid the conclusion Greece's best hope for recovery is for a Yes vote, a new government that re-engages with the international community and a new programme.
Alan Ahearne is professor and head of economics at NUI Galway.