Weak domestic demand is holding back Greek recovery

Significance

Evidence of Greece’s economic recovery, which started in 2017, is to facilitate its exit from the bailout programme on August 20, while the speed of the rebound should largely determine future Greek borrowing costs in international markets. The European Commission’s recent downward revision of its 2018 economic forecast for Greece comes at an inopportune time as the country strives to generate positive economic news; it draws attention to the economy’s persistent structural weaknesses that lenders may have underestimated.

Impacts

• Conditional debt relief measures, if agreed, will offer little incentives to future investors, as economic recovery remains fragile.
• That would in effect limit the circle of investors to those who are closely familiar with the Greek economy.
• IMF participation in Greek government funding would send a positive signal to the market regarding debt sustainability.
• A financial cushion accumulated by the Greek state is to support new debt issuances over the next two years.
• Rising income inequality increases political vulnerability to sudden external shocks, such as difficulty in borrowing in open markets.