Can a votary of the dismal science bring good New Year tidings? Is there any part of the world which today enjoys such good economic and financial news that 2020 is likely to be better than 2019, and that the next three or four years could see a major improvement on the last three or four?
The answer to these questions is “yes” and, astonishingly, the fortunate part of the world is Greece, where the 2010s have been a low, dishonest, pauperising decade.
The Greek government went on a spending binge just ahead of the Great Recession, and lied about the scale of its expenditure and deficit. According to figures now published by the International Monetary Fund and so presumably not far from the truth, government spending as a share of gross domestic product climbed from 45.1 per cent in 2006 to 54.1 per cent in 2009, and the budget deficit on the same basis more than doubled from 5.9 per cent to 15.1 per cent.
Keynesian textbooks say that increases in government spending and budget deficits — certainly increases of this magnitude — ought to stimulate demand, and boost output and employment. That was not the case. Greece was hit by the global downturn of 2009 in much the same way as fiscally responsible nations, suffering a 4.3 per cent fall in GDP.
2010 was even more disastrous. As the extent of official mendacity became clear, Greek government bonds suffered heavy selling on financial markets. Their price collapsed and their yields soared. For some days in April 2010 the yield on ten-year Greek government debt exceeded 30 per cent.
The stock of government debt — which official sources had earlier represented as roughly the same as GDP — was in fact heading towards 140 per cent of GDP. Of course, if an interest rate of over 30 per cent had to be paid on a debt of that size, the interest payments would jump to over 40 per cent of GDP.
The return of confidence in Greek financial management has led to a massive decline in the cost of servicing the public debt
The interest payments were themselves part of government spending, and hence would add to the budget deficit in 2011, 2012 and so on. Because explosive increases in debt interest both reflected past extravagance and increased future spending, the debt had become a self-sustaining Frankenstein monster. Only big cuts in non-interest spending or large tax increases could avoid bankruptcy.
The Greek government did reduce spending and raise taxes, but in July 2011 — as it tried to negotiate a resolution with its foreign official creditors — it announced that over half of the face value of bonds, when in the hands of private investors, would be cancelled. The recession intensified in 2011 and 2012, and by 2013 national output was over a quarter lower than in 2007.
Despite the default on privately-held debt, the persisting deficits kept on adding to the stock of debt and falls in output aggravated the rise in the ratio of public debt to GDP. By 2016 the debt-to-GDP ratio was over 180 per cent.
But somehow government spending was going down relative to national output and tax revenue was going up. The international organizations made clear that they would bully the Greek state into honouring its debts, while a few brave contrarian investors started to nibble at its bonds in the international debt marketplace.
Good behaviour was rewarded. The ten-year bond yield came down to single digits in 2016 and to under 5 per cent at the end of 2017. Still more remarkable has been the sequel. In 2018 and early 2019 the left-wing Syriza government kept promises to limit the budget deficit, until it was replaced in July 2019 by a right-of-centre administration under Kyriakos Mitsotakis.
A former investment banker with the standard sound-finance nostrums and the best technocratic connections, he has made the right noises and done the right things. Next year Greece will have a surplus of tax revenue over non-interest spending of approaching 4 per cent of GDP and an overall budget deficit of as little as 2 per cent of GDP.
Incredibly, crucially, the yield on the ten-year bond — over 4 per cent at the start of the year — is now down to under 1½ per cent. It is in fact lower than on American government debt of the same maturity.
The return of confidence in Greek financial management has led to a massive decline in the cost of servicing the public debt. A vicious cycle of fiscal extravagance until mid-2010 had been self-reinforcing and unsustainable in the wrong direction and ended in national bankruptcy and a 25 per cent fall in national output.
A virtuous cycle of fiscal probity since the crisis has been self-reinforcing in the right direction and has brought back fiscal sustainability, ushered in resumed growth and at least hinted at future prosperity. Glory, glory, hallelujah! Budget balancing works — and naive spendthrift Keynesianism doesn’t.
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