Greece Economy Briefing: COVID-19 and the Greek Economy George N

ISSN: 2560-1601

Vol. 27, No. 2 (GR)

March 2020

Greece economy briefing: COVID-19 and the Greek economy George N. Tzogopoulos

1052 Budapest Petőfi Sándor utca 11.

+36 1 5858 690 Kiadó: Kína-KKE Intézet Nonprofit Kft. [email protected] Szerkesztésért felelős személy: Chen Xin

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COVID-19 and the Greek economy

The outbreak of the COVID-19 pandemic is causing serious trouble in Greece. The priority of the Greek government is not only to contribute to public health but also assist citizens economically suffering. Numerous companies are encountered with tremendous difficulties and others are forced to close down. Employees are either fired or asked to temporarily stop working. The Greek government has already announced measures to support companies and people and seeks to benefit by the so-called Pandemic Emergency Purchase Program of the European Central Bank. Several organizations – including the Bank of Greece – make predictions about the future of the national economy in 2020. But these predictions remain unsafe as long as uncertainty continues.

The month of March finds Greece coping with COVID-19. A few weeks after the release of the 5th enhanced surveillance report for the Greek economy, the economic situation appears completely different. It almost immediately became obvious that Greece would be unable to catch fiscal targets agreed for 2020. More fiscal space to deal with the effects of COVID-19 is necessary. On 10 March Finance Minister Christos Staikouras welcomed the European Stability Mechanism (ESM) Managing Director Klaus Regling in Athens. Staikouras reiterated Greece’s commitment to materialize commitments but said that the Greek government had requested the exemption from the state budget of certain expenses. Along with COVID-19 the country has taken a heavy burden in dealing with the migration crisis following the decision of Turkish President Tayyip Erdogan to push desperate refugee towards Europe. That is because it is in need to better protect its borders which also constitute the border of the European Union.

Regling, for his part, acknowledged the unexpected double challenge Greece was facing. And he could not but agreed with the Greek Finance Minister that the European fiscal framework allowed for some flexibility for unexpected developments outside the control of the government. A few days after the meeting between Staikouras and Regling, the Eurogroup (teleconference) of 16 March welcomed the good progress with reform implementation in Greece as the country has been able to outperform its fiscal targets for the fifth year in a row, reaching a primary surplus of 4 percent in 2019. More importantly, Finance Ministers of Eurozone member-states agreed that Greece would be able to make full use of the flexibility with the fiscal rules to deal with the consequences of the coronavirus. Staikouras underlined

1 after the Eurogroup that the target for a primary budget surplus of 3.5 percent of GDP would not apply any longer.

On 11 March 2020 Greek Prime Minister Kyriakos Mitsotakis made his first national address about COVID-19 and announced important economic measures. In particular, the VAT and social security contributions for affected businesses will be temporarily suspended. Further to this, Greece introduces a special leave allowance for working parents with children up to 15 years old – both in the public and private sector – the burden of which will be shared by the government, companies and professionals themselves. Six days later, on 17 March Mitsotakis made a second national address and announced new measures. These include the allocation of resources from the National Strategic Reference Framework for market and labor without time- consuming bureaucratic procedures. €2 billion euros will support production activities facing problems due to turnover reduction. And the state will undertake to pay part of the wages of the workers in sectors affected. The Greek Premier also said that the government was coordinating with the Bank of Greece and the European Central Bank to prevent a new generation of bad loans. The state will cover the cost of borrowing rates and banks shall temporarily suspend debt payments for companies that were constantly serving their loans until September 2019.

Finance Minister Staikouras has provided detailed information on governmental economic measures. As he said, an estimated 200,000 businesses employing approximately 600,000 people will be exempt from paying taxes and social security contributions until 31 July 2020. And workers losing their job because of the shutdown of several companies, circa 500,000, will receive a benefit of €800 euros in April with that state covering their insurance and health costs. The amount to be spent will be €450 million. According to Staikouras, self- employed professionals and one-person businesses will be relieved of tax obligations for four months. Last but not least, businesses that will end their operation during the pandemic will have to pay 60 percent of the rent on their premises for March and April 2020.

Despite the unprecedented situation, the decision of the European Central Bank (ECB) to trigger new bond purchases worth of €750 billion can benefit Greece. That is because they will – for the first time – include debt from Greece. Specifically, the ECB decided on 18 March to grant a waiver of the eligibility requirements for securities issued by the Greek government for purchases under the so-called Pandemic Emergency Purchase Program (PEPP). Staikouras commented that the ECB announcement could have an impact on Greek bonds worth of 12 €billion. Greek governmental sources attempted to give Mitsotakis a credit for the inclusion of Greek bonds in PEPP. A press release published in the Greek daily Hi Kathimerini asserted: ‘It is a huge personal success for Prime Minister Kyriakos Mitsotakis, as it came after a telephone

2 conversation he had with the ECB chief Christine Lagarde’. However, it should be clarified that the PEPP were Greece was included is different from the Quantitative Easing program from which the country remains to be excluded. It is wise not to confuse extraordinary ECB measures with its standard monetary policies. Irrespective of political speculation, Greek borrowing costs fell after the ECB included it in PEPP.

As far as the future of the Greek economy is concerned, the Bank of Greece’s baseline scenario for 2020 is zero growth. According to its Governor Yiannis Stournaras, who already noted offsetting measures, the impact on the economy will be significant in the first two quarters of the year, which will be partially balanced in the following two quarters. In addition, the Bank of Greece predicts that the 2020 surplus will be below the target of 3.5 percent. Factors to be taken into account include the increase in expenditure to tackle the pandemic and the negative effects on revenues. Stournaras recommends to use all available fiscal options to secure the funding of expenditure for tackling the coronavirus and minimize the negative impact on the economy with the least possible effect on debt sustainability.

The Centre of Planning and Economic Research (KEPE), for its part, has attempted to forecast future economic trends. In the view of KEPE COVID-19 economic ramifications will mainly affect medical services, welfare, tourist and travel services, catering and other services, trade, transport, global supply chains, investment projects, private consumption, prices of raw materials and other goods and services as well as the labor market. The Centre elaborates on three different scenarios. In the mild one, it expects a decrease in annual real GDP growth rate by 0.1 percent to 0.3 percent. In the moderate one, the decrease will vacillate between 0.4 percent and 0.6 percent. And in the worse one, it will be between 0.7 percent and 0.9 percent. Other agencies appear more pessimistic than KEPE though. Scope Ratings predicts that the Greek GDP will decrease by 1 percent. Capital Economic portrays a grim situation with recession amounting at 8 percent by the end of the year.

At the time of writing, predictions are unsafe though. From 2 until 19 March 2020, the Greek stock market fell by 42.78 percent. Whether this negative trend will continue remains unknown. The stock market, for example, does not normally operate every day due to heavy losses. Citigroup foresees that Greece will issue fewer bonds this year. And Aegean Airlines announced that it will suspend all its international flights until 30 April hoping to support the sustainability of its operations. The decision of Aegean Airlines is indicative of the impact of COVID-19 on tourism. Should the pandemic is not placed under control before the summer holidays, the consequences will be even tougher. Τourism Minister Harry Theocharis does not exclude the scenario of a ‘lost tourist season’. A study conducted by the Institute of Tourism

Research demonstrates losses for hotels exceeding €500 million by mid-March because of cancellations of bookings.

Conclusion

For the Greek economy the outbreak of the COVID-19 pandemic is a disastrous development. Taking into account that it is largely based on tourism, the impact is expected to be huge, especially if the summer tourist season is lost. The Greek government attempts to temporarily relieve the pain by providing economic assistance to companies in trouble and employees – both salaried and self-employed – in need. The good news for Greece is that the EU seems determined to drastically restrain the financial consequences of COVID-19. The so- called Pandemic Emergency Purchase Program launched by the ECB constitutes an example. But to make predictions about the future remains a hard task. Estimations for growth vacillate between 0 percent and a recession of 8 percent. For the time it is impossible to draw safe conclusions that will only depend on the potential spread or not of the pandemic in the country.