Last month, the European Commission estimated that every country in the EU was growing in 2016. It had near-complete data for most places, so it didn’t seem like a stretch to say so.
But Greece, as it so often does, sprang a nasty surprise. A shock revision to fourth-quarter GDP earlier this week—an initial estimate said GDP fell 0.4% from the previous quarter, but new numbers showed the fall was in fact -1.2% (pdf)—suggested that the beleaguered economy may have shrank, again, in 2016.
Annual GDP data published yesterday confirmed that Greece indeed grew last year, by just 0.01% (pdf). That won’t do much to dig the economy out of its hole: GDP has shrunk by a quarter since 2008 and the unemployment rate is stuck above 20%.
Greece is on its third multibillion-euro bailout program since the financial crisis, with each tranche of aid offered in exchange for imposing strict austerity measures. As a result, the government has been spending less each year since 2009, dragging down economic growth. The main reason for the unexpectedly large fourth-quarter revision to GDP was a sharp drop in government spending—down 2.1% from the third quarter.
Greece’s chronic debt crisis is rumbling on, as Athens and its creditors are locked in a stalemate. The Greek government is weary of austerity, and the IMF has been pushing for debt relief as a more effective, sustainable way to improve Greece’s economic prospects. But Greece’s European creditors, led by Germany, insist on the borrower maintaining big budget surpluses that require deep austerity.
If Greece’s economy continues to limp along, its crippling debts will only get more burdensome. Public debt already stands a about 180% of GDP, and the IMF warned earlier this year that it could rise to 275% of GDP by 2060.
An international consensus has been emerging that questions whether austerity does more harm than good, even in cases where some belt-tightening is warranted. Last month, there was finally a sign that Greece may get some relief from the creditor-imposed spending cuts. At a meeting of euro-zone finance ministers to discuss the terms of Greece’s bailout, the group’s president Jeroen Dijsselbloem said that “there will be a change in the policy mix, moving away from austerity and putting more emphasis on deep reforms.” Experienced market watchers will believe it when they see it.