At the Organization of Economic Cooperation and Development (OECD) Council of Ministers in Paris on Wednesday, Greek Finance Minister Yannis Stournaras challenged the institution’s forecast that Greece will remain in recession next year, which would mean a seventh straight year of contraction. Stournaras thinks the OECD will be proved wrong. There isn’t a Greek in the world who doesn’t hope he will be proved right.
The OECD’s recent Economic Outlook contains some alarming messages for Greece, messages that are in contrast with the recent wave of positivity from the government and upbeat assessments from the media domestically and abroad. The Paris-based organisation does not see a return to growth in 2014 but predicts a further economic contraction of 1.2 percent, a gap from Stournaras’s projections that translates into about 3.6 billion euros of economic output. It goes as far as suggesting that additional financing from the EU/IMF program will be required for Greece so automatic stabilizers are allowed to kick in if the recession turns out to be deeper than initially anticipated.
As much as Stournaras was quick to challenge the OECD’s projections on growth, he did not comment on the devastating projections for unemployment. The finance minister has designed Greece’s medium-term fiscal strategy based on average unemployment of 22.8 percent for 2013 and a lower figure of 21.4 percent for 2014. The OECD and the Bank of Greece, which also gave its forecast this week, think otherwise.
The differences in the forecasts are as stark as they are vexing. The OECD sees unemployment at 27.8 percent this year and a higher rate of 28.4 percent in 2014. Equally, the Bank of Greece in its monetary policy report published Wednesday sees unemployment “stabilizing” at 28 percent this year and does not foresee a reduction before 2015, which suggests the rate will hover at 28 percent – not far from OECD’s projections.
Considering the unemployment rate in February reached 27 percent, unless there is surge in seasonal hirings over the next four months, when the tourism season hits its peak, the chances of the Finance Ministry’s unemployment projections being met seem remote.
The situation would be even direr if the OECD’s projections for next year materialize as it would defy any macroeconomic logic to expect that even the modest growth that the Finance Ministry expects would lead to a reversal of the current trend and unemployment falling to 21.4 percent.
In a labour force of approximately 4.9 million, the differences between what the Greek government is predicting and what the OECD forecasts translate into 244,000 jobs for 2013 and 342,000 for 2014. In a country where over 60 percent of the unemployed (or 17 percent of the country’s workforce) have been out of employment for over a year, these figures carry an extra urgency and demand to be studied more carefully.
If the OECD proves accurate, close to a quarter of a million more unemployed Greeks than the Finance Ministry has anticipated will remain out of contact with the labor market and could see their skills further deteriorate. They are in danger of joining the ranks of some 800,000 people that have lost eligibility for unemployment benefits and health coverage or the 400,000 families that do not have a single bread winner. This threat of poverty and social exclusion cannot be taken lightly.
The government has announced a number of short-term job schemes in an attempt to combat the worst effects of the terrifying dimensions that unemployment has taken. The programs, assisted by EU funding, aim to provide tens of thousands of people with a small income and, perhaps, a sense of purpose. These are worthwhile gestures but not an overarching solution for the much wider problem. A bumper year is expected in Greece’s tourism sector. This will also help create jobs but, again, does not constitute a panacea. The social dimension that Greece’s runaway unemployment has taken on means it cannot be regarded in purely numerical terms, as we have done with almost everything else in our lives over the last few years of spending reductions, tax hikes and debt
Numbers, however, are important. In this respect, it must be noted that it is a brave man who takes on the OECD’s predictions these days. It is worth remembering that in the International Monetary Fund paper on “Growth Forecasts and Fiscal Multipliers” by Olivier Blanchard and Daniel Leigh earlier this year, the IMF’s economists compared their projection errors with those of the European Commission, the Economist Intelligence Unit and the OECD. According to their findings, the OECD had the lowest error coefficient, meaning it came closest to the actual outcome in its projections. The European Commission also published a report recently looking at its macroeconomic forecasts between 2004 and 2011. Its authors, Laura Gonzalez Cabanillas and Alessio Terzi, found that the Commission was more accurate than the IMF but that the OECD beat both of them.
If the OECD proves to have the most accurate projection on the Greek economy, the devastating implications are clear. One can only hope that Stournaras proves the most precise of all. In the meantime, though, we really need to talk about unemployment.
Nick Malkoutzis & Yiannis Mouzakis
Yiannis Mouzakis works for a global content supplier and blogs at The Prodigal Greek.