Half a decade has passed since the debt crisis plunged southern Europe into deep depression. Now, after bailouts, riots, spending cuts and elections, it’s starting to look up — just a little.
Who’s found the best path to recovery?
“Things seem to be improving but it’s still very hard for most,” says Lara Baste, a 26-year-old Spanish doctor who just returned to a job in Barcelona after a year working in Florida. “I’m just hoping I won’t be forced to choose again between having a career and staying with my family.” She tells OZY she’s happy to be home even if earning only a third of what she made abroad.
As members of the eurozone, they lacked the traditional remedy for a failing economy: to devalue the currency.
Baste was fortunate to escape the misery that most in Spain, Greece, Italy and Portugal have endured. The countries faced similar problems: boom and bust growth, soaring debt, sky-high unemployment, plunging wages, deadbeat banks, discredited politicians. But as members of the eurozone, they lacked the traditional remedy for a failing economy: to devalue the currency, which makes exports cheaper and inflates away domestic debt. Instead, they’ve put people out of work and cut wages and spending.
So which of the four might win the tortoise’s austerity race to recovery?
Greeks hurt like no one in Europe. Athens is covered with foreclosure signs and political graffiti protesting soaring taxes, pension cuts of 40 percent and unemployment at 26.3 percent.
After repeated bailouts and rescue packages, the public national debt is still 175 percent of annual economic output and the government’s always one crisis away from collapse.
But from that far down, some things look up. The government has finally balanced its budget and posted a small surplus (before interest payments). It’s recorded the first current account surplus in history, as imports shrank and tourism increased.
Greece has not yet convinced investors that it is at a stage of recovery.
“Artists are increasingly moving here because rent is 50 percent cheaper than before the crisis and the situation poses interesting creative questions about whether we should reinvent or demolish the current system,” says Pantelis Arapinis, owner of the Alpha Beta Gallery in Athens.
After four years when no bank would touch it, Greece was able to borrow abroad by issuing 5-year bonds at 4.75 percent interest, raising 3 billion euros. A booming tourism industry — occupancy rates are up by 25 percent — has helped the economy return to timid growth but doesn’t provide a long-term solution.
Foreign investment? Just a dream. “Greece has not yet convinced investors that it is at a stage of recovery,” says Nicholas Economides, professor of economics at NYU and UC Berkeley.
That might require greater public spending for investment — an IMF no-no — and politically difficult structural reforms like cutting protections for industries or making it easier to fire workers.
Italy has a shot at the podium, with less than half of Greece’s unemployment — 12 percent — and strong exports.
The country initially raised taxes to finance public spending but Prime Minister Matteo Renzi’s government has ambitious new plans to kick-start the economy through labor reform and tax cuts.
Italians’ biggest concern is stubbornly high unemployment. “I know I’m never going to find a job in Italy,” says despairing Lorenzo Fantacuzzi, 42, who moved to Gibraltar to work in a casino. Many young university graduates have fled to serve coffee in London or babysit in Berlin.
A drastic drop in demand for industrial goods has recently darkened the outlook, and the Italian central bank cut its GDP growth forecast for 2014 from the 0.8 percent promised by the government to a measly 0.2 percent.
Political bickering and widespread corruption undermine government effectiveness. “The major roadblocks to economic growth are a bloated public administration and unclear boundaries between public and private activities,” says Pier Giorgio Ardeni, professor of political economy at the University of Bologna.
Macroeconomic indicators are looking up across the board after harsh austerity measures imposed by the ruling center-right People’s Party following a decisive electoral win in 2011.
Tourism and revived industrial exports, like cars, have driven growth.
Behind each abandoned building site, empty residential compound and unfinished road lies a mountain of private debt.
“Spaniards are starting to trust their economy which is crucial because it’s increasing consumption,” says José García-Montalvo, professor of economics at University Pompeu Fabra.
Spain’s government decided to rebel against austerity and now plans to cut both corporate and personal taxes early next year. The IMF recently doubled the nation’s forecast growth for 2014 from its initial 0.6 percent to 1.2 percent.
Still, one in every four people is unemployed and new jobs are mostly poorly paid and part time. “Everybody is saying that things are getting better but it’s just not true! I have a job coming up but it’s only a six-month contract and doesn’t pay enough for me to move out,” says Miquel Palanca, 28, who lives with his girlfriend’s parents in Granada and hasn’t worked for over two years.
Debt’s also a drag. Behind each abandoned building site, empty residential compound and unfinished road lies a mountain of private debt and bankrupt companies.
In May, Portugal got up the nerve to exit its international bailout package — a rescue line that came with conditions attached — after cutting the budget deficit to 4.9 percent of GDP from 6.4 percent in 2012. Very modest economic growth should return this year.
Government reforms to the labor market have paid off, with unemployment now at 15.2 percent, down from 17.4 percent in 2013, as more people went to work for lower wages.
…the city is eroded due to austerity — it is abandoned, empty, impoverished…
“This means there are good opportunities for foreign investment and lots of wasted resources that can easily be put to productive use,” says Luís Aguiar-Conraria, professor of economy at the University of Minho.
But the fragility of Portugal’s banks continues to scare European markets. Regulators stepped in early in July to prevent panic selling in shares of Banco Espírito Santo, the country’s second largest bank, and its former CEO was arrested in connection with an investigation into money laundering and tax evasion.
“Right now the uncertainty is so high that it is very risky to invest in Portugal,” says Aguiar-Conraria.
Meanwhile, domestic consumption struggles.
“The crisis is still visible everywhere: the city is eroded due to austerity — it is abandoned, empty, impoverished,” says Pedro Figuereido, a seasoned architect turned tourist guide in Porto.
And the winner is…
At least for now. How to restore growth in these economies was never a mystery. It was rather which government had the guts, determination and staying power to inflict pain on its citizens, quickly and decisively. An electoral mandate, like the one given to Spain’s People’s Party, can make all the difference.
Spain’s not out of the woods, but the return of consumer confidence may be the best sign it’s started on a self-sustaining path to recovery, unmatched by its tortoise-economy rivals.