Counting the cost for Greece and Europe

When Greek leaders began a shift in policy last year to ease themselves out from under the tutelage of foreign creditors, they hoped it would bring economic as well as political gains. Nine months on, falling output and a slump in asset values have racked up costs to the economy that by one measure stand at over 60 billion euros, or a third of national income, while EU states and the IMF may have to lend Athens three times more than they had planned to bail out Greece for a third time.

With difficult negotiations about to start and capital controls still in force, further missteps and uncertainty mean the bill is likely to rise even further throughout the summer. "The Greek negotiating stance was not a huge success," said Christoph Weil, European economist at Commerzbank. "It is clear that the Greek economy is in a strong recession. In the first two quarters of this year it is clearly a result of Greek government policies."

After Samaras's gamble on early elections saw leftist Alexis Tsipras take power in January with a mandate to end austerity, output is shrinking fast and creditors expect Greece, which defaulted last month on the IMF, to be shut out of credit markets for up to three years and need 80-100 billion euros. Adding together unrealised potential GDP, lost asset value on listed equities and the shrinking capital base of Greek banks, produces a figure of 63 billion euros, based on forecasts and data published by the creditors and others.

This week, the IMF and European Commission published analyses of Greece's financial position pointing to a rapid deterioration since the end of 2014 and especially this month. The Commission in early November expected the Greek economy to expand by 2.9 percent this year, up from 1 percent growth in 2014. In 2016, growth was seen accelerating to 3.7 percent. Creditors now expect GDP to contract by up to 4 percent this year, even assuming the smooth implementation of a new bailout.

That difference in growth translates into 12.6 billion euros in 2015, economists estimate. Another 9.8 billion euros will be lost in expected growth differences in 2016. "Greece's public debt has become highly unsustainable," the IMF said in its analysis. "This is due to the easing of policies during the last year, with the recent deterioration in the domestic macroeconomic and financial environment," it said.

"If you add up all the aid that the euro zone has given Greece, it is some half a trillion euros, transferred to an economy of 180 billion (euros annual GDP). That is an enormous transfer of wealth," the senior EU official said, echoing the frustration among creditor governments, many of them poorer than Greece.

The experience of negotiating with ministers in Athens has also soured many, fuelling arguments that it may be cheaper for Europe to push Greece out of the euro now. The biggest factor in that argument is the uncertainty that Greece's status creates across the continent, as well as the potential for one day having to write off much of its debt. (Reuters)

By Jan Strupczewski