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In this regard, all bets are off since the negative impact from the economic contraction will outweigh any positives from the improvement in the fiscal and current account balance, with the ensuing political fallout likely complicating the situation.
Excessive austerity has emerged as the biggest threat to the economic policy programme by causing unnecessary pain and accelerating reform fatigue. Author Dimitris Kontogiannis has also argued that frontloading the austerity measures in 2013 will heighten the political risk domestically and may lead to unthinkable configurations and consequences. However, he did not think that the political risk would manifest itself so soon with the coalition government divided over the labour reforms.
Greece may not obtain access to bond markets in 2015-2016 even if it manages to meet its budget deficit targets. This is because the primary surplus required to make the public debt sustainable is set too high at 4.5 per cent of GDP. This will hamper economic growth and make it extremely difficult, if not impossible, to drive the debt-to-GDP ratio below 120 per cent in 2020. In this context, political initiatives are needed to slash the debt-to-GDP ratio to much lower levels so market confidence is regained and the country can start funding its needs through capital markets.
Frontloading the austerity measures will make the projected drop of real GDP by 4.5 per cent seem optimistic. This conclusion is based on the following estimates, also shared by other economists. First, we have the negative impact from last year’s labour market reforms, which is put at 1 per cent of GDP or about €1.9 billion. Moreover, the adverse effect from the bigger-than-expected recession in 2012 and other austerity measures taken in the last two years – i.e. taxes, widely known as carry-over – is likely to amount to 2 per cent of GDP or €3.8 billion. Others estimate the carry-over effect at 2.5 per cent of GDP or €4.75 billion. The two combined will reduce GDP by about 3 per cent or €5.7.