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international group barcelona, Greece and Spain: the comeback kids
In the Athens riots
of February, 2012, the city centre turned into a war zone. Dozens of buildings
were torched and the streets overflowed with battling rioters and police. The
austerity backlash was evolving into civil war. I covered the riots, and I was certain
that Greece’s economy was doomed. I waited for the moment when Greece would
hightail it out of the euro zone, taking down Spain, Portugal and even Italy.
Scroll forward to
the early summer of 2013. The sleek new Athens hotel where I am staying, appropriately
called New Hotel,
is packed even though it’s not cheap. Ditto Black Sheep, a simple restaurant
near the old Olympic stadium that opened last year and specializes in
top-quality local ingredients. It cannot guarantee a dinner reservation on less
than a week’s notice. In a northern suburb of Athens, Diwine, a new wine bar
that doubles as a nightclub, is alive on weekday evenings with young,
well-groomed clients.
Economists refer to
the mini-eruptions of new businesses in distressed economies as “green shoots.”
To be sure, Greece is not saved and reprinting the disgraced old drachma is not
out of the question if the country is hit with another political and financial
shock wave. Greece’s economy has been shrinking for five years and unemployment
was 27 per cent in April, including a horrific 59 per cent among youths.
So what’s the good
news? The quarterly rate of gross domestic product contraction is falling
rapidly. The finance minister, Yannis Stournaras, told me he expects GDP to
flat-line in the fourth quarter and move into positive territory next year. His
prediction elicited skepticism from some of his peers, including the governor
of the Bank of Greece.
But I think
Stournaras is right, and I am even more optimistic than he is, not just for
Greece, but for the euro zone’s other clapped-out economies, too. While most
politicians, central bankers and economists remain exceedingly conservative on
their growth forecasts – they learned their lesson by vastly underestimating
the nastiness of the Greek and euro zone recessions – I will crawl much farther
out on the economic limb and predict a compelling rebound in some countries and
a surprisingly strong one in Greece and possibly Spain. Italy remains the wild
card; its reluctant austerity drive began much later, implying it will emerge
from recession much later.
As late as March,
when Cyprus’s oversized banking system blew up and set a precedent by whacking
bank customers – the infamous involuntary depositors’ “haircut” – a new euro
zone crisis seemed imminent. Arrivederci, Greece, Portugal, Spain and possibly
Italy. That turned out to be wishful thinking among the short sellers. Since
then, the strong economic headwinds have given way to gentle tailwinds. A bunch
of lesser economic indicators – and one biggie – have finally started to move
in the right direction. The former includes a 1 per cent rise in retail sales
in European Union countries in May – a nice little rebound from the 0.2 per
cent drop in each of the two previous months – and a slight fall in Spanish
unemployment with the summer hiring spree. The latter is the surprising
manufacturing strength in Germany, France, Spain and a few smaller European
countries, thanks, apparently, to pent-up demand, falling costs and waning
austerity programs.
This spring, German
industrial production was up 2 per cent in April over March, marking three
consecutive monthly increases. The bigger surprise was France, where industrial
production rose 2.2 per cent in April even though the economy is in recession.
But Spain was the biggest surprise of them all. In April, year-on-year
industrial production fell just 1.5 per cent; over the past five years,
declines of more than 5 per cent had been the rule.
Could the improving
industrial production be a harbinger of a swift economic recovery in the euro
zone? History says it could. We know a couple of things about recessions. The
first is that they always end. The second is that sharp contractions can
trigger equally sharp recoveries–the “V-shaped” rebounds of the economists’
lexicon. Recoveries can happen even if sovereign and personal debt is high,
banks are undercapitalized and wary of lending, and overall consumer sentiment
is in the tank.
Marshall Auerback, a
research associate at Bard College’s Levy Economics Institute, notes industrial
production fell more than 50 per cent in the early years of the Great
Depression. Then, between July and October, 1932, it surged 14 per cent even
though the banking system was a wreck and real interest rates were high because
of price deflation. With a few blips, production kept rising until 1937, fell
once again, then rebounded at the start of the Second World War.
The entrepreneurs in
Athens are brave to be launching new businesses in a deep recession, but
they’re not crazy. They know the best time to get in the game is when the
economy is reaching bottom. “People here want to forget about the recession and
get on with their lives,” says Damien Apostolatos, the creator of the Diwine
wine bar. I think – and hope – he is right.