Greece Has A New Groove

Many Americans are considering relocating to this historic and beautiful country—thanks at least in part to its Golden Visa program. Applications to the program from U.S. citizens have increased more than sevenfold.

The Golden Visa gives you, along with immediate family members, five years of residence, plus free travel in the Schengen Zone. The visa can be renewed and there’s the potential for eventual Greek citizenship.

The visa program can be accessed with a relatively modest investment; a property purchase of between 250,000 and 500,000 euros unlocks access.

While the visa allows for travel around Europe during the five-year residency, it requires you to live in Greece. For this reason, those considering the visa should stay on top of economic developments in the country.

After all, if there are reasons to think that the economy is unstable, the attractiveness of the visa program may not be as significant as if the economy is stable.

By instability, I do not mean that the country will experience a recession in the future. All countries experience recessions from time to time.

By instability, I mean chronic imbalances in the economy that could cause a serious crisis and would make living there pretty unpleasant.

Not So Long Ago, “Greek Tragedy” Was The World’s Most Popular Headline

Let’s start with recent history. You probably remember that Greece experienced a serious debt crisis after the global financial crisis that shook the world economy in 2008.

At the height of the crisis, in 2011, the yield on a 10-year Greek government bond reached nearly 30%—making it basically impossible for Greece to borrow on the international money markets.

Eventually a bailout was arranged by the European Union, but it came with harsh conditions.

To better understand the potential risks to the Greek economy moving forward, it is important to understand why this crisis arose. Crises like this do not come out of nowhere.

For government debt yields to reach nearly 30%, you need deep structural problems. Global markets do not simply price debt in such an aggressive

way because too many market participants got out of the wrong side of the bed one morning.

Greece’s most obvious problem in the run-up to 2008 was its enormous government borrowing. Between 2001, when Greece joined the euro, and 2007, just before global markets collapsed, Greece ran very large government deficits every year.

In this period the government deficit never fell below 5.5% of GDP and at one point rose to 8.8%. These are deficit levels that are typically associated with an economy in a deep recession, yet Greece ran them in the 2000s while its economy was growing. This was not a case of borrowing in a crisis, but rather an addiction to debt that signalled a deep underlying imbalance.

When we dig a little deeper the nature of that imbalance becomes clear.

During this period the country ran absolutely enormous trade deficits. Between 2001 and 2007 the Greek current account balance never fell below 6.8% of GDP and even reached a peak of 15.2% of GDP.

What this tells us is that Greece was not competitive and was living beyond its means. It was sucking in far more imports than it was selling exports, and to finance this addiction to foreign goods it had to go massively into debt.

In these years, the living standards of the Greek people rose sharply as huge quantities of imports flowed into the country, but the bills piled up year after year.

This was reflected in Greek wages. For a poorer European country like Greece to try to be competitive against economic behemoths like Germany, lower wages are needed.

The lower wages ensure that the local goods are cheap for foreigners to buy and that domestic consumers cannot buy foreign goods that they should not be able to afford.

Yet in the party years of 2001-2007 Greek wages went gangbusters, with total compensation rising nearly 41%. Meanwhile, the actual productivity of workers rose only around 17%.

With these imbalances in the 2000s it is no surprise that, when the global financial markets panicked in 2008, the scales fell from their eyes and investors realized that Greece was an economic basket case.

Greece’s Hard-Won Stability

The $64 million question then is: How does the Greek economy look today?

For the average Greek, not so good. Since 2012, when the bailouts began, wages have fallen off a cliff, with total compensation falling almost 21%.

Between 2012 and today, wages have only actually risen in two years. The Greek people have seen a terrible hit to their living standards.

Has this decline in living standards led to economic stability?

The first place to look is at government borrowing. In 2016, the Greek government started running a surplus for the first time in living memory. It maintained this surplus right up until 2020, when the pandemic hit, and the lockdowns started.

Since then, the government has been running deficits, but they have been falling despite the war in Ukraine and the hit to European energy prices. This has been achieved by a massive decline in government spending which fell from around 12 billion euros in 2008 to around 9 billion euros today.

So, everything on the government budget front looks pretty good.

The trade situation looks much more balanced too. Between 2013 and 2020, the current account deficit fell as low as 0.7% of GDP and never exceeded 2.9% of GDP. This was achieved by a remarkable rise in exports, which increased around 166% between 2008 and today.

Much of this can be accounted for by the enormous fall in wages, which made Greek goods and services much more attractive on European markets.

Greece today is stable, albeit much poorer than it was before the crisis. The problem here is that it does not seem to be growing very fast and therefore cannot make up for the losses that it suffered during the crisis.

This is clear in the GDP statistics. In 2022, the Greek economy was still 23% smaller than it was at its peak in 2007.

It is interesting to compare Greece with Ireland in this regard. Both countries experienced financial crises after 2008 and both countries required bailouts, but whereas Greece stagnated, Ireland took off like a rocket.

Whereas Greece has seen a 23% decline in the size of its economy since before its crisis, Ireland has seen an increase in the size of its economy by 28%.

The sad reality is that Greece is simply not a very dynamic economy and it is now trapped in a cycle of low growth.

This means that Greece is not a very compelling place for a foreign investor. Yes, there are sure to be opportunities in Greece, but these are going to be harder to come across than in a rapidly growing economy like Ireland.

But this does not mean that Greece is an unattractive place to live. If a non-EU citizen wanted to get access to Europe via Greece, or just wanted somewhere to relax or retire, Greece is very attractive because it is relatively cheap.

Once again, a comparison with Ireland is instructive. Consider the property markets in both countries. At the very high-end of the market, there is currently a very attractive four-bedroom detached house in Dublin that is 4,478 square feet for sale priced at 2.795 million euros.

A roughly equivalent property in Athens, a five-bedroom detached house with 5,490 square feet in space, is currently selling for 1.5 million euros.

The same dynamic is evident at the lower end of both markets. For 250,000 euros in Dublin, you can get a small, one-bedroom apartment with around 700 square feet in floorspace.

In Greece, on the other hand, for the same price you can get a semi-detached three-bedroom home in Crete with 2,067 square feet in floorspace or an historic two-bedroom apartment in Athens with 1,390 square feet in floorspace.

Add to this the low wages—and hence low costs for groceries, restaurants, and so on—and Greece looks like a very attractive place to live.

Real Estate In Greece

And Greek property may not be a bad investment. Since 2018 Greek house prices have risen 45%. (Although, this increase does raise the fear that there might be a bubble in the Greek property market, especially with central banks now rising interest rates.) If you’re interested in purchasing a property in Greece, it might be worth monitoring this situation and trying to get a good feel for the property market.

The Verdict

All in all, Greece certainly has its upsides. Its economy does not look particularly dynamic. But the instabilities that plagued the country in the past seem to now be under control.

There is no reason to think that Greece is any more prone to a serious economic crisis than any other country. Meanwhile the country is cheap relative to other European countries.

And, perhaps most important, it is a fantastically beautiful place with a rich history, phenomenal beaches, and wonderful weather. It is also very safe.

With a homicide rate of 0.68 it is the 9th safest country in Europe and has only 10% the murders of the United States. Greece has a lot to offer.

Sincerely,

Philip Pilkington

Contributor, Simon Letter