The inaugural gathering of the Greek Investment Forum in New York last October was an understandably modest affair. A few dozen investors showed up at the head office of Bloomberg to listen to government officials plead for an influx of foreign cash to stave off an economic collapse. Not surprisingly, few were enticed by the pitch. A Greek default and a forced exit from the euro seemed inevitable, hardly the kind of conditions that get investors to open their chequebooks.
Contrast that to the forum held last month, where more than 400 bankers and hedge-fund managers packed into the $1,000-a-night Plaza Hotel to listen to Morgan Stanley and Procter & Gamble extol the virtues of investing in everything from Greek real estate to Greek yogourt. “Greece is proving the naysayers wrong. Greece is proving the doctors of doom wrong,” declared Yanos Gramatidis, head of the American-Hellenic Chamber of Commerce.
Such talk might sound arrogant coming from a country whose bank failures and government debt once threatened to destroy the European economy. But despite 27 per cent unemployment and a recession that has dragged on for five years, there’s no shortage of confidence in Athens these days. In May, ratings agency Fitch upgraded Greece’s debt rating, saying its economy was “rebalancing” and that the crisis over whether it would exit the euro had effectively ended. Yields on Greek government bonds have fallen from a high of 40 per cent to around 10 per cent. Bank of Greece governor George Provopoulos predicted the country would complete a $20-billion bailout of its top four banks with $7 billion left over. The country is forecasting a budget surplus next year, along with modest GDP growth of 1.4 per cent, prompting Prime Minister Antonis Samaras to suggest that the Greek financial calamity is little more than “a sad memory.” Worries over a “Grexit” are being replaced with talk of a “Grecovery.”
The victory party extends beyond Greece. Across the continent, leaders who once worried about a “lost decade” of economic stagnation are bragging about a remarkable comeback. “The crisis in Europe is over,” French President François Hollande told reporters during a trade visit to Japan last month. He is backed by a series of reports showing the European economy may be on track for growth by the end of the year. Industrial output was up 0.4 per cent in April across the eurozone, the third month of slow but steady growth, led by French factories pumping out more goods. The Organisation for Economic Co-operation and Development released its updated index of leading indictors of growth that predicted a jump in the GDP of most European countries next year. “The euro area’s economies are slowly emerging from the recession,” European Commission economic chief Olli Rehn told a press conference in The Hague. Unemployment in Germany, Europe’s largest economy, fell to 6.8 per cent last month, beating analysts’ estimates, while the European Commission said its “economic sentiment” index of business and consumer confidence rose sharply in June, led by Italy and Spain. The U.K., which faced the threat of dipping back into recession, is now boasting some of its strongest growth since the start of the financial crisis. New car sales are back up to pre-recession levels, while home prices were up the most in three years in May. The Confederation of British Industry, a lobby group, reported that companies have started handing out bonuses to employees.
Rising consumer demand prompted the European discount airline Ryanair to place an order for 175 new Boeing 737-800s and launch a winter service from northern Europe to the Canary Islands, making a bet that travellers will have enough spare cash for a winter getaway. “The demand is there,” says airline spokesman Robin Kiely.
Such glimmers of good news are a dramatic shift from the disaster of 2012, when nearly every country in the eurozone saw a sharp drop in factory production and economic growth. Both voters and European leaders seemed poised to reject a bailout and an austerity program for Greece, and analysts feared the deadlock would spread financial panic throughout the continent. Billionaire George Soros predicted last June that the euro had “days to live.”
Much of the recent turnaround can be traced back to the European Central Bank (ECB)’s Outright Monetary Transactions program launched at the end of last year, the result of bank president Mario Draghi’s pledge to “do whatever it takes” to save the eurozone from collapse. By promising to back the bonds of indebted nations such as Greece, Spain, Italy and Portugal, Draghi has helped drive down interest rates in those countries, giving governments more time to repair their budgets. The program “was really, really crucial in achieving more stability in the financial markets,” says Zsolt Darvas, an economist with Brussels think tank Bruegel.
Investors and consumers alike have also been encouraged by signs that European leaders are pushing ahead with deeper economic integration, including a banking union that would create a Europe-wide “objective and impartial” bank regulator—an important step in ensuring that future bank failures don’t turn into government financial crises.
But although politicians are keen to paint a picture of a resurgent Europe, problems remain that could yet trample the green shoots of economic growth. While it has helped bring investment back to Europe, the ECB’s generous monetary policy has taken the heat off leaders to tackle the larger issues facing Europe, says Carlo Bastasin, an Italian economist and fellow with the Brookings Institution in Washington. “There is a complacency that brings us to say things are better now,” he says. “But that complacency is exactly the problem, because it prevents us from taking the necessary steps.”
The biggest hurdle is figuring out how to create more jobs. Unemployment rose to its highest level in seven years last month, with close to 20 million Europeans out of work. In Italy, nearly 40 per cent of young workers are unemployed. Once a manufacturing powerhouse, the country has seen its industrial output slashed by 25 per cent since the crisis began. Companies are starved for funds because the European Union lacks the authority to launch the kind of quantitative-easing programs the U.S. and now Japan are using to pump money into the private sector. One risk is that a very long bout of high unemployment will boost support for anti-EU parties bent on undoing many of the austerity measures that have helped restore investors’ faith. If so, “market confidence would vanish in a minute,” Bruegel’s Darvas says.
European governments also remain far too vulnerable to rising global interest rates, which are expected when the U.S. and Japan eventually start reversing their massive bond-buying programs. That could send rates on government bonds in indebted European countries skyrocketing again, prompting a new debt crisis.
Nor is the Greek revival proving to be a smooth ride. The country failed to find a buyer for its natural-gas monopoly, a central part of its plan to privatize many of its state-owned businesses to pay off its debts. The streets of Athens, which had grown quiet in recent months, erupted once again in protests over the government’s plan to shut down state broadcaster ERT to save money.
Still, the larger debate over whether Europe’s 14-year-old monetary union will survive the financial crisis appears to be over. Last month, European officials formally voted to admit Croatia as the newest member of its union in July. Critics questioned whether admitting a country that is still rife with financial cronyism and political corruption was a sign that Europe hasn’t learned from lessons of the Greek debt crisis. But few questioned why Croatia would want to join Europe’s biggest economic club, with its requirement that the country eventually give up its independent currency and adopt the euro. “Nobody disputes anymore that Europe will remain as a common currency and probably will never have a breakup,” says the Italian economist, Bastasin. “The political will behind it was stronger than any kind of problem.” For now, at least, Europe is back from the brink.