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Macroeconomics

17 February 2015

Bailout or Grexit? 

Greece could enjoy faster growth than any other EU member state next year, according to the European Commission, as long as it sticks to the bailout program currently the subject of heated negotiations with its European partners. If the talks fail, Greece could default on its debt next month and leave – or be forced out – of the eurozone.

The country’s economy returned to growth in the second quarter of 2014 after six years of recession, the Commission says, expanding by 1% over the course of the year. It forecasts that the country’s GDP will grow by 2.5% this year and 3.6% in 2016, and that investment will expand by 2015.

However, that growth is contingent on the country’s new government agreeing to continue with the structural reforms agreed as part of the bailout. But the Syriza-led administration argues that continuing austerity is making the country poorer and hampering its ability to generate the economic growth necessary to repay its creditors.

They point to the fact that the economy contracted again in the final three months of last year, suggesting that current policies are unlikely to produce a strong recovery in the foreseeable future.

Since 2008, the Greek economy has shrunk by about one quarter, and the gap with other EU countries has grown, especially in employment. The number of people without work has tripled to 26%, and three quarters of those have been jobless for more than a year.

A third of the population is at risk of poverty, and the population is falling, mostly as a result of emigration, leaving fewer working-age people to support a growing proportion of retirees.

The Greek government, along with some politicians from other EU countries and leading economists, argue that repayment of its debt should be linked to economic growth. Some of its EU partners are skeptical, but one way or another, a change seems inevitable.