Monday, 10 January 2011

The consequences of the crisis left unsaid...

The situation faced by Greece these days has many consequences that have been discussed heavily in the media (unemployment, uncertainty, migration by mostly young and well qualified people, a rise in criminality etc.) but also some contingent consequences that have not been addressed.

Of those left unsaid the one that beats all of them, according to my view, is the crisis’ effect on demographics. This potential knock-on effect has several feedback loops with the economy that are substantial.

High unemployment and the total loss of income that it brings have a negative effect on household formation and the number of births. Especially that can be said about high unemployment among young people around the age that, in most cases, families are formed.

The current growth model that Greece relied on has run its course. It was mostly based on state employment and its spill-over effects on the rest of the economy along with the heavy protection of certain lines of business that guaranteed a hefty profit margin for those involved in them. This was the norm for almost three decades, so people have come to consider it as normal. With the latest developments, where Greece is forced to cut down on deficit spending and to tidy up a prodigal state budget, this growth model has come down with a bang. Hence, it is natural for people to regard the future overwhelmed by uncertainty and stress. This is always the case when change comes suddenly and shutters the conventional beliefs but then Greece had its chances to bring changes gradually and all of them went to waste. Maybe this is part of human nature of just part of the Greek psyche.

I wanted to take a look at similar cases to draw some conclusions. I tried to find data for Argentina where the situation of its 2001 default was in many ways similar to the Greek case but I was not able to. I tried to come up with other countries that had a sudden and all engulfing change brought up on them suddenly and I thought of the former Eastern European communist states and more specifically Poland (which by the way is the only European country not to fall into a recession in the current crisis). So, here we go…

The communist regime in Poland collapsed on 1989 and the country faced a real challenge since it had to transform its economy from centrally-planned into a free-market one. The change going on was phenomenal and it made people feel uncertain about what is coming since this was something that had nothing to do with what they had come to regard as normal over the past forty years or so. Many people migrated and until things started to settle down unemployment was very high.

Unfortunately I only found data going back until 1995. Until the first years of the 00s unemployment climbed at 20% until it started falling on 2003. Therefore, we can safely conclude that the transformation process is not a short one but a rather long one.

source: Central Statistical Office of Poland 

This uncertainty along with the poor economic conditions has a direct impact on household formation and consequently on the number of births. My line of thinking goes like that: if people were used to a higher level of financial security and were mostly steadily employed they have associated these condition with starting a family. When these condition are not met they are hesitant to start a family, hence births tend to decline during such prolonged periods of economic uncertainty and hardship.

Actual data support this since, the number of marriages started to rise after the commencement of the decline in unemployment in 2003, to stall again after the current crisis started when unemployment picked up again.

Births followed exactly the same pattern with marriages. Historically they had declined significantly and steadily since the 80s where the communist party started facing strong opposition domestically (i.e. rising social tensions) and the first cracks in the country’s political system started to show. They only registered an upward trend recently as we mentioned above.

source: Central Statistical Office of Poland

source: Central Statistical Office of Poland

Similarities with the current situation in Greece are obvious not in the political front but in the economic one. Both countries (Greece presently, Poland in the 90s) face a change in their growth mode and that brings uncertainty and economic hardship until things stabilize.

We saw how long the transitional period for Poland was, so let’s hope that the period for Greece will prove to be shorter. Of course the respective situations are not identical since the factors that brought the change are not the same. 

The game changer for Greece which will determine the amount of pain Greek people will take is how fast (and in what way) sovereign debt issues are resolved, until then we are in a debt deflation situation that the raising of indirect taxes has turned into stagflation, at least for now. Of course asset deflation is here, a look at the ASE indices proves that, the same goes for the bonds market and it would apply for the housing market as well, if the market there wasn’t that sticky (I’m not going into this here).    

I expect marriages and births to decline in Greece as well, in the same fashion that they did in Poland in the period examined above. This will put further pressure onto the housing market and it will delay its recovery, of course all connected sectors will feel this too. I could very well be totally wrong, so let’s wait and see what actually happens.

If this situation materializes it will affect other sectors too that I won’t discuss here in length. Let’s just say that it will have dire consequences on the already strained public pensions system and maybe, just maybe (if such a situation persists) it can affect a country’s geopolitical standing (always theoretically apeaking).

So, let’s stick around to find out what actually happens…

No comments:

Post a Comment