When European finance ministers approved another $64 billion in aid to Greece in December, Europhiles breathed a collective sigh of relief. Economic catastrophe had been averted and the so-called "Grexit" now seemed unlikely. The $64 billion, like previous installments, would soften Greece's fiscal adjustment program -- the severest in history -- and the country would gradually recover. Inside Greece, however, economic salvation has felt far less reassuring. The government coalition has aired a predictable sense of optimism, but overburdened and overtaxed citizens do not share its enthusiasm for the country's grim economic outlook. Bailout or not, economic despair is now descending over Greece.
Fiscally, Greece's adjustment has been successful. The government deficit has been cut from 15.6 percent of GDP in 2009 to an estimated 7 percent in 2012. This year, the government could theoretically record an annual primary surplus. At the same time, Greece's Athens Stock Exchange General Index recorded the strongest performance in the Western European market in 2012, surging 33 percent, and Greek borrowing spreads have begun to narrow.
But the cost of economic reform has been staggering. 2013 will mark the sixth year of Greece's "Great Depression," during which the country has lost more than a quarter of its GDP. Although the United States' depression saw GDP decline 27 percent, it lasted for only four years (1929 to 1933) and the country returned to its pre-Depression GDP level only eight years later, surpassing it the year after. This kind of recovery will almost certainly not happen in Greece before 2020.
Moreover, Greece's depression dynamic is far worse than what the piecemeal policies prescribed by the "troika" -- the International Monetary Fund, the European Union, and the European Central Bank -- could possibly remedy. Personal income has been in free-fall since 2010, and it's unlikely that wages will rebound for many years. At the same time, the country's output has regressed to levels last seen in the 1990s -- before nearly two decades of European integration that pulled GDP per capita in Greece to within striking distance of the EU average. And as the country's debt sustainability is being put to the test, so is society's ability to withstand hardship.
At the same time as the Greek welfare state is being gutted, the expectations, income, and quality of life for an entire generation are being adjusted downward. The same generation that became accustomed to cheap credit following Greece's accession to the eurozone in 2002 is now trying to learn to live on far less. Wages in the private sector have declined more than 30 percent since 2010, and wage floors (minimum monthly wages) have fallen 22 percent -- and 32 percent for those younger than 25. Meanwhile, lack of competition, oligopolistic behavior, and rising taxes have kept prices elevated.
Unemployment is set to surpass 26 percent by 2014, according to the conservative Bank of Greece, or 31 percent according the German-based Kiel Institute for the World Economy. These forecasts exceed the 24 percent reached during the depths of America's Great Depression. Over 60 percent of unemployed Greeks have been without work for more than a year, an alarming trend given the difficulty of addressing long-term unemployment. Youth unemployment, meanwhile, which clocks in at 55 percent, has already surpassed rates in most countries with similar labor force participation rates. And the light at the end of the tunnel is a long way off. Analysis of previous crises by the International Labor Organization showed that the average recovery time for youth employment during crises in countries where the pre-crisis employment level was eventually attained is 11 years, while in many countries employment only achieved a new trough.