The growth plan for Greece begins with one main axiom: in a situation where the GDP of the country is contracting, the only way for the country to grow is through a trifecta of extensive reforms, exports and foreign direct investment. The key to all this is the notion of “production” as a national goal.
The significant growth rates that Greece displayed in the last decade were the result of lower interest rates, through its participation in the Eurozone. Cheap money flowed into the Greek economy – and financed consumption instead of production. As a small economy, Greece was a price-taker in its tradable sector. Thus, better chances for profit making appeared in the non-tradable sector of the economy --- an effect which further increased wages without following the productivity patterns.
This unsustainable process came to an end with the Greek debt crisis – and made us turn our focus towards creating a new model of production and a new institutional architecture for Greece.
Before delving deeper on what has been achieved so far in Greece, one first needs to be aware of the conditions under which the Greek reform program is being implemented.
Specifically, the implementation of the reform package touches upon issues of the proper functioning of our democratic system and of our national sovereignty.
In a time frame of 24 months, 248 pieces of legislation were passed in parliament that included comprehensive reforms from the tax and the legal systems to education and the environment – an average of one law for every three days – and then be judged on results.
One should also note that until the formation of the current coalition government in Greece, all the parties that were not in power – from the Right to the Left – were firmly against the reform package – along with organized groups on behalf of the employee classes that were most affected by the reform package. Furthermore, all the reform measures had to be implemented by a public administration that was experiencing 30% or more cuts in their average wage and for the first time faced the possibility of unemployment.
All this occurred in a national landscape where the possibility of disorganized default dominated daily social and political discourses – a process which was further fueled through an often problematic portrayal of the Greek effort through stereotypes that are very unfitting for the achievements and the history of the Greek people.
Thus, in my talk today I would like, as convincingly as possible to address five myths that concern the Greek efforts of the last two years and to showcase the ways in which Greece has been progressing so far.
MYTH #1: It’s better for everyone if Greece leaves the Euro
This view is absolutely mistaken.
First, such a scenario would be devastating for Greece. According to a widely circulated report by UBS, if a country like Greece left the Euro, it could lose 40% to 50% of its GDP during the first transitional year. Many economists – especially in the United States – have argued that it would actually be beneficial for Greece to leave the euro. They are too easily forgetting the huge transitional costs. Greece would have huge issues of access in pharmaceuticals and energy to begin with – while our banking sector would face additional issues. At the same time, the benefits of devaluation wouldn’t be too significant because Greece’s main issue does not like in export prices per se but in the organization of its productive base.
It’s interesting to underline that the same report states that if Germany were to leave the Euro, it could also lose 20% to 25% in the first transitional year.
Second, it is highly unclear what the domino effect from a Eurozone exit would be. The whole discussion about the existence of a “firewall”, that would protect the other countries from a Greek exit is purely theoretical --- and we have seen how many times we have failed to foresee the reaction of the markets to similar decisions, as the Lehman Brothers case has painfully taught us.
A single currency was always considered to be an integral part of the European Single Market Project, in order to increase competition and productivity in the union. The euro offered an effective way to control inflation, especially for the formerly inflation-prone countries of the peripheral South, through the acquisition of a credible inflation-targeting monetary policy.
At the same time, the single currency was attractive for Germany as well, because 1) it allowed it to operate in a large internal market where the inflation prone countries would not be able to recover their lost competitive edge through devaluations, and 2) where a lower external exchange rate for the euro would allow Germany to boost its exports outside the Eurozone without exercising any form of currency manipulation.
The economic cost is, quite possibly, the least of the concerns investors should have about a break-up. Fragmentation of the Euro would incur political costs. Europe’s “soft power” internationally would diminish (as the concept of “Europe” as an integrated polity would increasingly become void). It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.
I think that this analysis leads to the conclusion that as long as Greece’s pushes with reforms in close cooperation with its counterparts, it is in the best interest of Germany and the other Eurozone members not to disrupt the existence of the common currency in its current state and membership. In fact, I think that any different scenario will prove much more catastrophic than anticipated.
MYTH #2: Greece has failed to cut its budget deficit
In reality, Greece managed to reduce its budget deficit by 6.5% in just two years – a rather unprecedented performance., In absolute terms, the budget deficit was at 36.6 billion euros in 2009, decreased to 24.1 billion euros in 2010 and then further to 20.3 billion euros in 2011 – a total decrease of 16.4 billion euros.
The reason why the initial targets were not perfectly met was not because the Greek government was failing to meet the absolute fiscal targets --- but rather due to a deeper than projected recession, caused by the cuts themselves. In fact, since 2008, Greece’s GDP has contracted by 13%.
Nonetheless, this should not negate the monumental effort of cutting the deficit by 6.5 percentage points in just two years. As one might expect, this process hasn’t been bloodless.
Our aim is to further reduce the deficit in 2012 and achieve primary surpluses starting in 2013 – with an aim of 1.8% surplus in 2013 and 4.5% surplus in 2014.
MYTH #3: Structural Reforms are not being implemented
While there have been delays on some instances, again, the reform effort that has taken place in the last two years is unprecedented. Reforms have touched all aspects of Greek life – from public administration and bureaucracy to education and the legal system. Greece has displayed the highest overall responsiveness to OECD reform recommendations from all other member-states during 2008-2011. According to the Euro Plus Monitor, Greece ranks no2 in terms of its total degree of adjustment in its economy during 2009-2011, after Estonia.
In public administration, we had to start from scratch. Things that are being taken as a given in Germany were not present in the Greek case of 2009. We held the first comprehensive census of public servants and pensioners and established a single payment authority. The implementation of the Diavgia program – which involves the mandatory publication of all spending decisions of the Greek public sector online -- is by itself a revolution. At the same time, the Kallikratis plan changed the administrative model of the Greek state by reducing the number of municipalities from 1,034 to 325 and placing regions at the epicenter of Greek governance, with cost reduction in the area of 400 million euros annually.
We have liberalized 108 closed from July 2011. This took many forms -- from decreased fees by 30% for notaries and changes in the legal profession to the removal of quantitative restrictions at the road haulage sector on road transport operator licenses.
In education, comprehensive reforms took place that touched primary, secondary and tertiary education – most of which received broad bipartisan support.
In what concerns foreign direct investment, there is this other myth, that Greece is hostile to foreign investments. I am afraid that Greece has historically been hostile to all investments, regardless of their origin. I have studied cases of German firms that are either already located in Greece or wish to enter the Greek market – the problems that they are facing are exactly the same with the ones Greek firms are. This means that we are in need not of eclectic but, rather, of systemic solutions in the Greek business environment. The aim is to minimize the interaction of the investor with the state and eliminate all unnecessary bureaucratic procedures – while accelerating the decision-making processes of the Greek legal system in issues that involve business activity. Many reforms have taken place in the last two years -- many new ones are included in a bill that I introduced in the Greek parliament just today. A new law has also passed parliament this year that significantly simplifies and accelerates legal processes.
Finally, after the completion of the Greek debt restructuring, it is expected that the Greek Asset Development Fund will manage to raise 40-50 billion euros. This privatization scheme is the largest divestment program in the world. We expect that the fund will significantly contribute to restarting the Greek economy and fuel economic growth.
MYTH #4: Greece isn’t becoming more competitive
In reality, Greece has been consistently closing its current account deficit, which is the most direct measure of a country’s competitiveness.
All of the problematic countries of the Eurozone had current account deficits in the previous period. In simple words, this means that they were borrowing from abroad in order to finance spending at home. Current account deficits are not that problematic per se, as long as they are taken into account in the calculations of the long-run ability of a country to service its debt. However, in the European case, they tended to reflect problematic competitiveness and productivity levels.
The Greek current account deficit fell from 14.9% of the GDP in 2008 to 9.8% of the GDP in 2011. This improvement stems from 1) declining labor costs, 2) the increasing pressure on Greek firms to shift focus from the domestic market to exports, but also 3) the improvements that have taken place in the last years in what concerns the broader regulatory environment for business. Of course, shrinking Greek incomes are also a factor in this equation, in terms of decreasing demand for imports.
In what concerns exports, Greece has traditionally been a laggard in the EU and the EMU – often occupying the last position in the relative rankings among its peers. In exports, Greece is increasingly faring better: our goal for 2012 was to reach a level of 10% of the GDP – which we already achieved in 2011 – with the exact number being 10.4% of the GDP. Our goal for 2014 is for exports to reach 16% of the Greek GDP.
MYTH #5: Greeks are not making any sacrifices
From all the myths, this is the one that is the most mistaken.
Nominal wages in the Greek public sector decreased by an average of 30% in the last two years. For specific classes of employees, the cuts were much more significant. The average wage in Greek State-Owned Enterprises is 65% of what it used to be in 2009. Pensions have also decreased significantly – cuts in the area of 20% were made in 2011 and 12% in 2012 – with additional cuts of 11% in supplementary pensions. At the same time, the surcharge on main pensions increased up to 10% in 2010 and 14% in 2011. Finally, all the instances of Greeks retiring early from work have been ceased and the retirement age has significantly increased.
130,000 positions have been eliminated from the Greek public sector since 2009 – while an aggressive rule that for each new hire five exits are required. At the same time, more than 310,000 people per year lost their jobs since 2010 due to the severe recession – with unemployment surpassing 20% of the working population and youth unemployment about to each the 50% mark.
However, while wages are declining, prices are often sticky. Plus, on many instances, obligations for the average Greek household have remained stable. It is extremely difficult for a country to grow itself out of a severe recession, solely through austerity and reforms.
In most instances Greece that has failed to achieve an agreed goal, it has typically been due to the unforeseen level of recession and not due to the lack of cooperation on behalf of the Greek government and the Greek parliament, which has been consistently voting for austerity measures despite their deep-rooted unpopularity due to a sense of national duty.
Greece has a firm commitment to do its part – and it will. Not only will we keep up with reforms, but we will accelerate.
But Europe should do its part as well. By that, I am not negating the huge efforts that have been done on behalf of the EU Commission, the ECB and the National Governments of the EU-27. I am trying to underline that sometimes there are solutions that work and solutions that fail – and in order to catch up with the expectations of the market, we should be audacious in our reach – fix problems before they appear and not after.
There is a story I like to recall and which I mention in a book I wrote in the midst of the previous decade. When the Persians invaded Greece in 490 b.c., the Oracle at Delphi said to the Athenians “The wooden walls will save the city”. The conservatives of the time, perceived this as a message from the Gods that new fortifications should be built around the city. Themistocles and the progressives interpreted the message differently – and decided to built a new fleet – which later won the Persians at the battle of Salamis.
The example for us to follow as Europeans is crystal clear – we can opt to built new walls – or we can opt to build new ships and explore new shores.