Is Greece reformable?
On the question of whether Greece is a country that can change, my answer is affirmative. Yes, Greece is a country where reforms can be made that improve the quality of democracy, strengthen the economy and change the lives of Greeks for the better. Better education and better health for all, more efficient justice, better public transport, environment and infrastructure, less bureaucracy, less tax evasion, more competition. These reforms increase productivity and reduce costs, thus improving rates of economic growth. Ultimately, they increase prosperity and contribute to greater equality of opportunity.
In the previous 10 years, many reforms were made, most of which were imposed on us by the three bailouts. We stabilized the economy, the banking system, the insurance system, improved the tax collection process and competitiveness, liberalized certain markets. The question is whether we can continue them. I think we can, since the Greek people also say that they want them. So, the timing is ideal.
While the period after the restoration of democracy saw the establishment of an exemplary democracy, from an economic point of view, and especially a fiscal one, we did not do well. That is why we reached near bankruptcy in 2010. But every cloud has a silver lining. Greece – despite the division and false dilemmas between those who support the bailouts and those against them, despite the great tribulations of the first half of 2015 – finally succeeded. And not only did it succeed, but in return it also received a great “gift.” The largest financial aid ever given to a state. Greece received loans totaling 289 billion euros for the refinancing of its public debt with an interest rate of 1.1%, and a 20-year term, while the debt is held by official bodies.
This creates a sense of security for many years, under two conditions, which partially ensure the sustainability of the public debt: firstly, that the primary surplus hovers around 2% of GDP on a cyclically adjusted basis and, secondly, that certain basic reforms proceed decisively in the direction I mentioned above. In this way, the great “gift” given to us, which was based on the sacrifices of the Greek people in previous years, will be utilized.
At this point, I would like to point out a problem that we will be confronted with if we do not deal with it quickly, which is the lack of a large enough labor force. At the moment, we lack 200,000 hands in activities related to tourism, agriculture and construction. If we don’t find them immediately, we will start to have problems in the economy as well. In the 1990s, when Greece was in the process of fulfilling the “convergence criteria” set by the Maastricht Treaty, it was the foreign workers who kept Greek inflation low. Most people think our problem was mainly the public sector deficit. It wasn’t the most important one. It was inflation, because we had an economy that started with interest rates of 19% only to drop to about 4%. This big rate cut overheated the economy and drove up all prices. If we did not have immigrants in the agricultural sector and construction, we would not then achieve the inflation criterion.
Fifty years ago, the Greek public debt was well below 60% of GDP, which is the limit enshrined in the European Union Treaties. We owe it to the next generations to bring it back down to this level. At the Bank of Greece we have made calculations according to which with a primary surplus of 2% of GDP and with reforms of the type I mentioned above, we can ensure, on the one hand, the desired primary surplus and, on the other, an appropriate difference between the interest rate of the public debt and the rate of economic growth (this is called a “debt avalanche”), so that we reduce our debt to 60% of GDP in about 40 years. It is something feasible and we must bequeath it to our children and grandchildren.
‘Democracy is not in danger in Greece today, because it has solid foundations. What is needed is to improve its quality. And quality will improve through the strengthening of institutions’
Democracy is not in danger in Greece today, because it has solid foundations. What is needed is to improve its quality. And quality will improve through the strengthening of institutions. Let us consider here the example of the Bank of Greece. Since it became an independent institution it has played a very important role in building a sense of confidence in the economy. Who doubts that if the Bank of Greece did not exist, we might not be in the eurozone today after the tribulations of the first half of 2015, with the talk of a parallel currency and parallel banking system?
Therefore, the strengthening of institutions is a key element for the quality of democracy. The ultimate goal of all of us is for people to be happier. And how will they be happier? By being free from the fear of unemployment, poverty, disease, their children’s future, the lack of access to progress and public goods.
Fear and economic disparities also feed populism, which threatens democracy. But fear is also created by ignorance, economic illiteracy, the lack of basic knowledge and the weaknesses of the educational system. The creation of inequalities is due to the nature of the free economy system. One of the main problems of the Western world is how to reconcile capitalism with democracy. Capitalism means a free market. The free market, however, also needs a social safety net, so that inequalities are not created. And this net is supported by targeted social policy, effective public education and health, a fair and efficient tax system, and effective market supervision.
It may not be widely known that even after the big economic crisis that we went through in the last decade, Greece is in a relatively good position based on the United Nations Human Development Index (HDI). Based on that index, and weighted by population, Greece is in the upper 13% of the world’s population. The index includes not only include the GDP, but also areas such as education, health, quality of life and the environment. Therefore, despite the crisis, Greece is today a relatively prosperous country and, if we have to build on this, then in the next 50 years this 13% can become 5% – a goal that is not impossible but needs effort and persistence.
All reform efforts in every sector are important. However, if I had to choose three, I would choose education first, health second and the environment third. In my opinion, the main problem in Greece is education. The country’s performance in the PISA (student assessment) competition is not encouraging. Also, in the OECD’s skills index, we are in the worst position, after Turkey. Despite the fact that we have many graduates and postgraduates, the OECD classifies 18.5% of them as citizens with very limited skills. Only Turkey is worse than Greece in this indicator. Therefore, the biggest reform for me must be in education, and in fact on all its levels, because that’s where everything starts!
Yannis Stournaras is the governor of the Bank of Greece.
