It’s time for a new deal
The beginning of a new year, indeed a new decade, is a good time to look ahead at the prospects of the Greek economy. It is also roughly six months since the government of Kyriakos Mitsotakis took office and it is useful to look back and review how they have been doing.
The news is mostly good. Greek public sentiment regarding economic prospects is at the highest level since the country's economic collapse more than a decade ago. In 2019, the economy grew for a third year in a row – originally estimated a modest 1.8 percent but now revised to more than 2 percent, which is higher than the European Union average, and everybody is predicting continued growth for 2020.
Still, there is a sense of disappointment: The forecasts continue to talk about growth at around 2 percent per annum for the next decade, which means that Greece, having lost 25 percent of its per capita income during the crisis, is unlikely to regain its earlier level before 2030. And although many jobs have been created, unemployment is still at 17 percent, the highest in the EU.
The International Monetary Fund and the European institutions bemoan the fact that the recovery has not been stronger. Indeed, the IMF points out in its most recent report that Greece’s recovery has been weaker than that of Ireland, Portugal, Spain and, I would add, Cyprus, all countries that went through a crisis in the last decade. It is important to ask why that has been the case and what can be done about it.
To be sure, there are many differences between Greece and these other countries, including the nature of the problem and the policies each pursued to get out of their difficulties. But there is one major difference worth pointing out: In none of the cases were these countries forced by their creditors to sustain a government budget surplus of the size and duration that was forced on Greece.
Running a budget surplus of 3.5 percent for five years and a continued surplus of 2 percent for the indefinite future in order to maintain sustainability of the outstanding government debt – i.e. so as to ensure that the creditors are repaid – is a straitjacket that constricts the capacity of the Greek private sector, through heavy taxation both of consumers and business. It takes the money away from those that can spend it and makes it impossible to have the kind of rebound one would expect from a country coming out of a crisis.
But there is nothing magic about the 3.5 percent target: The IMF, which is not known for recommending fiscal laxity, said in its October 2019, Article IV Consultation, “Staff urged the authorities to seek consensus with European partners on a lower primary balance target, given the large negative output gap and the need to bring down high tax rates and address unmet spending needs.” It is clear that a lower surplus will stimulate growth and thereby improve rather than reduce debt sustainability, the concern of all creditors – in Greece’s case, the EU, which holds almost 70 percent of its external debt and now plays a dominant role in the continued surveillance of the Greek economy.
The Greek economy suffers from a variety of structural deficiencies that need to be addressed: Despite some recent improvements, Greece ranks behind practically all EU members in the World Bank’s “Ease of Doing Business” index; there are many oligopolistic structures; there are closed professions earning large rents; and there is a sclerotic justice system involving large delays. All these need to be addressed.
According to both the IMF and the last Commission report, the Mitsotakis government has made a good start in most cases – good enough for the Commission to conclude in its last Enhanced Surveillance Report last November that “Greece has taken the necessary actions to achieve its specific reform commitments for mid-2019.” Further actions will be crucial to complete, and where necessary accelerate, reforms. But their impact will only be felt over time. What are the priorities now?
The greatest and most urgent short-term need is to revitalize investment. Greece ranks last in the EU in the proportion of its GDP devoted to investment. Growth, inclusive and sustainable, does not happen without a spurt of investment. Unfortunately, a lot of the problems derive from a banking sector that is still struggling and whose return to health will take years. Both the IMF and the Europeans have been correctly making banking sector improvements a key priority.
The Mitsotakis government has said that increasing investment is a priority and has proposed stimulating the construction sector – which has been the Greek economy’s motor in the past – though tax breaks. But one has to be careful: Speculation in the sector was part of the bubble that burst in 2009, and the sector presents many opportunities for tax evasion.
Much more must be done. There is about 7 billion euro waiting to be contracted from the European Structural Investment Funds, assistance provided by the EU under the 2014-20 program which has yet to be contracted and may be lost. Only 37 percent of the funds budgeted six years ago have been spent. Amazingly, though both the IMF and the European Surveillance teams have highlighted the importance of raising domestic investment and decried the fact that the government investment budget has been underspent, they have said nothing about this issue. ESPA, the Greek agency that deals with the EU Structural Funds, is not even mentioned in their reports which cover practically all government agencies and activities.
I have argued before (see Kathimerini, August 5, 2018) for a new deal with the Europeans, involving less budget stringency and conditioned on Greek governments continuing their efforts in structural reforms. As shown by the largely positive reports of all the surveillance missions, by and large, the Greek governments have done their part – notwithstanding the 2019 pre-election shenanigans and setbacks of Alexis Tsipras’ administration. The time has come for a new deal: The Europeans should be more relaxed about getting repaid, and be willing to loosen the requirement of running a large primary budget surplus. In exchange, the Greek government should explicitly commit itself to a target of increasing the amounts it spends on investment.
Greece’s demonstrated access to the capital markets in the last two years means that the government can borrow in these markets the sums needed to service all its forthcoming obligations, including the roughly 5.5-billion-euro annual interest bill. Indeed, recently it was able to borrow enough at the prevailing very low interest rates to repay 2.7 billion euros of high-cost money owed to the IMF in advance.
To be sure, there are future risks: A global economic slowdown is always possible, which would hurt Greek exports and tourism; Brexit and the US president introduce uncertainties; and the Greek economy has strong economic links with countries in its dangerous neighborhood. But the government has already built sufficient large reserves, in the range of 32 billion euros, to address such contingencies.
The European institutions are now performing their fifth enhanced surveillance of the Greek economy. This presents the opportunity for a deal: The European institutions should reduce the expected primary surplus by 2-3 percent of GDP, and in parallel the Greek government should commit to a target of an equal increase in the government investment budget spending. This is a pro-growth deal. The opportunity should not be missed.
Constantine Michalopoulos is senior policy adviser at the Hellenic Foundation for European and Foreign Policy (ELIAMEP), a former senior official at the World Bank and adjunct professor at Johns Hopkins University and American University.
