Greece and the new rescue package

23/02/2012 | Manthos Delis

Published at http://lecercle.lesechos.fr/

… If one listens to the arguments made in the majority of the media both in Greece and abroad, the overwhelming impression is that the new rescue package is solely about wage cuts and tax increases.   In contrast, four out of five policies in the new deal concern structural reforms for the Greek economy  …

Following the first rescue package provided to the Greek economy by the Troika, we have seen the recession in Greece unfolding to a depression. A natural question arises about the efficiency of the proposed measures in the Greek case, whether Greece should default on its debt and/ or whether to leave the euro zone.

If one listens to the arguments made in the majority of the media both in Greece and abroad, the overwhelming impression is that the new rescue package is solely about wage cuts and tax increases. In contrast, four out of five policies in the new deal concern structural reforms for the Greek economy. Indeed, for the most part, the new rescue package requires that Greece will:

- Simplify the payments system, introduce e-auctioning systems in the public sector to promote the efficient use of public investments

- Fiscally decentralize the public sector to provide local authorities with more powers

- Liberalize the labour market and all the professions to increase employment

- Overhaul the tax system and introduce electronic payments to fight tax evasion

- Open up the energy market to create green jobs and increase energy output

- Strengthen the legal system, with an emphasis on public finance cases

Not surprisingly, most of these proposed policies were included in the first rescue package, almost two years ago. Unfortunately, with few exceptions, only the recessionary policies related to wage cuts and tax increases were implemented. These policies are horizontal, which hurts productivity and detracts the most efficient and productive labour away from Greece. If the structural reforms were now in place, I am not sure at all that a recession would be hitting the Greek economy. After all, zero economic growth would imply a public deficit as low as 4-5% of GDP, which is still high but “acceptable” compared to the current one of almost 10%.

Given the above, the road ahead should be clear to all the involved parties, i.e. the Greek government and the Troika. Greek politicians should break bonds with political and economic interest groups and facilitate change through structural reforms, giving priority to the liberalization of markets and to the strengthening of institutions. The first will gradually create new investment and employment opportunities and the second will help increase public revenue through the reduction of tax evasion and corruption.

The Troika needs to help in this strategy. Since the summer of 2011, there have been plans in place to revitalize supply-side policies through investments in public infrastructure, which are now completely frozen. This so-called “new Marshall plan” seems to have followed the negative dynamics of the structural reforms. Indeed, more than six months have passed since there has been any productive support to the local authorities for the absorption of funds from the National Strategic Reference Framework (NSRF). Since 2011 this investment remains particularly low, failing to contribute to economic growth in a time period that it is much needed. Support on this front clearly needs to be provided in a way that promotes growth in those sectors that Greece has a comparative advantage, so as to help the particularly negative current account deficit recover. Further, the Troika needs to be more active in providing solutions for the institutional failures and, in particular, for those institutions associated with economic crime. This seems to be quite a necessity for a long-term recovery. 

The road ahead for Greece is rocky and there is no easy economic solution. However, the alternative to the bailout package, the return to a Greek currency, will signal massive bank runs, the loss of household savings and, potentially, riots that we have seen only in the underdeveloped world.

Europe will also suffer to the extent that its banking system is exposed to Greek sovereign debt or to bonds from Greek banks. The problematic feature of the economic arguments in favour of bankruptcy is that the already weak Greek institutions cannot guarantee even the safety of property rights in such an event. A bankruptcy will further weaken these institutions, the quality capital, both human and physical, will flee and these institutional effects will be long term and devastating. From this perspective, the fast implementation of policies related to structural reforms, especially in the areas of comparative advantage, and the enhancement of institutions are the sine qua non for the future of the Greek economy.

Author: Manthos Delis

Professeur, Cass Business School de Londres

Membre depuis le 23 février 2012

Nombre de contributions : 1

Professeur spécialiste en Economie Bancaire à la Cass Business School de Londres, auteur de référence dans de nombreuses revues économiques et financières en Grande-Bretagne et appartenant au Top 100 des plus jeunes économistes du Monde, selon IDEAS.

[Eng]: Economics professor specializing in banking at Cass Business School in London, author of reference in many financial and economics journals in Britain and belonging to the 100 best young economists of the World, according to IDEAS.