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WHAT DO THE GREEK
ELECTIONS MEAN FOR
GREECE’S FUTURE?
LSE HO
London 5 February 2015
Dimitri Vayanos
Bailout plan -- Successes



Greece remained in Eurozone.
Banking system, which was insolvent, was recapitalized successfully.
(Near) Elimination of twin deficits.



Budget deficit: Primary deficit was 10.5% of GDP in 2009. Has turned
into surplus of 0.8% in 2013, 1.5% in 2014, proj 3% in 2015.
Trade deficit: Current account deficit was 11.2% of GDP in 2009. Has
turned into surplus of 0.7% in 2013. Deficit of 2.3% in 2014, proj 2.2%
in 2015.
Structural reforms.


World Bank Doing Business Report: Greece ranked 109 in 2009 (2010
report). Has improved to 78 in 2012, 72 in 2013, 61 in 2014.
Largest improvements in:


Starting a business. (140 in 2010, 52 in 2014)
Trading across borders (i.e., exporting). (80 in 2010, 48 in 2014)
Bailout plan -- Failures

Large contraction.

GDP dropped by 24.6% between 2008 and 2013. (0.6%
growth in 2014, proj 2.9% in 2015.)

Unemployment rose from 9.5% in 2008 to 27.5% in 2013.
(26% in 2014, proj 24% in 2015.)

Sharp drop in investment.

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
Fixed capital formation dropped from 23.8% of GDP in 2009 to
11.4% in 2013. (12.7% in 2014, proj 13.8% in 2015.)
Trade adjustment almost exclusively through imports.
Limited reforms in product markets and public sector.
Trade Adjustment

Change between 2007-2012 as % of 2007 GDP:
14%
12%
10%
Imports
8%
6%
Exports
4%
2%
Trade balance
0%
Greece
-2%
Ireland
Portugal
Spain
Desired Steps Forward

Reduce state intervention in the economy.




Improve accountability and incentives in public sector, and make it
more independent from government.






Regulatory burdens in product markets are highest among European
OECD member countries.
Regulatory burdens in labour markets (e.g., collective dismissals) higher
than, e.g., Denmark, Germany, Sweden.
…
Universities are micro-managed by Education ministry.
Political interference in statistical and tax-collection authorities.
Performance evaluation of judges and other civil servants lacks rigour.
…
Goal: Bring Greece’s institutions to a level comparable to those of
advanced Western European countries.
Reforms are necessary for long-run membership in Eurozone.
Debt

National debt is 177% of GDP.



Solution:





Very large (although maturities are long and interest payments
are low).
Partly because Greece was not allowed to default on its private
creditors in 2010.
Reduce debt burden (e.g., by extending maturities or directing EU
structural funds)…
… gradually, and conditionally on reform milestones.
HIPC. Has been applied to over-indebted countries (mostly thirdworld).
Savings from debt reduction can be used to fund reforms (e.g.,
pensions, welfare system).
Greece’s main problem is lack of reforms and NOT debt.
Current Government

Statist, anti-market agenda. Exact opposite of what is
needed.
Increase size of public sector. Reduce accountability and
incentives.
 Cancel privatization programme.
 Re-regulate labour market.


Positives: Intention to fight corruption and tax evasion.

However:
Statism creates incentives for corruption because it prizes political
connections.
 Fighting corruption and tax evasion requires strong and
independent agencies, and it is unclear whether government is
committed to that.

Going Forward

Official lenders unlikely to agree to relaxing or
reversing reform effort.


If commitment to reforms continues, then they could agree to
future debt relief.
Possibilities:

U-turn by current government.


Unlikely given its anti-market agenda.
Escalation.
Default by Greek state?
 Troubles in banking system?
 New elections or referendum on Euro exit?
