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Greece – Current state of affairs and the way forward Business Europe EXCO / March 2015 Bailout programs at a glance (Start of program till end of 2014) • € 241,8 bn (107% of GDP) • € 78 bn (43% of GDP) • € 85 bn (49% of GDP) • -24,1% in GDP • Unemployment from 9,6% to 26,6% • Nominal compensation per employee: -14,6% • -2,9% in GDP • Unemployment from 12% to 14,2% • Nominal compensation per employee: -1,1% • +11,4% in GDP • Unemployment from 13,9% to 11,1% • Nominal compensation per employee: 2,7% Greece (May 2010) Portugal (May 2011) Ireland (January 2011) Data base year before program approval. AMECO data . Fiscal adjustment results at a glance Primary budget balance of the general government (% GDP) Source: February 2015 forecast of the European Commission. Excluding one-off measures (the middle data panel of the table) and both one-off measures and the impacts of the economic cycle (i.e. the structural balance, the right data panel of the table), Greece has clearly implemented the largest fiscal adjustment among Eurozone programme countries. Economic & political impact …of the Greek adjustment program •A steep increase in unemployment 27% and a historical fall (-24%) in GDP. •Significant reforms were implemented but did not eliminate the regulatory gap with the euro area average. •A large fall in (especially) private sector employee compensation (low by euro area standards even in 2010) improved much labor competitiveness but did little to overall competitiveness. •Primary surplus has been mainly achieved by overtaxation and fiscal cuts. •Political system volatility - 4 elections in 5 years. Complete meltdown of Social democrats (PASOK) from 44% (2009) to 4,5% (2015). Rise of radical left SYRIZA from 4,6% to 36%. Rise of neo-nazi Golden Dawn 7% (2015) and populist right (Independent Greeks). •Public support for the euro has increased (7080%) An unprecedented fall in GDP (over 25%) and employment Reforms have been implemented in 2010-14. Still plenty of room to improve. Indicative list of reforms 2010-2015 Labour market and pension system reforms • 2012 labour market reforms introduced increased flexibility in the determination of wages and reduced the minimum wage. This allowed the adjustment of the economy to shift from cutting jobs to cutting wages, and ultimately for the increase in employment. • Consolidation of pension funds and severe cuts in pension expenses Business environment reforms • It is easier to start a company. • Significant improvement in the licensing process of smaller companies and the workings of customs. • Liberalization of closed professions (fees and excessive entry restrictions for lawyers, engineers and numerous other professions). Tax reforms • Revamping of tax codes • Restructuring of tax authorities The tax paradox: Improved tax revenue for the state came from overtaxation and not tax evasion Greece now levels on the EU average regarding tax revenue. BUT this achieved by high taxes at the individual level for honest taxpayers. Tax and social security payment evasion in particular by numerous smaller companies and self-employed. This discourages in particular the development of larger companies that depend on well-paid salaried employment. Therefore the part of the tax base that is lucrative for the state is thin and as a result we have: Modest tax and social security revenue for the state by squeezing out the few. The simplest index: per employee average gross earnings in the Greek private sector less than half of euro area average. What has gone wrong in Greece “It takes 2 to tango” Troika Institutions - Policy design Greece Implementation • Lack of experience-expertise in economic restructuring and debt management within a single currency union. “Haircut” was a dirty word back in 2010 due to incomplete EU structure. • Lack of appropriate European mechanism to deal with a sovereign debt crisis. • “Big problem, little time”. Only suitable analogy with the case of East Germany which took 15 years to restructure. • Strategic mistakes contracted real economy (e.g. government lending from the Eurosystem) and growth forecasts never materialized. • The debt crisis evolved into a financial crisis. Access to liquidity for businesses was not addressed appropriately and on time. Cost of money still impedes export-led growth. • Structural reforms should have been key pillar of the program, along with fiscal adjustment. Not vice versa. • Greek governments should have opted for “fair austerity”. Instead, due to incapacity, they opted for horizontal austerity measures and tax increases instead of targeted ones which a) framed the program as UNFAIR in the mindset of people and b) plummeted any growth potential for years. • Political elites and public administration are generally anti-reformists and unsophisticated in policy design. • Fragmented social welfare services did not avert expansions of social inequality and widespread new poverty. • Institutions and Social Partners are weak and not properly integrated in the reform agenda. • A stronger emphasis on wage adjustment (where less was to be gained in terms of competitiveness within a self-employed business structure) and a weaker emphasis on structural reforms and reduction in administrative burden. What is at stake now Greece: squandering of past achievements, loosening of external pressure to go on with reforms & strengthening of institutions within EU principles and values. EU: increase “fear of currency” in the euro area, endanger coherence of the Union in the long term taking also into account the geopolitical dimension. SEV priorities Achieve a successful deal with the EU Work solutions for private sector financing Reduce non wage cost to increase salaried employment Rationalize energy prices for production Ensure a level playing field in taxation and labor law enforcement Continue with useful reforms (eg justice, licensing, coordination of audits for companies) in consultation with Social Partners. Privatizations as key accelerators of efficiency – ownership does not matter, management does. 12 Our Way Forward Further integration to secure a sufficient level of common policy implementation not only in the financial and fiscal dimension, but also in the dimension of economic (structural) policies. Reduce rhetoric tensions and work together to remove uncertainty. Encourage and support the Greek government to work in the right direction with adequate policy space within a reasonable timeline. Effectively, that is, complete the Single Market and EMU. Take away messages There has been substantial progress on all fronts! We need to avoid the ACCIDENT. The agenda of the new Greek government includes some notable priorities (eg tax evasion, corruption). In spite of a political slowdown, we the Business Community have to promote the European agenda on all possible levels – economic, social, political.