Download YannosPapantoniouTRANSCRIPT24Nov2009

YANNOS PAPANTONIOU
Hellenic Observatory Policy Seminar
Greece and the Crisis:
Recovery or Decline?
London School of Economics and Political Science
24 November 2009
It is a particular pleasure for me to be here, among many old friends and colleagues.
Especially Kevin, I would like to express to you my most sincere appreciation for the
excellent job you have been doing all these years at the Hellenic Observatory, as well
as for the opportunity you are giving me to address the challenges Greece is facing in
the context of the current economic crisis.
As we know, Greece was characterized until the middle of the nineties by
exceptionally weak economic performance: low rates of economic growth, huge fiscal
deficits, very high inflation and interest rates, unstable currency. The accession into
the European Economic and Monetary Union (EMU) created new conditions leading to
the stabilization of the economy, through the drastic reduction of deficits and inflation,
and to the acceleration of growth. Over the last decade, the annual rate of growth was
4%, about three times higher that over the preceding twenty years.
The upgrading of Greece’s economic performance during the period before accession
in the year 2000 was based on stabilization policies, important structural changes
aimed at improving competitiveness as well as the implementation of major
infrastructure projects. The growth was fueled by the increased confidence gained by
consumers and invertors alike through the securing of stability conditions. Low
inflation, low interest rates, strong currency, led to higher levels of consumer and
investment expenditure. Thanks to the structural reforms and the modernization of
infrastructures, the productive base of the country responded positively to the growth
of demand. Eventually, however, the external deficit widened excessively, reflecting a
lack of adjustment of the economy to the new competitive environment. Private and
public borrowing followed a sharply upward trend. The country started to live above its
economic potential. The greatest part of savings was channeled to financing fiscal
deficits, while productive investments decelerated and competitiveness weakened.
The global economy faces the greatest crisis of the portwar era. The only comparable
precedent is the oil shock of the 1973-74 period, that was repeated in 1979, creating
fears of long-term stagflation. However, the problem of the seventies was not related
to deficiency of global demand, but to transfer of resources – through a revaluation of
oil – which required stability-restoring policies so as to secure a return to normal levels
2
of economic activity. The exit from that crisis did not lead to new growth patterns, with
the exception of factoring into the model the element of energy saving.
Today, the situation is different. First, global demand suffered substantial losses and
recovers in a slow and uncertain way. Despite the extraordinary reflation packages
and the coordinated loosening of monetary policy, no return to normal activity levels is
in sight, particularly in the short term. Moreover, unemployment continues to rise
acquiring the characteristics of a long-term problem.
Second, the causes of the crisis, residing in functional weaknesses of the global
financial system as well as large imbalances in the external accounts of the economic
superpowers, particularly in the US-China trade accounts, do not appear to be
addressed in an effective way. The planned changes in the regulatory framework of
the financial system are insufficient, providing little protection against the emergence
of new crises due to excesses either in the growth of lending or in the scope of
financial innovation. At the same time, global economic governance does not dispose
the means to curb imbalances (for example, by influencing the determination of
exchange rates).
Third, the legacy of the global crisis is the fiscal problems produced by the reflation
packages. The public debt of advanced countries is reaching excessively high levels,
making it necessary to introduce restrictive policies which will have a negative impact
upon the pace of economic recovery.
Within the unfavourable international environment described above and the uncertain
prospects concerning the pace of recovery, Greece faces additional problems of its
own making. These problems are not “new”, in the sense that they have come into
existence during the recent years. However, their gravity worsened considerably
during the period of conservative governance that ended in the October 2009 election.
The country is facing an acute fiscal crisis, whose dimensions far exceed the limits of
the problem in other European countries – with the exception of Ireland. The huge
increase of the fiscal deficit – which reached 12.7% of GDP this year – has created
conditions of explosive growth of the public debt – projected to exceed 120% of GDP
3
in 2010. Debt ratios at such heights risk triggering a credit crisis. Borrowing costs may
rise to levels that it will be difficult for the economy to endure. It is not excluded, either,
that problems occur in covering borrowing needs, necessitating the adoption of painful
measures that will lead to a reduction of incomes and a sharp increase in
unemployment.
At the same time, the worsening competitiveness of the economy restricts the
possibility of taking advantage, or even part, of the global recovery – whenever it
comes. Production remains grounded to traditional labour-intensive branches and is,
therefore, vulnerable to the growing competition of low-wage countries.
The preceding New Democracy (ND) government bears heavy responsibility for letting
the economy weaken to such a dramatic extent. Both the fiscal and competitiveness
deficits have widened very considerably during the last five years because of policy
laxity, inaction and a clientistic approach to the management of the state apparatus.
Reforms have been effectively absent from the government agenda while those that
were attempted lacked any significant impact because they were badly designed and
poorly executed. It is no wonder that ND lost the recent elections by a very large
margin registering, in fact, the lowest share of votes in its history.
The coexistence of a major fiscal crisis and lack of competitiveness preclude any
substantial resumption of economic growth even in the unlikely event of a dynamic
global recovery. Rather, the weight and explosive dynamics of the public debt in
combination with the devaluation of the country’s productive potential point to
stagnation of incomes and a continuous rise in unemployment.
The prevention of such outcomes requires an aggressive policy for addressing
immediately the fiscal crisis as well as for reinforcing competitiveness.
Fiscal consolidation must proceed at a quick pace and be completed for the larger part
in the beginning of the new government’s term, before valuable political capital is
expended. It is equally clear that it should not be based on new taxation, but on
curbing pervasive tax evasion as well as wasteful public spending. The government’s
4
stated objective, as expressed in the new budget, appears to be in line with this
approach.
With respect to reinforcing competitiveness, it is critically important to move to a
knowledge economy, to new technologies and advanced organization patterns.
Investing in a well educated and trained labour force, raising the employment rate,
promoting research, creating on institutional and administrative environment that
favours entrepreneurship and innovation, provide the foundations of a new
development strategy. Public investment and EU projects should support the
introduction of new technologies as well as green growth. Information technologies
and renewable sources of energy should have high priority.
Concerning the energy sector in particular, Greece should move away from the
present pattern of high energy intensity and oil dependence. The implementation of
the necessary reforms will require proper planning and appropriate incentives. Such
reforms would help attract large-scale investments and contribute to strengthening
competition in the energy sector, creating new businesses and jobs while reducing the
country's oil dependence. Therefore, these reforms would also help reduce the current
account deficit. The present crisis environment should not be viewed as an obstacle to
such developments. Green investment could contribute to the recovery of the
economy.
Reforms need to be far-reaching in order to have a significant impact upon the
performance of the economy. Achieving a sound and efficient public sector, upgrading
human capital as well as strengthening competition in all markets are keys for both
fiscal consolidation and reinforcing competitiveness.
The OECD Regulation Database, the World Economic Forum competitiveness survey,
the World Bank “Doing Business” and “Governance Indicators” and European
Commission estimates, to name a few, all find that in Greece the administrative
burden is exceptionally high, that regulation of markets is excessive, that government
intervention limits competition as well as resource allocation and pricing decisions in
crucial network industries, that the regulation of professional services is high as far as
entry and price setting is concerned, while qualitative standards are excessively lax
5
and the business environment is unattractive. These findings are complemented by
more general statements that indicate weak institutions and high levels of corruption.
The latter in turn seems to follow as a consequence of the high administrative burden
and poor governance, that allow powerful and well connected interest groups to
capture the state and create for themselves rents taking advantage of excessively
bureaucratic procedures. In a similar way, one can also reconcile almost all of the
other pieces that describe the weak performance of the country, ranging from the
weak research effort and lack of innovation to the neglect of environment and the poor
quality of public health services as well as of schools and the higher education
system.
Radical reforms are necessary across a wide spectrum of economic and social
policies, crystallizing on the need to restructure the institutions and the administrative
system whose deficiencies account for a large part of the country’s woes.
•
Decentralisation of functions and strengthening of market signals so as to
improve the quality of services and accelerate the speed of delivering
outcomes. Greek state universities should gain freedom from the Ministry of
Education so far as personnel management, pay policy, curricula and student
selection are concerned, and accept that their funding will be related to
evaluation results for their educational and research output. State hospitals
should also gain additional degrees of managerial freedom in return for
accepting that their funding will be related to efficiency criteria in delivering
services.
•
Greater competition and flexibility regarding personnel policy covering
promotions and pay so as to attract talent and ensure top quality at the higher
echelons of the administration. Strict seniority rules prevailing in many
branches of government such as justice should be abolished.
•
Reinforcement of independent authorities in fields such as competition and
mass media, ensuring fair application of rules and sanctions. Strong and
independent internal audit systems should be established so as to combat
effectively corruption.
6
•
A targeted deregulation, involving abolition of antiquated laws and rules
particularly regarding licensing as well as simplification of administrative
procedures so as to remove obstacles to entrepreneurial activity and the
creation of new firms. Such action is essential for promoting innovative
enterprise and investment, both domestic and foreign, and attaining
international standards of competitiveness.
At the same time, growing inequalities, underpinned by the worsening performance of
the welfare state, must be addressed squarely so as to reinforce social cohesion and
solidarity. A major objective of tax reform should be income redistribution. Curbing tax
evasion will, by itself, greatly contribute to attaining higher levels of equity. Rebuilding
the welfare state is a more complicated proposition touching upon the wider problem
of institutional reform. Upgrading the quality of public health and employment services
requires, besides reforms aimed at modernizing management structures, improved
training levels for the personnel as well as substantial new investment in infrastructure
and equipment.
This is a vast and ambitious project affecting many important sectors of economic and
social policy. For it to be carried out, many features of the successful EMU-accession
project should be emulated: strong political will and leadership; a cohesive and
efficient “task force” of committed politicians and officials; substantial dialogue and
consultation with social partners and other interested parties in order to create the
necessary alliances.
This
last
point
is
particularly important
because
the
implementation of such radical policies will undoubtedly encounter fierce opposition
from entrenched interests and lobbies while challenging antiquated mentalities.
Greece finds itself at a critical crossroads. If it does not recapture the dynamic of
reforms, it will not only miss the train of the present era, but it faces the risk of
regression.
The PASOK government appears to be determined to move in this direction. To
succeed, it requires ambition, stamina and ability. We should support it in order to
carry out a reform agenda that is crucial for the country’s future.
7
8