By Klaus Schrader, David Benček, Claus-Friedrich-Laaser
Kiel Institute for the World Economy, IfW
In 2014, there was evidence that Greece’s economic situation would take a turn for the better for the first time in a long while. A positive growth rate and a primary surplus of the Greek state budget seemed to signal that the reform and austerity policy would pay off. But last year’s political turmoil which led close to a sovereign default and a Grexit set back economic recovery and fiscal consolidation again — a zero growth and a small primary budget surplus are not sufficient to overcome the crisis. It is cold comfort that Greece’s economic situation could have been even worse: required growth rates at the 3 per cent level and the envisaged primary surplus of 3.5 per cent of GDP are still out of sight.
But how realistic is the hope that the third economic adjustment program will induce a turn for the better? The Memorandum of Understanding from August 2015 comprises a suitable reform agenda – as it already was with the last bailout programs. The Memorandum seems to imply the awareness that structural reforms matter for enhancing competitiveness and growth. Reforming the labor market, modernizing the educational system, liberalizing product markets, improving the business environment, better regulating the network industries, continuing the privatization process, and reorganizing public administration and other state institutions – no cornerstone of a comprehensive reform process was missing in the Memorandum.
However, this list of structural reforms negotiated with the Greek government raises a feeling of déjà vu. Since May 2010, the euro area countries have tied financial assistance for Greece to extensive structural reforms. But the majority of these reforms have not been completed, and the obvious necessity to include numerous familiar reform actions in the new Memorandum underlines this woeful fact. The Memorandum is more or less a complete relaunch of the Greek reform process from the very beginning.
The Memorandum of 2015 is not the only element in the Greek tragedy which evokes a déjà vu. The same comes true with respect to (i) the unbearable debt burden which increases instead of shrinking by sustainable economic growth, (ii) the gloomy income and employment situation, and (iii) the underlying ground for the aforementioned issues: the persistent structural crisis of the Greek real economy.
When analyzing Greece’s current economic situation, it becomes clear that without significant growth, the Greek debt will remain unsustainable. Therefore, a final haircut or a phasing-out of the Greek debt burden may be inevitable to make Greece’s public debt sustainable. To be sure, a haircut or a phasing out of the debt burden can only complement supply-oriented structural reforms. Unfortunately, there is reasonable doubt that the Greek policymakers have put it on their own agenda that structural reforms are indispensable for economic recovery. It is therefore crucial that the current government will take the ownership of structural reforms.
The major problem which Greece traditionally and actually is facing is that the country neither overcame its structural weaknesses nor developed export industries as a driver of growth. Greece’s sectoral structures still mirror a low level of industrial development and its service industry suffers from a below-average growth performance compared to other EU countries. And, unfortunately, this situation of lagging behind and mismatch between production potential and income claim has not changed substantially since Greece joined the European Union in 1981.
Greek policymakers should keep in mind that the reform process is essential for improving the conditions for doing business in Greece and attracting private investors. The involvement of private domestic and foreign investors is crucial to initiate the kind of structural change Greece needs to generate economic growth in the long run. A dynamic investment process is indispensable for accelerating the modernization of the Greek economy. Greece needs private capital to develop competitive structures and to integrate the economy into international chains of production, preferably with high value added at Greek locations. Greece faces the problem that it can never win a wage race against low-income countries from Eastern Europe or Asia if it seeks to retain its prosperity level. Without the modernization of Greek manufacturing and service industries the decline of economic prosperity will become permanent.
Even if the political willingness for structural reforms should emerge in the course of time it is doubtful that the Greek administration can implement and enforce the reforms without external support. For this reason, a large-scale outsourcing of reform projects is advisable. Therefore, the Greek government should send appropriate signals that it supports the reform process without any restriction and accepts far-reaching technical assistance.
*This article is part of a feature regarding the Greek crisis, within the context of a cooperation between "Naftemporiki" and "DIW Berlin". It is based on the research "The Greek crisis: A Greek tragedy?" and expresses the personal opinion of the author.
