A blue­print for Greece’s re­cov­ery

Financial Mirror (Cyprus) - - FRONT PAGE -

Months of ne­go­ti­a­tions be­tween our gov­ern­ment and the In­ter­na­tional Mon­e­tary Fund, the Euro­pean Union, and the Euro­pean Cen­tral Bank have pro­duced lit­tle progress. One rea­son is that all sides are fo­cus­ing too much on the strings to be at­tached to the next liq­uid­ity in­jec­tion and not enough on a vi­sion of how Greece can re­cover and de­velop sus­tain­ably. If we are to break the cur­rent im­passe, we must en­vis­age a healthy Greek econ­omy.

Sus­tain­able re­cov­ery re­quires syn­er­gis­tic re­forms that un­leash the coun­try’s con­sid­er­able po­ten­tial by re­mov­ing bot­tle­necks in sev­eral ar­eas: pro­duc­tive in­vest­ment, credit pro­vi­sion, in­no­va­tion, com­pe­ti­tion, so­cial se­cu­rity, public ad­min­is­tra­tion, the ju­di­ciary, the labour mar­ket, cul­tural pro­duc­tion, and, last but not least, demo­cratic gov­er­nance.

Seven years of debt de­fla­tion, re­in­forced by the ex­pec­ta­tion of ever­last­ing aus­ter­ity, have dec­i­mated pri­vate and public in­vest­ment and forced anx­ious, frag­ile banks to stop lend­ing. With the gov­ern­ment lack­ing fis­cal room, and Greek banks bur­dened by non-per­form­ing loans, it is im­por­tant to mo­bilise the state’s re­main­ing as­sets and un­clog the flow of bank credit to healthy parts of the pri­vate sec­tor.

To re­store in­vest­ment and credit to lev­els con­sis­tent with eco­nomic es­cape ve­loc­ity, a re­cov­er­ing Greece will re­quire two new public in­sti­tu­tions that work side by side with the pri­vate sec­tor and with Euro­pean in­sti­tu­tions: A devel­op­ment bank that har­nesses public as­sets and a “bad bank” that en­ables the bank­ing sys­tem to get out from un­der their non-per­form­ing as­sets and re­store the flow of credit to prof­itable, ex­port-ori­ented firms.

Imag­ine a devel­op­ment bank lev­er­ing up col­lat­eral that com­prises post-pri­vati­sa­tion eq­uity re­tained by the state and other as­sets (for ex­am­ple, real es­tate) that could eas­ily be made more valu­able (and col­lat­er­alised) by re­form­ing their prop­erty rights. Imag­ine that it links the Euro­pean In­vest­ment Bank and the Euro­pean Com­mis­sion Pres­i­dent Jean-Claude Juncker’s EUR 315 bln in­vest­ment plan with Greece’s pri­vate sec­tor. In­stead of be­ing viewed as a fire sale to fill fis­cal holes, pri­vati­sa­tion would be part of a grand public-pri­vate part­ner­ship for devel­op­ment.

Imag­ine fur­ther that the “bad bank” helps the fi­nan­cial sec­tor, which was re­cap­i­talised gen­er­ously by strained Greek tax­pay­ers in the midst of the cri­sis, to shed their le­gacy of non-per­form­ing loans and un­clog their fi­nan­cial plumb­ing. In con­cert with the devel­op­ment bank’s vir­tu­ous im­pact, credit and in­vest­ment flows would flood the Greek econ­omy’s hith­erto arid realms, even­tu­ally help­ing the bad bank turn a profit and be­come “good.”

Fi­nally, imag­ine the ef­fect of all of this on Greece’s fi­nan­cial, fis­cal, and so­cial-se­cu­rity ecosys­tem: With bank shares sky­rock­et­ing, our state’s losses from their re­cap­i­tal­i­sa­tion would be ex­tin­guished as its eq­uity in them ap­pre­ci­ates. Mean­while, the devel­op­ment bank’s div­i­dends would be chan­neled into the long-suf­fer­ing pen­sion funds, which were abruptly de-cap­i­talised in 2012 (ow­ing to the “hair­cut” on their hold­ings of Greek gov­ern­ment bonds).

In this sce­nario, the task of bol­ster­ing so­cial se­cu­rity would be com­pleted with the uni­fi­ca­tion of pen­sion funds; the surge of con­tri­bu­tions fol­low­ing the pickup in em­ploy­ment; and the re­turn to for­mal em­ploy­ment of work­ers ban­ished into in­for­mal­ity by the bru­tal dereg­u­la­tion of the labour mar­ket dur­ing the dark years of the re­cent past.

One can eas­ily imag­ine Greece re­cov­er­ing strongly as a re­sult of this strat­egy. In a world of ul­tra-low re­turns, Greece would be seen as a splen­did op­por­tu­nity, sus­tain­ing a steady stream of in­ward for­eign di­rect in­vest­ment. But why would this be dif­fer­ent from the pre-2008 cap­i­tal in­flows that fu­eled debt-fi­nanced growth? Could an­other macroe­co­nomic Ponzi scheme re­ally be avoided?

Dur­ing the era of Ponzi-style growth, cap­i­tal flows were chan­neled by com­mer­cial banks into a frenzy of con­sump­tion and by the state into an orgy of sus­pect pro­cure­ment and out­right profli­gacy. To en­sure that this time is dif­fer­ent, Greece will need to re­form its so­cial econ­omy and po­lit­i­cal sys­tem. Cre­at­ing new bub­bles is not our gov­ern­ment’s idea of devel­op­ment.

This time, by con­trast, the new devel­op­ment bank would take the lead in chan­nel­ing scarce home­grown re­sources into se­lected pro­duc­tive in­vest­ment. Th­ese in­clude star­tups, IT com­pa­nies that use lo­cal tal­ent, or­ganic-agro small and medium-size en­ter­prises, ex­port-ori­ented phar­ma­ceu­ti­cal com­pa­nies, ef­forts to at­tract the in­ter­na­tional film in­dus­try to Greek lo­ca­tions, and ed­u­ca­tional pro­grammes that take ad­van­tage of Greek in­tel­lec­tual out­put and un­ri­valed his­toric sites.

In the mean­time, Greece’s reg­u­la­tory au­thor­i­ties would be keep­ing a watch­ful eye over com­mer­cial lend­ing prac­tices, while a debt brake would pre­vent our gov­ern­ment from in­dulging in old, bad habits, en­sur­ing that our state never again slips into pri­mary deficits. Car­tels, anti-com­pet­i­tive in­voic­ing prac­tices, sense­lessly closed pro­fes­sions, and a bu­reau­cracy that has tra­di­tion­ally turned the state into a public men­ace would soon dis­cover that our gov­ern­ment is their worst foe.

The bar­ri­ers to growth in the past were an un­holy al­liance among oli­garchic in­ter­ests and po­lit­i­cal par­ties, scan­dalous pro­cure­ment, clien­telism, the per­ma­nently bro­ken me­dia, overly ac­com­mo­dat­ing banks, weak tax au­thor­i­ties, and a weighed-down, fear­ful ju­di­ciary. Only the bright light of demo­cratic trans­parency can re­move such im­ped­i­ments; our gov­ern­ment is determined to help it shine through.

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