In search of a clean break with the past

Financial Mirror (Cyprus) - - FRONT PAGE -

De­spite the rule vi­o­la­tions, the Eurogroup de­cided to re­lax the key “no bail-out” rule and be­gin the pro­vi­sion of mas­sive fi­nan­cial sup­port to Greece, avert­ing bank­ruptcy. This de­ci­sion was based on fear of ‘con­ta­gion’ – the spread­ing of the cri­sis to sim­i­larly vul­ner­a­ble economies in the Eu­ro­zone. While a key ob­jec­tive of the Greek bail-out was to avert a fi­nan­cial cri­sis in Europe, it also pro­vided fi­nanc­ing for a pri­mary deficit in the tran­si­tion to a bal­anced bud­get. This was done on con­di­tion that Greece would agree to a tough ad­just­ment pro­gramme of fis­cal con­sol­i­da­tion and struc­tural re­forms, ne­go­ti­ated and over­seen by the Troika of cred­i­tors – the EU, the ECB and the IMF. It was, of course, known that fis­cal aus­ter­ity is con­trac­tionary on liv­ing stan­dards for the ma­jor­ity of the pop­u­la­tion; but there was also wide­spread ac­cep­tance of a strong hy­poth­e­sis that fis­cal con­sol­i­da­tion when ac­com­pa­nied by broader eco­nomic and struc­tural re­form can im­prove con­fi­dence and com­pet­i­tive­ness and lead to growth.

The de­sign of the first two ad­just­ment pro­grammes was bal­anced in its equal em­pha­sis on spend­ing cuts and tax in­creases on the one hand, and struc­tural re­forms on the other. How­ever, the ac­tual im­ple­men­ta­tion of mean­ing­ful struc­tural re­forms to en­cour­age pri­vate sec­tor in­vest­ment, in­clud­ing for­eign di­rect in­vest­ment, an es­sen­tial el­e­ment of a strat­egy for growth, em­ploy­ment cre­ation and debt sus­tain­abil­ity lagged far be­hind.

A bud­get deficit of 15% of GDP was im­pres­sively vir­tu­ally elim­i­nated, but rel­a­tively lit­tle was done to im­ple­ment the pri­vati­sa­tion agenda, re­duce bu­reau­cratic im­ped­i­ments to pri­vate sec­tor ini­tia­tives while com­bat­ing cor­rup­tion, im­prove the ef­fi­ciency of the public sec­tor, lib­er­alise mar­kets and pro­fes­sions, pur­sue ac­tive labour mar­ket poli­cies and re­struc­ture ed­u­ca­tion to im­prove the qual­ity of out­comes and em­ploy­ment prospects. Most of these ar­eas are be­ing re­vis­ited in the third Mem­o­ran­dum of Un­der­stand­ing (MOU) agreed this year with the cred­i­tors.

As struc­tural re­forms are not only po­lit­i­cally more dif­fi­cult to im­ple­ment, they also typ­i­cally take a long time to bear fruit, de­lay­ing their im­ple­men­ta­tion has dealt a se­ri­ous blow to the suc­cess prospects of the Greek pro­gramme. Worse, as peo­ple lost hope that the good days would re­sume any time soon, they turned to­wards the pop­ulism of the left and the xeno­pho­bic ex­trem­ism of the right.

While fail­ure to im­ple­ment key agreed re­forms was cen­tral to the poor per­for­mance of the Greek econ­omy `iv­ity (known as the fis­cal mul­ti­pli­ers) in a struc­turally dis­torted, con­sump­tion-driven and rel­a­tively closed econ­omy proved much larger than an­tic­i­pated. Fur­ther­more, the com­mon belief that public debt was un­sus­tain­able dis­cour­aged for­eign and do­mes­tic pri­vate sec­tor in­vest­ment im­pact­ing neg­a­tively em­ploy­ment and growth.

Fi­nally, the leg­endary mal­func­tion­ing of the Greek public sec­tor, led to giv­ing pri­or­ity to civil ser­vice re­form, which takes time to pro­duce re­sults, at the ex­pense of prod­uct mar­ket and tax re­forms which nor­mally have a quicker im­pact on out­put. A dif­fer­ent se­quenc­ing of pol­icy re­form with em­pha­sis on quick-im­pact mea­sures, a less dog­matic and moral­ist len­der stance on early debt re­lief that would have re­duced un­cer­tainty, and a more grad­ual fis­cal ad­just­ment would prob­a­bly, with hind­sight, have been more con­ducive to Greek re­cov­ery; but jump­start­ing eco­nomic growth re­quired gamechang­ing and po­lit­i­cally de­mand­ing struc­tural re­forms which were not im­ple­mented.

Cen­tral to the fail­ure to im­ple­ment re­form is a con­tin­u­ing con­sen­sus across the full range of the po­lit­i­cal land­scape and most mass com­mu­ni­ca­tion media that the agree­ments with the lenders are re­spon­si­ble for the prob­lems of the Greek econ­omy. This anti-Troika con­sen­sus in­cludes suc­ces­sive gov­ern­ments which crit­i­cised heav­ily the re­form agenda whilst in op­po­si­tion and, once in of­fice, failed to take real “own­er­ship” of the pro­gramme and pro­vide lead­er­ship to the so­ci­ety at large.

While im­ple­men­ta­tion ca­pac­ity lim­i­ta­tions have played a part, ex­pe­ri­ence with World Bank/IMF sup­ported struc­tural ad­just­ment oper­a­tions strongly sug­gests that po­lit­i­cally de­mand­ing re­form agen­das, con­fronting vested in­ter­ests, are al­ways dif­fi­cult to im­ple­ment but are al­most im­pos­si­ble with­out own­er­ship. The chal­lenges in Greece are of course home­grown and pre-ex­ist­ing and the op­po­si­tion to re­form is strong de­spite the fact that the pro­posed re­forms ul­ti­mately ben­e­fit the more nu­mer­ous un­der-priv­i­leged cit­i­zens.

The priv­i­leged classes, which are state-fed and are ben­e­fit­ing from dis­tor­tions, mo­nop­o­lis­tic prac­tices and cor­rup­tion, are strongly rep­re­sented in all po­lit­i­cal par­ties, which in turn, cham­pion their in­ter­est. This is where the Troika failed to com­mu­ni­cate, to re­spond to the ac­cu­sa­tions of those in­ter­ests dur­ing the im­ple­men­ta­tion of the first two pro­gram agree­ments. They have not made a se­ri­ous ef­fort to ex­plain the ra­tio­nale of the re­form pro­gramme through a more ac­tive en­gage­ment with civil so­ci­ety, and they have also done a dis­ser­vice to the Greek peo­ple by not push­ing much harder on the im­ple­men­ta­tion of key struc­tural re­forms, while at the same time over em­pha­sis­ing and ap­plaud­ing fis­cal aus­ter­ity.

Dur­ing the Eurogroup dis­cus­sions that even­tu­ally led to a third pro­gramme agree­ment for Greece, the Greek side ar­gued that the short­com­ings in the mon­e­tary union that al­lowed ex­ces­sive bor­row­ing in Greece and else­where in the pe­riph­ery were as much to blame for the ori­gins of the cri­sis as the more fre­quently dis­cussed nar­ra­tive of pol­icy fail­ures at the na­tional level. They also ar­gued that the mis­man­age­ment of the cri­sis by the Eu­ro­zone lead­er­ship, which failed to ad­dress the prob­lem of debt sus­tain­abil­ity up­front, put more weight on bail­ing-out Euro­pean banks and, to en­able Greece to ser­vice this debt, im­posed an ex­cep­tion­ally harsh aus­ter­ity pro­gramme on the Greek peo­ple, con­trib­uted heav­ily to the fail­ure of the first two pro­grams.

There is a lot of truth in this al­ter­na­tive nar­ra­tive which iden­ti­fies chal­lenges that need to be ur­gently ad­dressed, but re­form­ing the Eu­ro­zone’s ar­chi­tec­ture and even re­duc­ing Greece’s debt bur­den will not by it­self im­prove Greece’s com­pet­i­tive­ness and growth prospects. Im­ple­ment­ing far­reach­ing struc­tural re­forms to make it at­trac­tive for pri­vate en­ter­prise to em­ploy, pro­duce and ex­port should be the key con­cern of pol­icy mak­ers and the wish of the vast ma­jor­ity of the Greek peo­ple.

As the Greeks fi­nally choose to own, and stay on, the road to re­form, the coun­try will also ben­e­fit from EU ini­tia­tives to al­le­vi­ate the debt bur­den for suc­cess­ful pro­gramme coun­tries and will be able to ar­gue for more room for fis­cal ex­pan­sion. Mon­e­tary stim­u­lus by the ECB, struc­tural re­form and room for fis­cal ex­pan­sion could be the tril­ogy of si­mul­ta­ne­ous ac­tion to strengthen both ag­gre­gate de­mand and sup­ply and open the way to faster growth. The chal­lenge go­ing for­ward is, there­fore, less on the out­come of the Septem­ber 20 elec­tions and more on the forg­ing of a strong so­cial con­sen­sus to im­ple­ment an ag­gres­sive struc­tural re­form pro­gramme to max­imise growth prospects. In par­al­lel, any re­main­ing fis­cal ad­just­ment should be grad­ual, rely less on tax in­creases, and put em­pha­sis on pro-growth public ex­pen­di­ture restruc­tur­ing. This will be the supreme test for the po­lit­i­cal lead­er­ship that emerges from the up­com­ing elec­tions.

This year marks the fifth an­niver­sary of the ac­ri­mo­nious pe­riod in the Eu­ro­zone when Greece’s ad­mis­sion of gross vi­o­la­tion of the agreed fis­cal dis­ci­pline rules marked the be­gin­ning of the Eu­ro­zone cri­sis.

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