Econ­omy’s re­sponse to mem­o­ran­dum of­fers hope

Coun­try must stay the course, says BoG gover­nor Yan­nis Stournaras

Kathimerini English - - Focus - BY YAN­NIS STOURNARAS *

ANAL­Y­SIS Greece’s par­tic­i­pa­tion in the Eco­nomic and Mon­e­tary Union and the fa­vor­able con­di­tions this brought led to its econ­omy grow­ing at a rapid pace. This growth was based mainly on do­mes­tic de­mand and con­sump­tion was in­stru­men­tal, be­ing fed by both pub­lic and pri­vate lend­ing. Thus, new prob­lems com­pounded the al­ready ex­ist­ing weak­nesses of the do­mes­tic model of pro­duc­tion: un­jus­ti­fi­ably ex­pan­sive fis­cal poli­cies, swelling debt, a se­ri­ous de­te­ri­o­ra­tion of com­pet­i­tive­ness and a sig­nif­i­cant in­crease in the ex­ter­nal deficit. The global fi­nan­cial cri­sis of 2008 turned the spotlight on the prob­lem cases. In Greece, the cri­sis swiftly turned into a debt cri­sis and the coun­try was shut out of the in­ter­na­tional mar­kets in a pe­riod when the state’s bor­row­ing re­quire­ments were greater than ever be­fore. In 2009, shortly be­fore the out­break of the debt cri­sis, the pub­lic sec­tor deficit stood above 15 per­cent of GDP and the cur­rent ac­count deficit was at sim­i­lar lev­els. No other coun­try in the Or­ga­ni­za­tion for Eco­nomic Co­op­er­a­tion and Devel­op­ment was ex­pe­ri­enc­ing such a toxic com­bi­na­tion of “twin” deficits.

We all know what en­sued. The mem­o­ran­dum and what came af­ter was noth­ing more than an ef­fort to deal with th­ese two sky­rock­et­ing deficits. The poli­cies im­ple­mented were fo­cused on fis­cal ad­just­ment while also en­sur­ing the credit needed to avert a bank­ruptcy. At the same time, re­forms were pushed through to cure chronic ailments of the pro­duc­tion struc­ture and ease the way to­ward a new growth model.

The sta­bi­liza­tion poli­cies in­evitably came at an eco­nomic and so­cial cost: ad­di­tional re­ces­sion, an in­crease in un­em­ploy­ment and a re­duc­tion in in­comes. To a de­gree, th­ese ef­fects were to be ex­pected and had been ob­served in al­most every sta­bi­liza­tion pro­gram im­ple­mented world­wide. In Greece though, this cost was, ac­cord­ing to all es­ti­mates, a lot higher. The rea­sons have been an­a­lyzed at length and lie in a string of fac­tors that are less tech­ni­cal than po­lit­i­cal, such as: weak­nesses in pro­gram plan­ning and er­ro­neous as­sess­ments of the con­se­quences, but more of­ten backpedal­ing, shift­ing fo­cus, pop­ulism, the hes­i­ta­tion of Greek gov­ern­ments to take own­er­ship of the re­forms and to im­ple­ment the pro­grams with con­sis­tency, to­tal de­nial of re­al­ity and a con­fronta­tional so­cial and po­lit­i­cal cli­mate po­lar­ized by the ab­sence of gov­ern­ment-op­po­si­tion con­sen­sus. Such con­sen­sus was achieved in all the other eu­ro­zone mem­ber-states where sim­i­lar pro­grams were suc­cess­ful in pulling them out of the cri­sis.

All of th­ese fac­tors weighed against the con­sis­tent im­ple­men­ta­tion of the pro­grams. How­ever, the most im­por­tant fac­tor that caused the re­ces­sion to drag on and fed bur­geon­ing un­em­ploy­ment ap­pears to be the in­abil­ity of a sig­nif­i­cant part of the po­lit­i­cal sys­tem to deal with a hand­ful of ma­jor and many smaller in­ter­est groups that re­sisted the re­forms and con­trib­uted to the con­tin­u­a­tion of struc­tural di­ver­gence. As a re­sult, the ef­fec­tive­ness of eco­nomic pol­icy was re­stricted, par­tic­u­larly in ar­eas such as tax­a­tion, so­cial se­cu­rity, in­vest­ment, mar­ket lib­er­al­iza­tion and in the con­se­quent strength­en­ing of the healthy forces of com­pe­ti­tion in the goods and ser­vices mar­kets, the mod­ern­iza­tion of the pub­lic sec­tor and, fi­nally, in the strength­en­ing of com­pe­ti­tion and the rapid re­ori­en­ta­tion of pro- duc­tion to­ward in­ter­na­tional mar­kets.

De­spite the prob­lems, the high cost of ad­just­ment and the fre­quent set­backs, the mem­o­ran­dums, i.e. the fis­cal and struc­tural ad­just­ment pro­grams, which were im­ple­mented from 2010 on­ward, suc­ceeded to a sig­nif­i­cant de­gree in re­vers­ing many of the preva­lent un­fa­vor­able trends and im­prov­ing the econ­omy’s growth po­ten­tial. More specif­i­cally, the pro­grams achieved:

Un­prece­dented fis­cal ad­just­ment. In the 2013-16 pe­riod, the pri­mary deficit was wiped out and, for the first time since 2001, pri­mary sur­pluses were recorded in gen­eral gov­ern­ment ac­counts. Fur­ther­more, the “struc­tural” pri­mary fis­cal bal­ance im­proved by more than 17 per­cent­age points of po­ten­tial GDP in the 200916 pe­riod. So, tak­ing into ac­count the ef­fects of the eco­nomic cy­cle, the fis­cal ad- just­ment in Greece was more than dou­ble that achieved by other mem­ber-states that im­ple­mented sim­i­lar pro­grams.

Re­cov­ery of the large losses in com­pet­i­tive­ness in terms of unit la­bor cost in the 2000-09 pe­riod.

Elim­i­na­tion of the cur­rent ac­counts deficit, which ex­ceeded 15 per­cent of GDP in 2008.

An in­crease in ex­ports from 19 per­cent of GDP in 2009 to 32 per­cent to­day.

The re­cap­i­tal­iza­tion and re­struc­tur­ing of the bank­ing sec­tor, which al­lowed it to weather the cri­sis and stem the flight of de­posits so that lenders to­day have the ad­e­quate cap­i­tal, pro­vi­sions and col­lat­eral which are nec­es­sary con­di­tions (though not suf­fi­cient in them­selves) to deal with the ma­jor prob­lem of non­per­form­ing loans.

Struc­tural re­forms, par­tic­u­larly in the la­bor mar­ket but also in the prod­uct and ser­vices mar­ket and in pub­lic ad­min­is­tra­tion.

An eco­nomic re­bound in the sec­ond and third quar­ters of 2016, re­sult­ing in an ex­pected pos­i­tive growth rate for the en­tire year, for the first time since 2014.

Curb­ing (and slightly de­creas­ing) the vol­ume of non­per­form­ing loans in the sec­ond and third quar­ters of 2016, for the first time since 2014.

The re­forms im­ple­mented over the course of the cri­sis are ex­pected to boost the Greek econ­omy’s growth po­ten­tial in the long term by in­creas­ing pro­duc­tiv­ity and em­ploy­ment. Ac­cord­ing to the OECD, the re­forms im­ple­mented in the 20102016 pe­riod, in com­bi­na­tion with those that will still be im­ple­mented as part of the pro­gram, are ex­pected, ce­teris paribus, to in­crease real GDP by 13 per­cent over the next decade. This es­ti­mate, in fact, is a min­i­mum, in the sense that it is dif­fi­cult to quan­tify and there­fore as­sess the ef­fects of re­forms such as, for ex­am­ple, im­prov­ing the jus­tice sys­tem, bank­ruptcy laws and out-of court set­tle­ment pro­ce­dures, mod­ern­iz­ing pub­lic ad­min­is­tra­tion and, more im­por­tantly, the ef­fec­tive man­age­ment of non­per­form­ing loans. The OECD’s es­ti­mate is also con­firmed by rel­e­vant analy­ses by the Bank of Greece, which have found that the main ben­e­fits of re­forms con­cern speed­ier growth of to­tal fac­tor pro­duc­tiv­ity. More specif­i­cally:

La­bor mar­ket re­forms lead­ing to a 10 per­cent re­duc­tion in em­ploy­ers’ pay­roll costs on a per­ma­nent ba­sis are ex­pected to re­sult, over a decade, in in­creases of 4.5 per­cent of real GDP, 3 per­cent in em­ploy­ment and 4.5 per­cent in pri­vate in­vest­ments. that caused the re­ces­sion to drag on and fed bur­geon­ing un­em­ploy­ment ap­pears to be the in­abil­ity of a sig­nif­i­cant part of the po­lit­i­cal sys­tem to deal with a hand­ful of ma­jor and many smaller in­ter­est groups that re­sisted the re­forms and con­trib­uted to the con­tin­u­a­tion of struc­tural di­ver­gence,’ says Bank of Greece gover­nor Yan­nis Stournaras.

In­creas­ing com­pe­ti­tion in the goods and ser­vices mar­kets by elim­i­nat­ing the ob­sta­cles faced by new busi­nesses leads to a re­duc­tion of profit mar­gins. A 10 per­cent re­duc­tion of profit mar­gins in non­trad­able goods and ser­vices is ex­pected over a 10-year pe­riod to lead to in­creases of 4 per­cent in real GDP, 3.7 per­cent in em­ploy­ment and 7 per­cent in ac­tual in­vest­ments.

Of course, for all of th­ese pos­i­tive ef­fects on the econ­omy to tran­spire, all of the agreed re­forms need to be im­ple­mented without de­lay. If just two-thirds of the agreed re­forms in the goods and ser­vices mar­kets are im­ple­mented over a five-year pe­riod, the cu­mu­la­tive ben­e­fits within the first three years of im­ple­men­ta­tion will be about 4 per­cent of GDP less than they would be if 100 per­cent of re­quired mea­sures were im­ple­mented over five years.

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