Here’s what Greece needs to fix now

Enterprise - - Contents -

Af­ter months of me­an­der­ing ne­go­ti­a­tions, a deal be­tween Greece, the Euro­pean Union and the In­ter­na­tional Mon­e­tary Fund now seems likely but far from cer­tain. Greece is run­ning out of cash quickly, and should ac­cept prac­ti­cally any deal to avoid bank­ruptcy and pos­si­ble Grexit. How­ever, with all the at­ten­tion to the drama of the er­ratic ne­go­ti­a­tion and the con­tro­ver­sial po­si­tions of sev­eral gov­ern­ment of­fi­cials, not enough at­ten­tion has been paid to the es­sen­tial el­e­ments that will make an agree­ment lead to growth and com­pet­i­tive­ness in Greece.

The three pre­vi­ous agree­ments with the lenders, while lead­ing to­ward a bal­anced bud­get and solv­ing fis­cal deficits, im­ple­mented very few of the mi­croe­co­nomic re­forms that would guar­an­tee Greece be­com­ing com­pet­i­tive and even­tu­ally not need­ing any more loan help. At the sign­ing of its fourth loan agree­ment, it is high time to learn from the mis­takes of the pre­vi­ous three and stress the mi­cro rather than the macro part of the pro­gram.

Greece has a huge and highly in­ef­fi­cient public sec­tor that weighs down on the pri­vate sec­tor. It needs to be re­duced sig­nif­i­cantly through eval­u­a­tions and re­duc­tions of its la­bor force to be­come more ef­fi­cient. The pen­sion sys­tem is in dis­ar­ray with some pen­sion­ers reap­ing huge benefits while oth­ers get very lit­tle com­pared to their con­tri­bu­tions. The pen­sion sys­tem needs to be ra­tio­nal­ized so that pen­sions cor­re­spond to con­tri­bu­tions. This may in­volve se­vere cuts for some, but also sig­nif­i­cant in­creases for oth­ers.

Cor­rupt gov­ern­ment pro­cure­ment in var­i­ous sec­tors, in­clud­ing de­fense and health care, needs to be re­vamped through com­pet­i­tive auc­tion pro­cesses. The “closed sec­tors” of the econ­omy (such as phar­ma­cies and truck­ing) have to be opened to en­try and com­pe­ti­tion. Greece should pro­ceed with pri­va­ti­za­tion of trains, air­ports, ports, and en­ergy. Th­ese sec­tors have been starved of in­vest­ment for years and pri­vate par­ties would pro­vide in­vest­ment as well as run them more ef­fi­ciently.

La­bor- mar­ket lib­er­al­iza­tion is es­sen­tial. To im­prove the ef­fi­ciency

of the Greek econ­omy, it is cru­cial that bu­reau­cratic pro­ce­dures and busi­ness taxes be re­duced. This will at­tract new in­vest­ment as well as lure back Greek com­pa­nies that have re­lo­cated abroad in the last few years seek­ing lower taxes and a more busi­ness-friendly en­vi­ron­ment.

Fi­nally, the public debt bur­den has to be dealt with so that its ser­vic­ing does not ab­sorb money that can be used in public in­vest­ment and grow the econ­omy. The op­ti­mal way to do that is to first shift the ma­tu­ri­ties of the debt to the Euro­pean Union to 75 years, sec­ond re­duce its in­ter­est rates and change them from vari­able to fixed, and third, post­pone ( re­cap­i­tal­ize) in­ter­est pay­ments for a decade. Th­ese ad­just­ments will al­low the econ­omy to grow while re­duc­ing the net present value of the Greek debt by at least 50 per­cent. Growth is the only guar­an­tee that Greece will even­tu­ally pay its debt.

Th­ese are the main el­e­ments of a suc­cess­ful pro­gram for Greece that will al­low the coun­try to grow, be pros­per­ous in the Euro­pean Union as well as pay its debts. Many of th­ese el­e­ments are highly un­pop­u­lar in Greece. The present gov­ern­ment came to power with a plat­form that con­tained el­e­ments op­po­site to th­ese struc­tural re­forms; fur­ther it promised never to im­ple­ment some of them. But re­al­ity should push the Greek gov­ern­ment to ac­cept a deal. The lenders could retreat away from the mi­cro is­sues and deal mainly with the ba­sic fis­cal pa­ram­e­ters. That would be a ma­jor er­ror, re­peated for the fourth time. Un­less the mi­cro is­sues are ad­dressed and fixed, Greece will be ask­ing for a loan again and again over the years.

Deal­ing ef­fec­tively with the mi­cro is­sues of the Greek econ­omy will al­most guar­an­tee that this is the last loan pro­gram for Greece.

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