Six years ago, Greece was on the brink of bankruptcy. To avoid falling over the edge, the country was obliged to sign a series of agreements with the European institutions and the International Monetary Fund, and thus obtained the largest loan in the history of mankind while undertaking one of the largest fiscal adjustments ever implemented during peacetime. By studying the results of these agreements, it becomes clear that the country’s preexisting growth model did not work well. The reasons behind this have been much discussed, and the blame game – mostly among politicians – has been a common aspect of the public debate; and will probably continue to be so.
The key question, however, is equally obvious: what happens now? If that growth model failed – and fail it did, overwhelmingly – what should replace it?
diaNEOsis assigned a team of Greek researchers, led by Panos Tsakloglou, Professor in the Department of International and European Studies at the Athens University of Economics and Business and member of diaNEOsis’ supervisory board, to undertake a study with three objectives: to map the structural causes of the crisis, to record and evaluate everything that has been done during the last six years, and, mainly, to highlight the macroeconomic priorities and the necessary reforms required for the country to forge a new and viable growth model.
You can read the full study here (in Greek). Below, the basic findings will be examined.
How did we arrive at bankruptcy?
The factors that led Greece to the brink of bankruptcy have been much discussed, mainly in the context of the domestic political debate. However, there exist some basic elements and facts that are undisputable and which describe the critical failures of the former Greek economic model, thus explaining why its collapse was inevitable.
In the mid 1990s, Greece began to move towards participation in the European Monetary Union. In order to do so, the economic situation needed to shape up. Inflation fell, Greek banks began to borrow from the markets at lower interest rates, and so they began to lend at lower interest rates to businesses and households.
Low interest rates, along with the capital that was injected into the economy through European Union structural funds, resulted in one thing: increased demand.
This, in turn, led to a rapid increase in imports, while domestic products were either insufficient, or unable to compete with imported products. Inevitably, a significant increase in all prices followed. The value of property increased, as did the value of shares, salaries, and expenditure on pensions.
At the same time, the economy was affected by a series of additional crucial factors:
- Tax revenues were not increasing at the same rate as prices, due to widespread tax evasion.
- Exports were not increasing. Greek products were either more expensive than or inferior to foreign products, and therefore non-competitive.
- Investments were being made mainly in construction and infrastructure.
What happens in a country that spends more without a corresponding increase in revenue? Public debt begins to pile up.
In 2008, when the global financial crisis erupted, Greece already had very high public debt relative to its GDP. Moreover, while its GDP was decreasing, the percentage of debt grew even larger. In 2009 it reached 127%.
Suddenly, the markets began to suspect that at some point Greece would not be able to repay its debt. To adjust for this risk, they began to lend at higher interest rates. While uncertainty continued, interest rates also continued to increase, until at some point it became clear that Greece could not borrow any more money.
At this point, the - now infamous - troika was created so that Greece could borrow funds in order to avoid bankruptcy, as long as it followed a series of conditionality agreements.
The memorandum years
Greece was, of course, not the only country that received low interest loans from the troika, in order to commit itself to a reform program. It was not the only country that signed a memorandum.
In contrast to other European countries that signed memoranda, Greece has still not managed to extricate itself.
At the beginning of the crisis, Ireland (2010) and Portugal (2011) also signed a memorandum, as did Spain (2012) and Cyprus (2013). In contrast, Greece did not sign one but three memoranda, in 2010, 2012 and 2015. Also in contrast to these countries, Greece received amounts in excess of 300 billion – the largest loan in the history of mankind.
In contrast to these countries, Greece has still not managed to extricate itself from the memoranda.
In the six years of the memoranda, Greece has managed the largest fiscal adjustment in modern history.
From 2009 to 2013, in just four years, Greece’s primary deficit of 10.2% of GDP became a primary surplus of 0.8%, an adjustment much higher than other members of the EU. Greece’s current account deficit was in surplus for the first time since 1948. Imports fell by 10%, while exports rose by 11%.
Despite public discourse, structural reforms did actually happen. From 2007 to 2014, Greece was first among OECD countries in implementing reforms (also because it started from a very low point; from 2007 until 2009 basically no reforms were undertaken).
However, these requirements for the country’s sustainable performance did not come without a cost. From 2008 to 2013, the country’s GDP decreased by 25%. Household disposable income was reduced by a third. The unemployment rate jumped from 7% to 27%, while 2/3 of the unemployed are long-term unemployed.
During the last six years, the Greek economy has experienced a crisis the likes of which no other OECD member state has experienced during peacetime. And it still isn’t over.
What needs to be done to make sure these sacrifices have not been in vain?
diaNEOsis’s study focuses on exactly this question: What should a new economic model for Greece look like, and which are the reforms that must be implemented to achieve it?
What do we do now?
According to the study, the main problems the Greek economy is facing include:
- The duration of the recession, which has led to, among other things, very high levels of unemployment
- Decrease in investment activity since 2008, especially in foreign direct investment
- Lack of sustainability of the pension and of the insurance system, and of public debt
- Uncertainty in the investment climate, mostly due to the lack of a stable tax system
- The elevated number of closed markets and professions
- Poor quality of public healthcare
- Poor quality of public education
- Poor quality of the public sector (lack of transparency, bureaucracy)
- The absence of a coherent immigration policy
- Lack of trust in institutions and low "social capital"
All the above constitute significant issues. The fact that the former Greek economic model had not managed to address any of them clearly explains its bankruptcy. So, if someone wanted to sketch a new growth model for our country, this could actually be quite simple: the above problems need to be solved. If they are addressed, economic development will inevitably follow. Of course, this is easier said than done.
The researchers, in order to describe a realistic path towards the adoption of a new economic model, delineated two types of objectives: the "ultimate" and the "intermediate". The ultimate goals must be:
- Ensuring the sustainability of the debt and of the pension system
- Sustainable GDP growth
- Improving social protection for the weak
The intermediate targets that could be set are essentially defined by the country’s current economic situation and by the above list of problems and economic distortions. These are:
- A stable macroeconomic environment
- Solid social organization institutions
- An efficient and effective public sector
- A mix of fiscal policy that focuses on economic growth
- A modern education system
- A modern healthcare system
- Modern Infrastructure
- Competitive markets for goods and services
- Incentives for increased savings and investments
- Configuration of an outward-facing and export-oriented model for domestic production
In order to achieve the above, major and substantial reforms are necessary. The difficulty in this case lies not so much at the specification of reforms but rather at the design of a realistic plan for their implementation. For a reform to pass, it must take into account economic, social but mainly political conditions. In the past, especially the latter blocked the implementation of many important reforms, resulting in a series of ‘partial’ reforms, as they were called, which were characterized by supplementarity. Their analysis spreads to four chapters in the study, but in summary they include:
1.Initiatives in public administration and electronic governance, which include, among other things, the development of a modern human resources management system, the evaluation and overhaul of general government structures - and the abolishment of those that are no longer useful, the extension of the "Diavgeia" program for transparency, the full implementation of a strategy for electronic governance and the development of a strategic plan to ensure the effectiveness of procedures and operations of the public sector.
2.Adoption of a tax system that provides incentives for work and investment, while also ensuring a fair distribution of revenue and wealth (Find diaNEOsis’ analysis of the Greek tax system here).
3.Initiatives in the judicial system to reduce backlog, improve the efficiency of judges, establish programs for their training in critical areas, as well as the reorganisation of the judicial system through the modernization of procedures, the use of digital systems and the creation of specialized courts.
4. Changes in the goods and services markets, with the provision of incentives to businesses, the further liberalization of closed professions and the strengthening of the export sectors by removing bureaucratic obstacles.
5.Interventions in the financial system for the modernization of the bankruptcy framework and the restructuring of entities that have declared bankruptcy, the improvement of the framework for protection of bankrupt households, as well as the improvement of banks’ loan portfolios.
6.The effective utilization of public property.
7.Initiatives to strengthen the sectors of the Greek economy that showcase significant competitive advantage, such as tourism, agriculture and foods, manufacturing, energy, transport, information technology and others.
8.Labor market interventions to utilize all the possible tools of active employment policies (training, grants, social work), in order to fight the high unemployment rates, along with the liberalization of the labor and goods’ markets.
9.Changes to social protection policies to reduce inequality and combat poverty. These should be accompanied by a new social security system, separating insurance from welfare benefits. The implementation of a guaranteed minimum income scheme is considered essential, as Greece is one of the only three European countries that have not implemented similar policies (find diaNEOsis’s study on combating extreme poverty here).
10. Measures introducing the assessment and the evaluation of the education system, lifelong learning programs for teachers, upgrading preschool education, redesigning the education process and content in secondary education, expanding all-day primary schools, developing an evaluation mechanism in higher education, with more autonomy and accountability.
11. Linking research centers with one another and with the private sector, providing incentives to attract high-tech entrepreneurs, strengthening the institution of venture capitals to support research and innovation.
12.Restructuring of the public health system, by enhancing primary healthcare and improving its interface with secondary healthcare, merging low-capacity hospitals, introducing new technology to improve hospital efficiency, introducing evaluation practices, promoting transparency in procurement, activating mechanisms to increase generic drug usage, general use of standard protocols and electronic medical records, and limits on numbers of admissions to medical schools.
The reforms mentioned above are analyzed in depth in the study, with reference to specific measures. Moreover, one can find a comprehensive analysis of policies implemented during the last few years in each sector. The above mentioned reforms have one thing in common: they were essential even before the crisis. Many of these (e.g. pension reform) have been under discussion for decades. A mix of political costs, risk aversion and specific interest groups’ coordinated response over time have prevented their implementation thus far.
As the authors of the diaNEOsis study note "reforms should normally be implemented in a period of economic boom, when groups who have something to lose feel less insecure, and they can be compensated by an economy that is expanding".
Unfortunately for Greece, this opportunity has been lost, and the reforms need to be implemented now, under the worst possible economic and social circumstances. They remain, however, absolutely essential.
With the publication of this study, diaNEOsis aspires to contribute to this effort.