Prof. Nicholas Economides, Stern School of Business, NYU
As we reach the fall of the 5th year of the Greek economic crisis, Greece has good fiscal news as it continues to build a primary surplus. In the other three main economic problems (debt, reform, unemployment), Greece has made only limited progress. Here is what needs to be done now.
- Need to create a wise strategy and persistence in its implementation
Greece needs to set targets, to create a strategy, and above all to insist in its implementation. The stakes are huge. Greece has a realistic possibility of leaving the economic crisis behind it in 15 months. Failure would be catastrophic, creating a political and economic crisis similar to one of May 2012. As I have written before in Kathimerini in the beginning of 2014, at the present juncture, Greece has choices. This requires wisdom in the creation of a strategy, persistence in its implementation, and regaining of credibility for Greece.
- Economic program and strategy
The first and most important issue is growth. All agree on the need for growth. In the long run, it will be created through the improvement of the Greek economy through structural reforms. But how can it be achieved in the short term? Through public investment. Greece is now able to borrow from the international markets by issuing new bonds. All the money (€5 bil. annually) from the new bonds should be put in public investment. Not even one euro should be lost and buried in the general State budget. Through these investments, Greece will create new employment positions, income, tax receipts, and will rebound. And surely, through the boost of public investment, private investors who have been waiting to buy “Greece” cheaper, will now be pushed to invest in Greece by the fear that, if they do not buy now, they will have to pay more in the future. Public investment of €5 bil. yearly (3% of GDP) and 1-2% of GDP private investment will surely make the Greek economy take off. Greece has to convince the Troika to exempt public investment from fiscal restrictions since, through the products and services investment produces, it decreases rather than increases the percentage of debt to GDP. For those who foolishly ask why should Greece borrow from the market at 3-5% interest rather than borrow from the Europeans at 2%, I remind them that the Europeans and the IMF do not lend to Greece all the money Greece wants.
Second, Greece should set up a crucial target to reduce unemployment from 27% to 13-15% in two years through the creation of new employment by the investment program. Greece should convince the Troika that this is a crucial target. After the deep fiscal consolidation, Greece has to immediately act to reduce unemployment. However, this should be done through investments that create new work positions and not through an “employment program” that just subsidizes the unemployed and renames them “employed.”
Third, Greece needs to persevere in implementing the structural reforms. The recent quote of the Greek Economics Minister in the New York Times “Greece has done most of the reforms” is unfortunate. Everyone knows that only few reforms have been made, and most reforms are waiting to be done, including the reduction of tax rates, the reduction of bureaucracy, the increase in efficiency in the public sector, the evaluation of public servants, and the shrinking of the public sector. Greece should say “yes” to the structural reforms, and Greeks should be convinced that they want them done even if they did not have the Troika to remind them to do them. Of course this requires political support. It is crucial that citizens are convinced that reforms are crucial for the long term prosperity of Greece. Some may lose their privileges, but the public will win a lot and for a long time. Surely there is need for prioritization in their substance and time of implementation.
Fourth, Greece needs to tackle the very large public debt that was accumulated from decades of corruption, populism, foolishness, and inertia. Greece is in a good position since it pays small interest rates (average 1.82%, below 2%) on the largest part of its debt that is held by the European Stability Mechanism and the European partners of Greece, and additionally these lenders allow Greece to delay payment of interest for a number of years. Moreover, Greece is lucky that worldwide interest rates are at the lowest of the last 50 years. However, these are likely to increase because of a change in policy of the Fed, possibly before the end of the year.
Greek pubic debt is large as a percentage of GDP, and some worry that at some point in the future it may not be serviceable/viable. This problem is solved through growth, increasing the GDP as I propose above, and reducing the ratio of debt to GDP. And to be sure that in the future Greece will be able to pay interest on its debt, Greece should now ask its European partners to convert the now variable low interest rates to low fixed rates. And Greece should also ask for the reduction of the net present value of the debt by 50% through the elongation of the maturity of the debt to 75 years. The Greek debt will stay the same as a number of Euros, but its net present value will decrease by 50%. This change will give the opportunity to future generations of Greeks to pay off a much smaller debt. To those who say that the elongation of the maturity of the debt burdens future generations, I should underline that, unfortunately, the present Greek generation already (before 2009) has consumed the moneys of its children and grandchildren. The elongation of debt maturity does not add any new burden to future Greek generations. On the contrary, it reduces their burden. Those (including SYRIZA) who advocate that Greece should not pay its debts to friendly countries and should instead blackmail them, are not grounded in reality. Such a move would lead to the exit of Greece from the Euro, the collapse of Greek banks, hyperinflation, and shrinking of incomes to the level of 1950s.
- Greece’s relations with the Troika
The Troika came to Greece to supervise the fiscal consolidation of Greece when suddenly the European Stability Mechanism, the EU partners, and the IMF became Greece’s main creditors. Its second target was structural reforms.
The macroeconomic model of the Troika (that is, the IMF’s) was repeatedly way off in its predictions (as the IMF has also admitted). On the other side, Greece never proposed its own macroeconomic model in the negotiations and never proposed qualitatively different targets than the Troika’s. That is, the negotiations of Greece with the Troika were quantitative and not qualitative, with Greece attempting to get a “discount” of 20% on the proposals of the Troika. The frequent visits of the Troika, the many small installments, and the inertia of the State mechanism cast a shadow on the substance and the objectives of the program. Additionally, the constant repetition of the dilemma for and against the Mnemonia (the agreements of Greece with its creditors) without a real understanding of the content of the Mnemonia denied the Greek people the possibility to take a serious part in the discussion on the future of the Greek economy.
After four years of supervision, having created a primary surplus and the possibility of borrowing from bond markets, Greece is in a much better negotiating position than earlier. But it still lacks a comprehensive strategy, and it still addicted to the quantitative negotiation.
- What Greece should ask of the Troika
First, Greece should ask for the immediate start of the discussion for the elongation of debt maturities and the conversion of the interest rates to fixed ones. The elongation helps Greece. There is no substantial reason for this issue not to be finished now.
Second, Greece should ask the Troika to exempt public investment from the fiscal consolidation restrictions up to €5 billion, with the money coming from new issues of bonds that will go exclusively to public investment.
Third, Greece should clearly tell the Troika that it does not need more money and a new program, having achieved and sustained a primary surplus. The fiscal consolidation has ended. Of course, Greece can make structural reforms that decrease tax evasion, shrink the public sector and make it more effective.
Fourth, Greece should tell the Troika that it wants to make the structural reforms and in fact it is implementing them. The government should prioritize them. The quantitative negotiations on the forms (e.g. Greece has done 80% rather than 70% of them) are ludicrous and should stop.
Fifth, the negotiation should stop focusing on details (e.g. where there will be 50 or 40 installments), even though it helps the government giving it the justification that specific measures were imposed by the Troika (and Greece “succeeded” in negotiating for 50 installments while the Troika wanted 40), and the middle level bureaucrats of the IMF and Brussels “live” for the details. However, the focus on the details hurts Greece because it is not focused on the crucial issues.
- The end of the Troika, the possible departure of the IMF from Greece, and the issue of growth
Some in the IMF and some in Greece want the IMF to leave Greece. This would be politically expedient for the IMF because it now gives money to Greece rather than poorer countries with perhaps bigger needs. It would also be politically useful to the Greek government that hopes that IMF’s exit will automatically mean the dissolution and exit of the Troika and an end to its frequent supervisory visits. But, most likely the Europeans will continue to check on the Greek economy hoping that Greece will pay off its loans to them. This means that the supervisory visits will not end with the death of the Troika.
There are two significant problems related to the possible exit of the IMF from Greece. First, the IMF has already given 16 billion euros to Greece, and, according to its rules, this debt has to remain “viable,” or the IMF would need to immediately ask for its full repayment. This means that the IMF will implement a supervision similar to that of the Troika, even if it were not to make any additional loans to Greece. Therefore it is not improbable that after the end of the Troika, two of its constituent parts, the IMF and the EU, would conduct two separate supervisory checks!
Second, as part of the program, the IMF is expected to loan €12 billion to Greece in 2015-16. These moneys are already budgeted and their lack has to somehow be covered. At some point, there were thoughts to use the remaining €11 billion of the moneys originally borrowed for the bank recapitalization, but now it seems that they will be given to the banks for partial coverage of non-performing loans that reach €80 billion.
There are thoughts for Greece to issue €12 billion new bonds to cover the needs arising from IMF’s exit. In my opinion, such a move is in the wrong direction. Instead, Greece should use all moneys from new bonds issuance for public investment. Greece does not have the luxury to reject moneys that have been promised to it years ago from the IMF, if this results in killing the public investment program. To put it simply: as long as Greece can draw money from the financial markets, it should put all these moneys to public investment. But what should Greece do about the shortfall of €12 billion that would arise if the IMF exits? What does Greece really gain from IMF’s exit? Either way, the IMF will send a team to check on the viability of the Greek debt. This implies that Greece wins very little from IMF’s exit, but Greece loses the unique possibility to finance its rebound from the recession and growth by issuing new bonds.
In conclusion, I emphasize the most important point of this article. The strategy that leads Greece quickly and with certainty to growth and reduction of unemployment is simple. Greece borrows €5 billion per year issuing new bonds and uses all the moneys in public investments. Greece does not put a single euro from these moneys in the general budget, and the money is not wasted to “pay” the IMF, which would send inspectors to Greece even if it extends no further loans. With some attention and care, Greece can reach a 3-5% growth in 2015 and higher in 2016. And by the end of 2016, this growth would result in 600,000 new work positions. In contrast, without insistence in reforms and without this specific program of fast growth, Greece can easily stay in the swamp of recession, which will be accompanied with huge dangers of political instability and
*A Greek version of this story appeared in Kathimerini, on September 14, 2014.