YANNIS STOURNARAS *

Next Eurogroup must indicate measures for the sustainability of Greek public debt

COMMENT

TAGS: Economy, EU

The Greek economy is at a critical point. From 2010 to the present, Greece has accomplished an unprecedented – in the annals of the European Union and of the Organization for Economic Cooperation and Development (OECD) – adjustment of macroeconomic imbalances. The big “twin” deficits (fiscal and current account balance) have been transformed into surpluses. There has been a 25 percent improvement in competitiveness in terms of labor costs. Numerous structural reforms have been implemented in the labor and products markets, as well as in public administration. Banks have been recapitalized extensively. No one can disregard these achievements, which were possible thanks to the sacrifices made by the Greek people after 2010.

There is further a strong political consensus in favor of the country's continued membership in the eurozone. By a significant majority, Greece's political parties are not just pro-euro, but have also voted in Parliament for measures that have often come at a heavy social cost so that Greece can remain in the euro area. Populism and the bad practices of the past have been condemned in the minds of Greeks.

Nevertheless, the country still has a long way to go. What has been accomplished so far is just the beginning of a new growth model based on healthy fundamentals and higher competitiveness. For example, we need to become more comfortable with privatizations and with public-private partnerships even in areas that are considered taboo today, such as social security, health and education. We need quite a few more reforms, such as in the energy market, the product and services market, as wel as in certain professions, in order to increase productivity. We need an evaluation of the structures of the public sector, measures to curb red tape across the public administration, and to speed up justice. Our independent institutions need to be respected, and innovation and the transition to an economy of knowledge need to pushed forth by encouraging and offering incentives for cooperation between the private sector and universities and research institutes. And of course, we still face the task of dealing with the huge volume of nonperforming loans and the problem of so-called strategic defaulters, both steps that are crucial not just to returning the banking system to good health, but also to boosting the Greek economy. Attracting foreign investment so as to cover the huge investment gap, with an emphasis on the more productive sectors of the economy, is also a major issue right now.

The current fiscal adjustment program expires in the summer of 2018. The second review of the program has been completed, the Greek Parliament has enacted new measures – some of them painful – while after the fiscal results of 2016, the adjustment of the program that was to end in 2018 has already been largely achieved. In other words, Greece has done what it needed to do.

All of this, however, is not enough to do away with uncertainty and set the economy on an upward path from where it is today. Our partners, and the Eurogroup in particular, need to step up to their responsibilities as well. Specifically, the very next meeting of eurozone finance ministers needs to determine in as much detail as possible medium- and long-term measures for the sustainability of Greece's public debt which, as was agreed last year, will go into effect at the end of the current program. This must be done because the markets on which Greece will need to borrow after the end of the program in the summer of 2018 are demanding to know from now whether the debt will be sustainable or not. We are all aware of the fact that tapping the markets after the program is the only way forward. No one, neither the partners nor Greece, are in any mood for another memorandum.

The Bank of Greece has already made specific proposals for a moderate restructuring of the debt such as, for example, extending the weighted average maturity of the interest on the loans from the European Financial Stability Facility by 8.5 years at least. Our calculations show that this would be enough to achieve debt sustainability even if the primary surpluses of the general government remain at 3.5 percent of GDP only until 2020 and are reduced to 2 percent afterward.

If adopted, these two proposals will help boost both the economy and the country's solvency, and even more so if that 1.5 percent of fiscal space is used to reduce taxes on labor and capital. This proposal for a moderate debt restructuring is of vital importance to Greece and would come at a very small cost for the partners.

The above would open the way for Greek government bonds to be included in the European Central Bank’s quantitative easing (QE) program, which, in turn, would facilitate access to the market and further bolster an economic rebound. This would set in motion a new virtuous cycle that would signal the return of investor confidence in Greece's economic prospects, while also encouraging the return of bank deposits, the country’s return to the markets after the end of the current program and, ultimately, the lifting of capital controls.

The economy has been through some very rough terrain, with many mistakes and a lot of backpedaling on the part of both Greece and its partners. But the result, after seven very tough years, is certainly positive and the foundations for an improvement in the near future have been laid. At such a crucial juncture, further mistakes and backpedaling are simply not allowed.


* Yannis Stournaras is the governor of the Bank of Greece.

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