Monday March 2, 2015 Search
Weather | Athens
11o C
6o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
Greece needs growth, not austerity

By Costas Meghir, Dimitri Vayanos & Nikos Vettas

Greece’s economy and society are imploding.

Gross domestic product has declined more than 20 percent since 2008. The unemployment rate has tripled, and now stands at 25 percent, with joblessness among youth at twice that level. Crime is on the rise, as are racist incidents, and ideologies of the extreme right and left are gaining significant support.

Worse, current policies aren’t stemming the economic decline. The new three-party government elected in June has focused its energies on negotiating a new package of austerity measures to meet the conditions set by the so-called troika (the European Central Bank, the European Commission and the International Monetary Fund) for the disbursement of the next tranche of the bailout loan.

The reforms that are the only pathways to growth, such as building a well-functioning public administration and liberalizing markets, are resisted by Greek politicians and vested interests. They are also greatly underemphasized by the troika’s push for austerity.

Unless there is a change of course, Greece is headed for disaster: further declines in GDP, a possible chaotic default on its debt, extremist political parties in power, and isolation from Europe. The European Union also stands to lose because a Greek meltdown would reverse the decades-long process of integration and undermine the credibility of the single currency. And Greece’s creditors won’t get any of their money back.

To avoid such an outcome, which could occur soon, Greece’s European partners should devise a long-term strategy with two mutually reinforcing objectives: a drastic reduction of Greece’s debt and a thorough overhaul of the country’s dysfunctional economy.

Greece’s debt is projected to rise to 189 percent of GDP next year, from 129 percent in 2009. This is despite the restructuring of privately held debt and severe austerity measures that have almost wiped out the government’s primary deficit.

Most of the increase in the debt-to-GDP ratio can be attributed to the large decline in GDP. Further austerity measures, designed to generate the large primary surplus necessary to begin reducing the debt, will cause GDP to fall further, making the debt-to-GDP ratio even larger. This will make it impossible for Greece to ever repay its debt in full. Its European partners should recognize this state of affairs and write off a significant fraction of the debt. This would allow Greece to grow and repay the rest.

Writing off Greece’s debt can be done in a way that preserves, and even promotes, incentives for reform. A portion of the officially held debt -- 50 percent or more -- should be set aside to be written off gradually over the next five years or so, on the condition that Greece completes a set of institutional and market changes. The steps include making the public administration more efficient, speeding judicial proceedings, reducing corruption and liberalizing markets.

Achievement of these milestones could be monitored using existing indexes designed by institutions such as the World Bank and the IMF. Such a system would not only promote reform, but would put Greece’s debt, which cannot be repaid in full in any case, to good use.

More generally, the troika should emphasize structural changes rather than the rapid accumulation of a primary surplus. The initial emphasis on reducing the deficit was appropriate given the unsustainably large budget shortfall.

However, continued austerity will be counterproductive because it undermines reform. For example, deep salary cuts in the public administration are causing talented personnel to leave, thus impairing an already weak system and worsening the core problem of low public-sector productivity. The agencies in charge of essential tasks such as tackling tax evasion, supervising financial markets and prosecuting white-collar criminals, are often short of funds, equipment and the ability to attract talent. The troika should ensure that those funding needs are met, regardless of the effect on the deficit.

And it is hard to imagine how the Greek politicians and vested interests who have successfully resisted reform could continue to block institutional changes that are the condition for writing off a large part of the debt and averting disaster.

An emphasis on transformation and debt reduction would be welcomed by the Greek population, whose support is necessary for these efforts to succeed. Giving voters the chance to back debt relief in exchange for reforms will dim the appeal of the extremist parties.

The only way forward is to overhaul the Greek economy. For the population, that means recognizing that resisting structural reforms would be suicidal. For its part, the troika should acknowledge that further budget cuts would be catastrophic, and could only lead to a continuing deterioration of the economy and to the severing of Greece’s links with Europe.

[Bloomberg]

ekathimerini.com , Wednesday November 21, 2012 (22:13)  
A unionist agenda
The beguiling limelight
A breath of opportunity
Give the green light
Greece to make international protest over Turkey reserving Aegean air space
Greece is protesting Turkey's move to reserve a large chunk of airspace over the Aegean Sea for military maneuvers until the end of the year, a Greek foreign ministry spokesman says. Foreign...
Spanish PM hits back at Greek accusation of anti-Athens ´axis´
Spain's centre-right Prime Minister Mariano Rajoy hit back on Sunday against accusations from Greece's leftist premier that Spain and Portugal had led a conservative conspiracy to topple his...
Inside News
ANALYSIS
Greek debt becoming less sustainable
The agreement between the Greek government and its lenders, which was sanctioned by the Eurogroup last Tuesday, appears to be more of a respite and less of a sea change in the relationship b...
No progress seen in tax administration
Tax evasion loopholes remain wide open in Greece, the monitoring mechanisms are still shackled to political power, and an apparent determination to adhere to all laws and regulations conceal...
Inside Business
SOCCER
Super League to seek way out of impasse
The Super League governing board is convening again on Monday in a bid to overcome the tensions that keeps building up in Greek soccer despite the suspension of action on the field over the ...
BASKETBALL
Spanoulis leads Olympiakos to win over Malaga
A good second half was enough for Olympiakos to get the better of Unicaja Malaga (77-72) and score its seventh win in eight games at the second group stage of the Euroleague on Friday. Playi...
Inside Sports
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. Greece to make international protest over Turkey reserving Aegean air space
2. Super League to seek way out of impasse
3. Greek debt becoming less sustainable
4. No progress seen in tax administration
5. House protection criteria will benefit wealthy borrowers, too
6. Agenda
more news
Today
This Week
1. Greece to make international protest over Turkey reserving Aegean air space
2. Greece's lenders skeptical on new bills but focus on funding needs
3. Schaeuble softens tone, says Greece 'needs time'
4. Greece to prioritize IMF repayments but wants talks on ECB-held bonds, says Varoufakis
5. Lenders to be consulted over collective bargaining
6. Spanish PM hits back at Greek accusation of anti-Athens 'axis'
Today
This Week
1. Time for Alexis Tsipras to keep his nerve
2. A fierce battle looms
3. The ignorance of the West about the culture of Islam
4. Spain said to lead push to hold Greece to terms as Podemos grows
5. SYRIZA feeling the pain
6. The unlikely winners of Greece's surrender on euro
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2015, H KAΘHMEPINH All Rights Reserved.