Friday August 1, 2014 Search
Weather | Athens
32o C
25o 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)  
In trying to conquer, Putin unites Europe
Summer turbulence
Capital upgrade
Populism eating up education
Greece to help ´hundreds´ of Chinese leave Libya
With the violence in Libya escalating to its worst level since the 2011 ouster of dictator Moammar Gadhafi, governments from around the world are scrambling to evacuate their citizens from t...
Plan to restore Asopos River enters final stage
Plans are in the final stage for the ecological restoration of Asopos River in Central Greece following a deal to install an integrated water resources management system. The 37.6-million-eu...
Inside News
Traders unhappy with turnover
Three weeks into the summer sales, traders say that purchases are not satisfactory. Shopping levels appear to be lower than during the same period last year, or on the same level at best, ev...
No rivals for Intralot as it bags racing bet permit
Intralot confirmed previous reports on Thursday by appearing as the sole bidder in a tender for the license to operate Greek horse-race betting held by state privatization fund TAIPED. Frenc...
Inside Business
SOCCER
One win and one loss in Europa League
Greece had a hit and a miss in the first-leg games for the third qualifying round of the Europa League on Thursday, as Atromitos scored a 2-1 win at Sarajevo while Asteras Tripolis lost 1-0 ...
SOCCER
Goalless draw at Liege puts Greens in driving seat
Panathinaikos got the upper hand in the battle for entry to the Champions League playoffs after snatching a goalless draw at Standard Liege on Wednesday. If anything, the Greek cup holders m...
Inside Sports
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. One win and one loss in Europa League
2. Greece to help ´hundreds´ of Chinese leave Libya
3. Traders unhappy with turnover
4. No rivals for Intralot as it bags racing bet permit
5. Energy cost cuts even without EU approval
6. KEPE: Greek economy returned to growth in Q2
more news
Today
This Week
1. Motorists refusing to pay tolls on Corinth-Kalamata highway to be monitored
2. Euro flows reveal shift in sentiment as losses mount
3. Greece may ignore EU and lower energy costs for business, says minister
4. EU puzzles over emergency funds for euro area bank crisis agency
5. Only 5 percent of stores see brisker business during this year's summer sales
6. Fake psychic caught in Thessaloniki after gaining 35,000 from victim
Today
This Week
1. Quadriplegic woman on life support 'dies due to unpaid power bills'
2. Wine cup used by Pericles found in grave north of Athens
3. Defense Minister Avramopoulos to represent Greece at European Commission
4. World’s largest solar boat on Greek mission
5. Greece names fifth privatization agency chief in four years
6. Greek coast guard picks up 77 migrants off Myconos
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2014, H KAΘHMEPINH All Rights Reserved.