The limits of optimism
There are at least two reasons for the current optimism over the Greek economy: a stronger-than-expected recovery, above the European average, and funds from the European Recovery Fund, as well as other, significant, European funds that can support growth. The positive situation is reflected in a series of individual indicators, from interest rates and real estate to industrial production and exports.
Of course, the strong recovery is also a reflection of the previous deep recession and has been accompanied by a significant fiscal deficit. The substantial financial support extended by Europe was planned precisely because the Greek economy combines a high level of public debt with an equally concerning investment gap. Assuming the damage caused by the pandemic heals, in terms of GDP, over the coming months, it is feasible to schedule a high rate of growth, approximately 3% annually over the next decade, that can cover the losses of the decade-long crisis and transform the country’s image. However, this can only happen under certain conditions, and it won’t happen automatically.
The Greek economy still has a long way to go to reach the European average. To put it on a stable positive trajectory, its production base has to be reinforced, with an increase in labor, investments and productivity. A series of related political moves is positive. Some deal with loose ends left over from the previous crisis, like nonperforming loans. Some are part of the necessary move to modernize and address obvious deficiencies, like the digitization of public services. Others are indicators of the priorities of the new funding, such as occupational training programs for the unemployed. For this scenario of significant growth to become a reality, it must be supported consistently and in its entirety by the political framework.
In an economy, households, businesses and investors are guided by incentives. They can be nudged toward innovative entrepreneurship or a parasitic relationship with the government, toward productive investments or occasional expenditure, toward a strengthening of human capital or the informal economy. Incentives are formed by the existing measures and policies, their long-term credibility and how they are applied and perceived by society. For the gradual and necessary shift in incentives for the Greek economy, it is crucial to ensure the continuity and consistency of the political measures.
Indicatively, the legislation on supplementary pensions for younger workers in a funded system was at the least an obvious intervention. It reinforces incentives for formal work, as any future pension will depend on the accumulated contributions. However, if there is a failure to build trust in the long run and make intentions of shaking up the existing system credible, every positive impact will be in vain. Accordingly, as the very limited size of many businesses hinders productivity and wages, tax incentives have been planned for mergers. This positive measure will nevertheless require moves to reduce the administrative burden on businesses, as this is the main reason keeping them small and engaged in informal activities. Even in higher education, the introduction of a minimum entrance mark is a positive development, most importantly to save young people from being trapped. It is necessary, however, to accompany this reform with a material upgrade in vocational training, as a reliable alternative, and equal opportunities.
In critical issues such as those mentioned above, individual measures can have a positive impact. However, if we accept the need for change in the incentives and structure of the economy, the consistency of interventions is necessary, as are clear indicators and signposting of the planned trajectory. Other stronger economies can venture forth with only limited adjustments, but not Greece’s. If, in the end, the new European funds are only used to strengthen the existing structure, the expected growth will simply never materialize. Optimism about the economy should be there, but directly related to the desire and capability of supporting changes.
Nikos Vettas is the general director of the Foundation for Economic and Industrial Research (IOBE) and a professor at the Athens University of Economics and Business.
