Cash reserve allowed for economic recovery
Former deputy finance minister says SYRIZA government policy is what set the conditions for the rebound after 2019
Giorgos Houliarakis was perhaps the most popular member of the SYRIZA government among his European Union peers. He was one of the very few people who focused on the real numbers of the economy and realistic data. Initially, as president of the Council of Economic Experts (SOE), Houliarakis led the technical negotiations for Greece’s third economic adjustment program from May to August 2015, before becoming deputy minister of finance.
Currently, he holds the dual role of economic adviser to both SYRIZA leader Alexis Tsipras and Bank of Greece Governor Yannis Stournaras.
Let’s start with a look back at the past. Was the contentious third bailout unnecessary after all?
First of all, I would like to clarify that my positions on the economy do not always coincide with those of the Bank of Greece. Therefore, I am speaking to you as an economist. The successful completion of a rescue program – such as the country’s second program between 2012 and 2015 – presupposes restoring the country’s access to international markets. And the country’s access to international markets, in turn, presupposes a sustainable drop of refinancing interest rates to levels compatible with the sustainability of public debt. Despite a temporary reduction in the spring of 2014, refinancing interest rates on Greek debt in the summer and fall of the same year stabilized at prohibitive levels for a return of the country to international markets.
So was the third program more or less inevitable?
Yes, because a safe exit also requires a cash reserve capable of covering the country’s financial needs, at least for the first 18-24 months after the completion of the rescue program. This reserve helps to safeguard the country against possible upsets in the financial markets in the early period after the exit, but also serves as a signal to the markets that, in any case, the country can fulfill its borrowing obligations. Both Ireland and Portugal had created adequate cash reserves during their own programs. Greece did not. With a prohibitive refinancing rate, no security cash reserve, and therefore no access to international markets, the only way to cover the country’s large financial gap was through the new loan agreement with the European Stability Mechanism (ESM). So far from being unnecessary, it was actually necessary for the country to avoid the dramatic consequences of an uncontrolled bankruptcy.
Nonetheless, your government followed a policy of overtaxation that impacted large productive categories.
‘The economic growth from 2019 to 2022 was supported by an unprecedented fiscal expansion, which cumulatively reached 8.3 percent of gross domestic product’
There is no doubt that the consistent taxpayers of the middle class had to shoulder a disproportionately high tax burden throughout the economic crisis in the effort to save the country from economic collapse. A valid estimate of the de facto performance of parametric measures in taxes and social security contributions for the duration of all three bailouts puts net income in the area of 24.5 billion euros, of which 4.1 billion euros, or 17% of the total, pertains to the period 2015-18. The burden is proportionally smaller compared to the period of 2010-14, but the cumulative exhaustion of the tax-paying capacity of the middle class has, I must say, naturally created the feeling of overtaxation. It is worth noting that the share of necessary adjustment on the side of primary spending was not small and corresponded to 43% of the measures.
It is widely thought that the economic policy of the previous government was dictated more by necessity than by planning.
On the contrary, the macroeconomic strategy adopted in the summer of 2015 was formulated, and it was based on three basic pillars. Firstly, recovering the credibility of fiscal policy. Secondly, providing economic support to vulnerable income groups. This objective was served by the development of new targeted social policy tools, such as the social solidarity income, the new family allowance and the housing allowance, as well as extraordinary social transfers at the end of the year. Thirdly, the restructuring of public debt, which, although it was implemented gradually from 2017 onward, had already been included in the economic adjustment program through significantly lower primary surplus targets it provided for.
The strongest criticism against the previous government, which indeed comes from all sides, was the obsession with surpluses. Why did the country need this overperformance?
The fiscal overperformance of the 2016-18 years was essential given that after two unsuccessful rescue programs, international markets maintained reservations over the country’s ability to achieve and maintain primary surpluses around 3.5%. Market reservations were intensified by the belief of International Monetary Fund officials that Greece could not achieve surpluses above 1.5%. If the international markets had maintained these reservations about the country for a long time, the cost of refinancing would not have de-escalated in a timely manner, and the adjustment program would have been at risk of failure. In this environment, the fiscal overperformance served as a timely signal of Greece’s ability to achieve adequate primary surpluses and contributed critically to reversing negative expectations toward the country and the consequent reduction of the cost of borrowing for Greek debt from 2017 onward. The second reason why fiscal overperformance was strategically important is, of course, its contribution to the creation of a cash reserve, which allowed the country to return to the international markets safely and continues to protect us, a fact which is acknowledged in the reports of credit rating agencies.
Today the economy is seeing some of the highest rates of economic growth in Europe, the markets have confidence in the country, while the digitization of public administration iingcontributes to the modernization of the economy and the state. Comparing the economic performance of the 2019-2022 period against that of 2015-2018 overwhelmingly favors the former. Do you think otherwise?
I think the comparison is inappropriate. It is true that the average annual economic growth rate for the period 2019-22 is around 1.8%, while conversely, for the period 2015-18, it was around 0.5%. However, the economic growth from 2019 to 2022 was supported by an unprecedented fiscal expansion, which cumulatively reached 8.3% of gross domestic product, without taking into account the impact of automatic stabilizers. On the contrary, during the 2016-18 period, fiscal policy was necessarily and rightly restrictive, aimed at restoring fiscal sustainability and regaining the country’s access to international markets. These differences in fiscal policy largely explain the differences in economic performance between the two periods.
In any case, the comparison does not seem to favor SYRIZA’s policies.
We should keep in mind that without the correction of macroeconomic imbalances in previous years, without the reduction of the country’s gross financing needs through the easing of public debt in June 2018, and without the creation of a significant cash reserve in 2016-18, there would be no conditions for economic recovery after 2019, and the country would be caught in the midst of the consequences of the pandemic and the energy crisis. The question now is how a stable and sustainable rate of economic growth can be supported when the fiscal support of households, which has so far supported private consumption, is completely lifted. The answer lies in institutional reforms for the country, which are still pending.
Economy is more resilient, but incomes are not converging with EU
All the parties have been insisting on the country’s institutional upgrade. But the practical question is, how shielded is the Greek economy in the face of future challenges? Don’t you agree that the economy is better off than it was at the start of the crisis in 2010?
The Greek economy is undoubtedly more resilient than it was on the eve of the debt crisis. However, despite the stabilization, the wounds left by the multi-year crisis on the “body” of the Greek economy remain largely unhealed and do not justify complacency.
What “wounds” are you referring to?
The per capita income of Greece in 2022 remains 16% below that of 2007 and is only at 59% of the average per capita income of the eurozone countries, when in 2007 it was at 77%. Countries with significantly lower per capita income in 2007, such as Portugal, have already overtaken us, or caught up, such as the Czech Republic. The percentage of the population at risk of poverty or social exclusion, which is at 28.3%, is the highest among the countries of the European Union and is second only to Bulgaria and Romania.
Why don’t you mention the reversing of the brain drain? Many young people who left the country, even as recently as 2019, have been returning in recent years.
The migration of young people with talent and education has not been suspended. In addition, this real deviation of the last 15 years from the eurozone average is reflected in the low wages of employees, the low structural competitiveness and the widening of the external trade balance, but also in the quality of the services of the welfare state and the state of the country’s critical infrastructures.
Your criticism may have some basis, but the productive gap of the economy created during the recession years has already been closed. Isn’t that a success of the government?
The fact that the production gap is closing, while the country’s per capita income remains significantly lower than that of 2007, shows the extent of the destruction of the country’s production capacity during the debt crisis. Real convergence with the eurozone average presupposes the replacement of these losses, which cannot be realized when the budget margins are exhausted in tax reductions with little social efficiency, such as the transfer tax on large assets, and in horizontal subsidies, however useful many of the latter were during the pandemic and the energy crisis.
Yes, but in the future, in the unfavorable international environment you mentioned, what public policies will be able to support the goal of real convergence?
It is necessary to effectively mobilize the resources of the regular budget and the Recovery and Resilience Facility (RSF) with the aim of [creating] an investment program that will strengthen long-term growth through the upgrading of the country’s human capital, the restructuring of the infrastructure of the national healthcare system and the transport network, the strengthening of social protection and the transition to a new productive model centered on the green economy.
Equally imperative is the need for the institutional upgrade of the country in areas such as the independence and speed of administration of justice, the fight against corruption, the quality of governance and fiscal transparency, without which the country cannot be an attractive destination for large investments, with the exception perhaps of the real estate market and tourism. Protecting fiscal credibility and public debt sustainability, investing in the factors that support the process of real convergence with social cohesion, and institutionally shielding the country from practices that brought it to the brink of bankruptcy in previous decades should form the outline of a new economic paradigm for the following years. In this context, the protection of fiscal credibility is of paramount importance. Adherence to the economic governance framework of the European Union and the return to a primary surplus compatible with the sustainability of the debt will contribute to reaching investment grade with beneficial results for both the public and the private sector. Greece’s per capita income in 2022 remains 16% lower than in 2007.
