Lagging competitiveness needs to be addressed

Both in Greece and abroad, public discourse is centered around whether the country?s debt ought to be restructured, yet this line of discussion is not only misleading, it is also irrelevant.

If Greece were a private enterprise, then it would have already gone ahead with some form of debt restructuring, whether an extension, a haircut or something else. It is not a business, however, but a country, and what it needs is fiscal policy rather than simple, myopic number-crunching.

For fiscal policy to be exercised, however, we first need to diagnose the problem.

After adopting the euro in 2002, Greek imports outpaced exports, resulting in a rapid increase in the trade deficit over the past few years. This is due to a great extent to Greece?s flagging competitiveness.

Salaries in the Greek private sector increased at approximately the same rate as in other European Union member states over the same period of time, though the producer price index increased to a much greater degree. In other words, the production cost of Greek products grew at a faster rate than wage costs, whereas in the rest of Europe production costs grew in tandem with wage costs. The result is the relative drop in Greek competitiveness as reflected in the difference between exports and imports.

This can be explained by the fact that other EU countries boosted competitiveness with investments in capital equipment and especially in research and development. In contrast, in Greece, funding was funneled to production activities with a low added value that were labor- rather than technology-intensive. The technology, moreover, is imported from abroad, widening the competitiveness gap even further. Greece is the only developed industrialized nation that does not fund research and development at universities, research institutes and private companies as a matter of priority.

The cost of transport, telecommunications, primary materials etc, because of lousy infrastructure and monopolistic structures at every link in the chain, adds to the cost of production and saps competitiveness. Therefore, the problem is not about private sector wages and cannot be solved by their reduction. The benefit to competitiveness from a 20 percent reduction in wages will amount to a mere 2 percent.

The first target of fiscal policy, therefore, must be to change Greece?s production structures. This mean that many small businesses will face problems during the transitional phase, but boosting competitiveness is the only way to go in order to reduce the primary deficit and, by effect, to reduce the overall deficit and debt. Restructuring would help only if competitiveness is addressed first. Otherwise, it will merely add to the uncertainty and deepen the crisis.

If Greece?s problem were the manner in which its debt is restructured, it would have been solved last May. But the question of its competitiveness is much more complex because it requires time along with social and political consensus. The longer society and the political system take to understand this, the closer Greece will come to bankruptcy.

Ioannis Chrysostomos Pragidis is a lecturer in economic analysis at the Democritus University of Thrace. Periklis Gogas is an associate professor in economic analysis and international finance at the Democritus University of Thrace.

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