Economy’s survival lies in boost for investment

The Greek economy continues to be in deep recession territory in 2012, which the Foundation for Economic and Industrial Research (IOBE) projects at 7 percent for the year.

As a result, the country will have lost about 20 percent of its gross domestic product (GDP) in five years (2008-2012), a decline that is unprecedented in the history of the European Union in the last 20 years.

The intensity of the recession and its repercussions on the social fabric, as well as the divergence from this year?s fiscal targets highlight the importance of government initiatives to boost growth. The decline in investment continues for a fifth straight year and now stands at 45 percent of its 2007 level.

The investment climate was strongly hit in the first half of the year due to a number of factors: The negotiations for the second bailout package (or memorandum) and the Private Sector Involvement (PSI) in the haircut of Greek deb, the political fluidity regarding the prospects for the formation of a new government, and the uncertainty regarding the outlook for fiscal adjustment and the implementation of structural reforms.

Currently, discussions on rekindling investment interest focus mainly on tapping the vast pool of public assets and privatizations by attracting foreign investment. Taking into account the fact that developments in these fields have been limited in the last 18 months due to the preparatory work required, the likelihood of the initiatives of the new government in this direction bearing fruit is considered relatively high now, compared to the prospects of investment in other fields, given the current adverse circumstances of the Greek economy. These include the unfavorable economic situation of Greek enterprises due to the protracted recession, the uncertainty of banks regarding their liquidity due to PSI and the deteriorating outlook for their loan portfolio, as well as the adverse impact of worsening fiscal targets on public investment.

Nevertheless, the significance of measures other than privatizations and the tapping of public assets in boosting investment activity should not be underestimated. A number of moves are urgent, such as the activation of legislation for facilitating business activity and the implementation of investment plans, the recapitalization of banks after the PSI, the completion of pending licensing applications and the acceleration of specific reforms favoring investment.

* IOBE research department.