European Economy Commissioner Paolo Gentiloni has expressed his intention to support decisions that will help the Greek economy to grow, sending a positive signal to the government regarding its request for the reduction of the primary surplus target.
In an interview with Kathimerini, the Italian commissioner noted that a possible decision for a change in the use of the SMP and ANFA profits that European central banks made when buying Greek sovereign bonds will leverage investments equal to 0.6 percent of the country’s gross domestic product.
The message he conveys to Athens and in his meetings with top government officials in his 48-hour visit to Greece concerns the progress in the restoration of the country’s credibility, as well as the need for the reform momentum to continue. He also stresses that the abolition of protection for borrowers’ main residences is a key Greek pledge.
Greece successfully issued a 15-year bond last week. What message does this send, in your opinion, concerning the Greek economy and its risks?
Greece has come a long way in re-establishing its credibility with investors. Last week’s successful issuance was further evidence of the progress made along that road. Investors clearly recognize the incredible efforts made in recent years and the impressive reform drive under way today. I am looking forward to discussing these efforts and the growth prospects for Greece with the government over the coming two days.
Do you believe the primary surplus targets for Greece should be lowered? When do you expect a decision on the Greek government’s request on this issue?
These targets were agreed at the Eurogroup of June 2018, and any proposal to change them needs to be discussed in that forum, following an updated debt sustainability analysis. The more swiftly and effectively Greece pursues its reform agenda, the more ministers may be open to discussing this question. As commissioner for economy, I will support decisions that help Greece to grow sustainably, while respecting the requirements of the Stability and Growth Pact.
Do you agree with the government’s goal to lower the tax burden? Which taxes should be given priority?
Greece’s tax burden does need to be reduced, in line with the availability of fiscal space and in a growth-friendly manner. The announced cuts in corporate tax, designed to stimulate investment, go in the right direction. Widening of the property tax base would also lead to a fairer and more efficient tax, and generate resources to reduce personal tax rates, such as the Solidarity Contribution.
What is your opinion about a further increase of the minimum wage?
I understand that the Greek authorities will take a decision on this in around six months, following an extensive consultation. The results of an independent ex-post evaluation of last year’s increase should be available soon. They will provide insights for this year’s revision process. I am sure the authorities will aim for a broad consensus on what could be a sustainable increase, in line with the current prospects of the Greek economy and labor market.
Are you concerned about possible social consequences, after the abolition of the primary residence protection, at the end of April?
The primary residence protection had a noble objective, but there is evidence that it has been subject to abuse by so-called strategic defaulters. The effect is that credit has become harder to access and more expensive for all borrowers. That’s why the European institutions have seen its abolition as a key commitment by Greece. Of course, there is nothing to stop the establishment of a specific safety net for poorer income groups.
Is the Hercules project enough to guarantee a satisfying reduction of Greek banks’ nonperforming loans?
The Hercules scheme will be an important step in decisively accelerating the resolution of nonperforming loans. In addition, further improving the legal framework for the resolution of NPLs both for banks and external servicers remains key. The upcoming reform of the personal and corporate insolvency framework will be a crucial step in this respect.
At the same time, banks also need to play their part and continue strengthening their internal capacity to restructure loans of viable firms and clients, or liquidate foreclosed assets.
Is Greece on safe ground now after the crisis? Which areas should its policies emphasize?
The Greek economy is picking up steam, backed by strong performance of exports. Unemployment has dropped below 17 percent – obviously still too high, but now 10 points below its peak and falling steadily. Bond yields are at historical lows, and confidence is at its highest since 2007.
Clearly, challenges remain: the large investment gap, high stock of NPLs, the still very difficult social situation and high public debt. That’s why maintaining a strong reform momentum is essential, to keep building up confidence and create the conditions for a strong, sustainable recovery. It is good news that the government has started to prepare an update of the National Growth Strategy and I hope this will be very ambitious. Addressing the regulatory burden on businesses and further improving the efficiency of the public administration and justice system are key. Greece should also make the most of its huge potential in areas like agro-food, sustainable tourism, energy efficient technologies and renewables such as wind and solar power.
What should be done to close the investment gap that was inherited from the crisis period? Will the use of the ANFA and SMP profits for investments help in this direction?
Greece’s long crisis has taken a toll on investment, which is now about 15 billion euros per annum below the EU average. Unfortunately, recurrent underspending of the public investment budget has also contributed to this.
A key priority would be to strengthen the governance of public investment including through the setting up of a project pipeline facility, while ensuring strong complementarity with private investment. I welcome that the authorities are considering developing such a facility, in the context of the SMP-ANFA investment provision.
On this point, the European institutions have a mandate from the Eurogroup to explore the possible use of the ANFA-SMP profits for agreed investments. We are engaging with the authorities at the technical level and will revert to the Eurogroup in June. If endorsed, this could mobilize an additional 0.6 percent of GDP for additional investment annually.
Finally, addressing gaps in digital performance and creating an innovation-friendly environment with adequate finance and support would help stimulate private investments.
Are you concerned about the eurozone economy, especially after the data for the last quarter showed it almost at a standstill?
I will present our winter economic data in one week’s time. After a positive surprise in the third quarter of last year, the euro-area economy slowed down towards the end of 2019. Recent data point to subdued economic growth, in particular in manufacturing. The services sector has been more robust, supported by a still solid labor market.
Some of the uncertainties related to trade tensions and Brexit appear to have faded, but the overall geopolitical situation remains fragile. The impact of the coronavirus is obviously difficult to quantify today, as this will depend on how far and fast it spreads or is brought under control.
Does the Stability and Growth Pact need an overhaul? What are the new challenges that should be addressed?
Our current rules have helped EU member-states to reduce their deficits and – obviously less markedly and less evenly across the euro – their public debt. At the same time, fiscal policies have frequently been pro-cyclical, the quality of public finances has been suboptimal and investments have not been prioritized. Also, our fiscal rules have grown excessively complex, hampering predictability and ownership by governments.
Moreover, the challenges we face today are very different to those that underpinned the adoption of these rules during the sovereign debt crisis. Stability remains a key objective, but there is an equally pressing need to support growth and the climate transition. We also need to enable more anti-cyclical fiscal policies, given the increasing constraints faced by the ECB.
Should the euro-area budget rules change to allow for the necessary financing, for the transition to a low carbon economy, according to the Green Deal?
Our Green Deal Investment Plan aims to mobilize 1 trillion euros over 10 years, but more will be needed. The transition to climate neutrality, an environmental necessity but also an economic opportunity, will require, over the next 10 years, at least 260 billion euros per annum in extra public and private investments.
Against that backdrop, we want to discuss how the fiscal framework can support the reforms and investments needed for that transition. This includes reassessing the appropriateness of the existing flexibility clauses in terms of their scope and eligibility.
Do you expect difficulties in agreeing on new rules?
Over the next six months we are going to have what I hope will be a constructive and results-oriented public debate about our economic governance. We are starting by putting on the table a series of questions for discussion, looking both at how we can rebuild trust and consensus on the policy goals and how we can ensure we are able to achieve those goals.
Based on the views expressed between now and the summer, we intend to complete our internal reflections and indicate the way forward by the end of 2020.
These issues are not all easy, but that is no reason not to put them on the table. Ultimately this is about ensuring the well-being and prosperity of our citizens. So we have to get it right.
How do you expect the EU economy to be transformed by Brexit?
We will only know the precise economic implications of Brexit toward the end of this year. Until December 31, nothing changes for citizens and businesses. After that, all will depend on what we are able to agree with the UK government in the negotiations that will soon begin.
We want to have close economic ties with the UK, but that requires alignment with EU rules and maintaining a level playing field in areas like social and environmental policies. The position of the UK today is that it wishes to diverge from our rules, knowing that this will reduce its access to the EU single market. I do not believe that is in the UK’s interest, but it is for them to choose, in full awareness of the economic consequences.