Three successive crises and a golden opportunity

Three successive crises and a golden opportunity

Equality and justice all around, raises in salaries and pensions, prosperity for everyone; radical improvements in the public health and education systems; modernizing the public administration; protecting the primary residences of debtors from repossession; reintroducing collective bargaining and labor agreements; bolstering small and medium-sized businesses; and helping farmers and the less privileged members of our society: With few exceptions, these are the promises every party makes in its program. It is a very long list, which essentially refers to the long-standing problems of the Greek economy and society. It is if all the parties agree that there are big problems everywhere and that they need to be addressed. The question is how, when the lavish handouts being promised only perpetuate these problems.

The “Growth Plan for Greece,” also known as the Pissarides report after 2010 Nobel Prize-winning economist Christopher Pissarides, who presided over the committee of eminent experts and academics that drafted it, was released in November 2020. This study, like so many others that preceded it, notes that the Greek economy chronically ails from a productivity deficit and the low participation of productive pillars like labor, capital and technology. As a result, we have watched incomes drop, the trade deficit widen and the fiscal deficit grow because of the perpetual subsidization of services and incomes. It is a vicious cycle that perpetuates an obsolete economic model of redistribution, without offering any prospects for growth or sustainability. 

In planning the future, Greek governments need to examine how to take advantage of two tectonic changes that are taking place: the fragmentation of production and labor

One aspect of this model includes the excessive number of small businesses, self-employed professionals and minimum-wage workers in services and unskilled labor. And this entire thing survives thanks to undeclared labor and tax evasion, as well as an unhealthy reliance on subsidies. What we need, and have always needed, instead, is manufacturing of any type, the introduction of new technologies, more exports and the production of competitive products. And even more so, we need industrial production and foreign investment in productive activities that ensure economic growth in the long term, good salaries and a share of the international division of labor and production.

The vicious cycle can only break with these things, and the Pissarides report points the way towards achieving them in the aftermath of the three successive crises we have experienced since 2010: the sovereign debt crisis, the pandemic and the energy crisis. 

Apart from pushing unemployment to the record-high level of 28%, and causing social upheaval and political turmoil, the notorious adjustment programs imposed by the country’s creditors during the debt crisis forced the country to make adjustments and achieve balances that successive governments had stubbornly refused to implement and organized interests to acknowledge. However, as the Pissarides report notes, they resulted in a balancing of the twin deficit of the fiscal balance and balance of payments, while also improving competitiveness by reducing the nominal cost of labor. The Covid pandemic took us to the edge of the precipice, but we managed to stop the fall. The European Union provided generous support packages that helped keep the Greek economy on its feet, prevented a deeper, prolonged recession and ensured a basic income, especially for vulnerable households. The impact of the energy crisis resulting from the war in Ukraine, meanwhile, was twofold: It sent energy costs and inflation skyrocketing on the one hand, but, on the other, within a relatively short space of time, we saw the prevention of an uncontrolled recession and a European Union with more cohesion, solidarity and financial interdependence. The irony is that these three crises created the opportunity for a new growth model for Greece.

In planning the future, Greek governments need to examine how to take advantage of two tectonic changes that are taking place. First, there’s the fragmentation of production, which makes it possible for Greece to produce high- or medium-level technology parts for multinational firms that make or sell products inside and outside of Greece. It is almost impossible for Greece to attract big production plants because it lacks a range of factors that investors can find in countries like China, Turkey, Mexico and even Spain. The other tectonic change concerns the fragmentation of labor. Thanks to digital forms of working, it is now entirely possible for specialized staff to work in Greece and for the object of their work to be part of an industrial product or service based outside the country.

Greece’s new production paradigm, therefore, needs to focus on creating incentives for developing or attracting medium-sized production units, preferably for high-tech, that will be a part of European production networks. For that to happen, it needs to upgrade infrastructure like roads and rail transport, improve access to communication networks, and link university and technical education to the labor market. Education at every level and the National Health System – both major achievements of advanced societies – need to start resembling those of a modern state. Likewise, Greece’s public administration needs to be modernized and the dispensation of justice speeded up, while improving transparency and reliability. 

There is enough money for all of the above to be accomplished. Resources from European cohesion programs and the Recovery and Resilience Fund are giving Greece fiscal reserves which, if utilized properly, could have a high growth – and production – multiplier, which is something this country has not seen in decades. Indicatively we mention that the NextGenerationEU and the 2021-2027 National Strategic Reference Framework alone are providing Greece with a total of 60 billion euros in subsidies and loans. The EU also recently introduced a special fund to help member-states “re-shore” industries as an antidote to Chinese competition and American protectionism. This opens up entirely new opportunities for member-states, like Greece, that do not have the fiscal ability to effectively prop up their manufacturers and industries, and to cover a part of the void from the absence of private investments. Creating incentives with tax breaks and special privileges to attract foreign capital is no longer a priority, given that European legislation provides the policy framework for these issues. The new opportunity for this country rests in these funding tools and the EU’s comprehensive regulations governing investments. 

No one is arguing against a system of social benefits and subsidies. Every modern economy must have such policies, along with the ability to protect and expand them according to its ability. But throwing money into propping up incomes for the sake of boosting consumption is neither desirable nor sustainable in the long term. What modern economies need to prioritize is creating the conditions for generating wealth through production and the fair and proportionate distribution of that wealth. To take a cue from Darwin, it is not the strongest or the smartest who survive, but those who adapt best to change.

George Stoumbos is a former university professor of economics and official at the Bank of Greece.

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