NEWS

“You were living beyond your means”

Olli Rehn is clearly worried about the future of the euro as well as the polyphony, or maybe cacophony, that is being caused by the issue of economic policy within the European Union. Supremely calm, a technocrat with an even voice that never shows sign of anger or frustration, Rehn has spent his day in meetings with Greek politicians. In an interview with Sunday’s Kahimerini, he explains why the EU took so long to publicly warn Greece about its fiscal problems, what surprised him most over the last few months that he has been focusing on Greece and whether he thinks it will be difficult for Athens to get approval for the next tranche of its loan package. Rehn, however, places most emphasis on one phrase: «For a long time, you lived beyond your means.» Nevertheless, he appeared optimistic that the Greek economy would soon see growth. You said that you have been paying close attention to developments in Greece. What has surprised you, pleasantly or unpleasantly? Compared to other member states that have been in the same situation that Greece was in this year, the political determination to reform the economy has definitely surprised me positively. It’s been even better than I expected. But of course it is important to maintain the momentum and not to let it slip, not to become self-complacent. I wanted to ask you about the past. It is surprising to me that before the crisis reached its climax there was very little concern on the part of the European Commission or the European Central Bank. Why was that? The main causes behind the sorry state of the Greek statistics started to be revealed only at the end of last year. During last winter and the early part of this year, the real state of public finances and the much higher fiscal deficit became clear on the basis of more realistic data. And even that was then proven to be less pessimistic than the real deficit figure of 2009 — it started from 5.7 percent and went to 15 percent — [it] was a major revelation, which then prompted the Commission to encourage Greece to take action on both the fiscal and the statistical fronts. There had been warnings previously — I don’t need to go into ancient history — but in the most recent period this was the most critical new finding, which then prompted further action. Do you think in any way that the Greek government or the Commission were slow to act in terms of the markets? Were they too late in taking action? We took action as soon as we were aware of the situation and I recall spending a big amount of my time when preparing for the parliamentary hearings in January with [European Competition Commissioner] Joaquin Almunia and my director general Marco Buti in dealing with the Greek case. When I started in office on February 9, the very first legislative proposal of the new Commission was to call for audit powers to [be given to] Eurostat, which then passed during the summer in the legislative process and now we have audit powers. And the second major act was to participate in the Eurogroup meeting on February 10, which paved the way for further decisions on Greece. So of course this crisis has been a learning process for everybody, but at the same time the reaction has been as rapid and effective as it can be in the [current] political context. In terms of the Greek statistics that you referred to, are you happy about them? Are they safe? Do we have a clear picture about 2009-10, of what the state owes, and so on? The figures for 2009 are certain, it’s a closed case. In other words, precisely in order to have a clean slate we prolonged the validation of Greek data on debt and deficit from October to mid-November and we closed the books of 2009. That is a clean slate and I’m very happy to say that Eurostat, which is an independent institution, was able to validate the data for the first time without reservations. That is major progress and it’s important that the action plan to reform Greece’s statistical office, ELSTAT, will be completed and completely implemented, because it is essential for the EU but also for democratic decision-making in Greece. Some people say that although the political leadership is there to take some painful decisions, the biggest problem in Greece is execution and implementation. Do you see this as a problem in terms of, for example, hospital management and tax revenue mechanism, and how would you address such a fundamental issue? It is indeed, but the government is pursuing reforms that will enable a more competitive healthcare system etc. This requires work in all key sectors and I would say that the healthcare system is one of the focal points. It is important that citizens have good-quality services; it is important to reform the system so it becomes more cost-efficient and less of a burden on taxpayers. We see that — it is not only my opinion. Our economists both in the EU and the IMF studied very carefully the reform of the healthcare system and it is one of the areas where one can get the most results in terms of better service and better efficiency. The problem, though, is that as far as tax collection goes, the mechanism is not in place and the necessary people are not there get results. How can you or the IMF help with this? We and the IMF both have some expertise in tax matters. Moreover, EU member states have more expertise in tax issues so we provide technical expertise and in that the Greek government has been positively open and receptive to receiving such technical expertise and working together both with the EU and the IMF. It is clear that the government has fallen behind in revenue collecting. Do you think enough has been done, or does it need to do more and faster? You are right that the government is behind in terms of tax revenues and we see that the collection of tax revenues has to go further to become more effective and we see that the battle against tax fraud and tax evasion needs to be intensified for the sake of public finances and for the sake of social justice, political etc. We see the overall goal of the program as being about internal devaluation so that Greece becomes more competitive. From your standpoint, is it essential that private sector wages are reduced as well? Is this something you have insisted on or isn’t it a priority? It is important that the wage development in the private sector will enable to restore the price and cost competitiveness of the Greek economy. The private sector is moving toward or has moved in the right direction following the public sector’s reduction of the wage bill. It’s important that the private sector becomes competitive so that Greece will be able to restore its economic growth and provide economic and social welfare to its citizens. Does this mean that private sector wages should be slashed? It is essential for the private sector to become competitive. Costs, of course, are mostly related to wages, but they are also linked to reform and the basic formation of the system — something that appears utopian in Greece today — as introduced in the bill on labor market reform. In this regard it is crucial that the government and Parliament opt for a system that will efficiently facilitate flexible wage settings in order to ensure that productivity and competitiveness are reflected in the formation of wages. As you know, the unemployment rate has risen significantly. What do you have to say to people who are losing their jobs and shop owners who are closing down? They basically believe it is because of your program. The main reason is that Greece, for a long time, was simply living beyond its means. Last spring, Greece was very close to a dead end, and it turned to the EU and the IMF for the loan packages, which were then provided and linked to a program of policy conditionality. In that context there was no other way than to introduce rigorous measures in order to start restoring confidence in the Greek economy. And one part of that, essentially, was to reduce the fiscal deficit, which implied, for instance, a reduction of the public sector wage bill. Structural reforms will help restore the competitiveness of the Greek economy and that will return the country to a path of better economic growth and employment. Are you concerned about the operation being successful but losing the patient on the operating table if the recession deepens further? No I’m not. It is correct that the recession is still going on, but we have light at the end of the tunnel. This is our projection and that of the IMF, and we are both quite careful about doing careful macroeconomic scenarios. Our scenario is that Greece will return to positive growth during the course of next year, let’s say around the middle or second half of next year, and then the following years from 2012 onward should be years of even stronger economic growth, which, of course, is essential for employment and job creation. There has been a lot of talk about efforts being made in the public sector. Will cutting wages, bonuses and so on, and transferring some people internally within the public sector be enough, or will layoffs become necessary at some point? It is an essential part of the reform program that the government pursues a certain degree of privatization of state-owned enterprises. This must be done for the sake of the credibility of the program and also as a way of bringing revenue to the state, but even more so it is important because these enterprises should become more competitive and efficient, and the state should refrain from providing subsidies to these public sector enterprises. Do you think privatization is the alternative to having to lay people off? Privatization is essential to the overall economic program, to make Greece’s public sector more effective and less costly for the taxpayer. And also to make these enterprises more competitive and more efficient. A lot of people believe that the next review in February is critical, and that there is very little time left for the government to do whatever it takes to succeed. What is your assessment? Nobody should underestimate the capacity of Greece to maintain the momentum of the reforms. I do not doubt that. Don’t you see a certain reform fatigue in public opinion? I’m aware that there is a certain resistance to the reforms, which is normal for every country that has lived so significantly beyond its means and has to take bold measures to correct the course of [its] fiscal direction as well as structural competitiveness. Some government officials and public figures believe that there is too much at stake for Greece to fail, that you have already given it too much money and that you can neither stop paying the installments nor get a lot stricter. How do you respond to that? I think it’s simply in the interest of Greece to implement the program according to the agreement we have made. It is a matter of Greek credibility and Greek economic policymaking, so I don’t have any reason to doubt the capacity and the will of the Greek authorities to implement the program according to the memorandum. How about the level of the political consensus both within the government and in the wider political system, are you satisfied with that? As I said, Greece, the government and Parliament have been able to pursue a very substantial reform program, which has, if anything, surprised us in a positive manner. Of course it would be preferable to have political consensus over the program because one should always ask for this. There is a question I can’t resist asking. Some ministers seem to be pursuing their own policies of resistance against the memorandum. How are you dealing with this? It is a matter for the Greek government and prime minister to ensure that the government and its ministers are implementing the economic reform program and respecting the commitment of Greece to the memorandum. I have no reason to doubt any commitment of any minister in this government. On a more global level, there are those who say there is a cacophony of too many voices of leadership in the EU on financial matters. Basically, everyone has an opinion. Is this a problem? And how do you solve it? First of all this latest step of the financial crisis has become increasingly systemic by nature, which calls for a comprehensive and systemic response by the EU and especially by the eurozone. That is a work in progress and the Commission is working together with member states to this effect. There is freedom of speech in Europe and it is valid also in relation to political leaders. Of course, it is up to each and every leading politician to decide how he/she uses that freedom. In my view it is very important that we reinforce verbal discipline in Europe in economic policymaking and this can only happen with clear-sighted leadership and inclusive consultation of all the key players who have an impact on economic policymaking in Europe. Do you think the Eurobond idea is dead? No. I find it intellectually attractive and, more than that, I signed a proposal in May for the Commission, which became a Commission proposal on May 9 to create a European financial and stability mechanism, based on the Union. The Commission’s proposal was rejected mainly because, for some member states, it [was too similar to] Eurobonds. We are ready to review all ideas from member states and in this context one has to review all the options in order to reinforce the financial backstops in Europe and in order to reinforce the systemic response to the systemic crisis. Are you concerned about the power struggle in the markets and in the EU bond markets, and by the fact that Europe is sometimes too small or too slow to react to it? I think, first of all, and even though we speak of the systemic nature of the current episode of the financial crisis, it is a matter of both the fiscal fundamentals of some member states and the systematic speculative attacks on the other hand. Therefore, if it has this kind of dual nature it is important to tackle both programs, which means those member states that have been in the market need to take very concrete action in order to ensure fiscal stability and financial sustainability. And that’s what Spain and especially Portugal are doing for the moment. At the same time you need to have a systemic response to this systemic challenge in the markets and that’s why we created the European Financial Stability Mechanism, the Greek loan and then the mechanism facility for up to 500 billion euros in May, and that’s why we are currently reflecting on our next steps to reinforce our arsenal in order to contain future speculative attacks. And you don’t see German public opinion loosing patience with us in the South and not supporting these kind of mechanism and even going to a dual euro system? In my view, the idea of two euros should be killed before it sees the light of day. It will not benefit anybody, it will be detrimental both to the surplus countries and deficit countries, besides being very detrimental to the very idea of European unity. We have much better alternatives in reinforcing our comprehensive and systemic response. I’m certain that the German public can be convinced of the necessity of taking the necessary action as long as we have some policies and we can convincingly make the cases for these policies. It’s a matter of insuring financial stability. In the euro area, we are fundamentally in the same boat and we need to ensure financial stability in Europe in order to protect the foundations of sustainable growth and job creation. Are you afraid that havoc may erupt at the upcoming summit? No. I have full trust in the sense of responsibility of the leaders of the EU member states. Could the pain of Greek citizens as a result of the program ultimately endanger the program? I know that there is anxiety, which is understandable. There are major changes. On the other hand, it’s essential that all the policymakers and the people who have influence in the public debate argue about the best alternative about Greece. To my mind, the economic reform program is clearly necessary. It will be difficult for a time, but Greece will shortly see better economic times and there is already light at the end of the tunnel. As I said, economic growth will [begin] in the middle of the next year and lead then to growth in the coming years. You said that Greece should be able to borrow by mid-2012? Greece is protected and out of the markets until May 2012, completely out of the markets until 2012. Then the idea is that Greece could partly and gradually return to the markets in the coming year by May 2013 and of course our macroeconomic scenario and Greek program are based on the assumption that growth will return. As growth returns, confidence will be reinforced and it will be possible for Greece to return to the markets. There is a feeling that the numbers are too big, that the debt is enormous in terms of GDP and that some restructuring will be necessary at some point. Both the Greek government and, of course, the EU and IMF have based this program on very realistic macroeconomic assumptions and also on a very realistic assumption regarding growth dynamics and depth sustainability. It will require substantial structural reforms in order to return to a path of growth, it will require sticking to the fiscal targets to reduce the depth of the public deficit and it will also require the extension of loan maturities to go beyond 2014 [and] 2015.