A weak link in the Greek reform program

The adoption of a Greek reform program for 2012-14, coupled with exceptional international assistance, has given the country?s ailing economy some breathing space. Despite the usual pessimism of pundits who see failure down the road, this new package could well lead to a resolution of the Greek crisis as it combines three important elements: a medium-term program of reinvigorated fiscal and structural reforms; substantial private sector involvement (PSI) in the form of the biggest ever write-down of privately held sovereign debt; and large official support on favorable terms from Greece’s euro area partners and the International Monetary Fund. Of course major problems persist, risks remain high, and much is at stake in the forthcoming national elections. Although recent policy actions have been promising, more are still needed and reform efforts will have to be sustained to ensure progress.

Yet, like its predecessor, the new Greek reform program has some design frailties. A particularly weak link in the program is that it does not adequately address the country’s prolonged and deepening economic recession and the urgent need for recovery and growth. In the best of circumstances, the program foresees a return to growth in 2014, almost six years after the recession began in 2008; and even this scenario may not be realized in the prevailing conditions.

It should be recalled that the initial Greek program, crafted with Greece’s partners in May 2010, had envisaged a mild recession with a growth recovery in 2012, and unemployment peaking at around 15 percent. Instead, economic conditions deteriorated sharply, business failures spread, and prospects are still worrisome. Since 2009, the real gross domestic product has declined by 13-14 percent, or by much more than foreseen in the initial program; and the new program projects a further decline in real GDP of about 5 percent in 2012 and virtual stagnation in 2013. At the same time, unemployment has surged alarmingly to nearly 22 percent of the total labor force and over 50 percent in the case of the country’s youth (under 25) seeking jobs. As such, the jobless rate already significantly exceeds the highest rate envisaged under the new program. Thus, apart from complicating the achievement of the program’s targets, the ongoing economic downturn and very high jobless rate pose a threat to social stability.

Although the planned structural and fiscal reforms are generally sound, and consistent with Greece’s commitment to remaining within the euro area, the program does not squarely tackle the issue of growth and, importantly, the need to build a virtuous cycle of reforms and growth that would reinforce each other. Basically, it focuses on closing the competitiveness gap through an internal devaluation, as well as on securing fiscal consolidation and financial stability, while leaving the timing and magnitude of growth quite uncertain.

To overcome this dilemma, additional and targeted efforts should be made to revive investment and growth more quickly, without compromising the macroeconomic framework of the program. For a start, it would be desirable to establish a national council for growth, preferably under the purview of the prime minister, to give high priority to such efforts. This council, which should work in close cooperation with the relevant Greek ministries and the European Commission’s Task Force for Greece, should concentrate on boosting and coordinating plans to ensure a faster and more durable economic recovery and growth.

In parallel with the broad policies envisaged to improve productivity and competitiveness, an agenda of immediate actions should also involve the following measures:

* Restarting the execution of a number of major infrastructure projects and undertaking others (especially those with the greatest impact on creating jobs) that can be financed almost entirely by available European structural and cohesion funds. The steps taken recently in this area should be accelerated, and no slowdown tolerated for political or other reasons.

* In light of the expected recapitalization of and liquidity support to the banking system, encouraging banks to provide much-needed credit facilities to the real economy, notably to medium-sized enterprises.

* As an integral part of the planned tax reform (which should aim at establishing a simpler and fairer tax system), readjusting or reducing certain tax rates in order to help lower costs and prices, revive business activity and promote the service sectors, particularly the vital tourism industry.

* Making effective use of the fast-track and other procedures already approved to facilitate foreign direct investment and domestic private initiative. Even so, there is no doubt that reducing the role of the state in the economy, vigorously combating bureaucracy and corruption, and avoiding damaging industrial actions will be essential to give confidence to private enterprise.

*Speeding up the privatization program of public assets to enhance economic efficiency and growth, as well as help reduce the public debt.

* Also, simplifying customs and other procedures designed to foster exports of agricultural and other products, thereby contributing to the reduction of the external current account deficit.

Evidently, these actions along with others will have to be carefully developed so as to place greater emphasis on growth while keeping to a minimum (if not offsetting) their impact on the fiscal deficit and public debt. What is essential is that they be carried out without delay in the interest of reinforcing the policies set out in the new program. The key to progress will be the rigorous implementation of the entire policy package. In this way the Greek authorities, with the support of their partners, would improve the prospects for achieving the desired financial and debt sustainability in the context of a more rapid and robust economic recovery and an increase in jobs.

* Evangelos A. Calamitsis is a former director at the International Monetary Fund.