Greece: Last Chance To Get It Right?

As negotiations between Greece and its creditors reach a standstill once again, the debate over the Greek problem has intensified. Prominent economists, political and business leaders have taken a stance on the Greek issue supporting one side or the other. The reality is that both sides made mistakes. And the even sadder reality is that five years down the line they still have yet to learn from them.

The result? The Greek economy is entering its sixth year of recession; having already shrunk by more than 25 percent, investment in the country has plummeted to 21 billion euros down from 50 billion; almost one million Greeks have lost their jobs, and the country is suffering its largest brain drain since the 1950s. For all the sacrifices they have made, the Greek people still can’t see the light at the end of the tunnel.

Was austerity the right solution to the Greek debt problem? The answer remains mired in debate, but what is less contentious is that Greece was given too much of the austerity “medicine.” European officials point to the ”successful” implementation of austerity programs in other counties, yet none of them were subject to the size and duration of austerity that the Greeks have endured. Total fiscal adjustment in 2009 to 2014 (17 percent of GDP) was about twice as large as in Ireland, Portugal and Spain and three times as large as in Cyprus. What’s more, the troika’s forecasts repeatedly underestimated the consequences of austerity on the real economy.

Only now, in the 11th hour, Europeans have eased their targets for primary fiscal surpluses. One can’t help but wonder where the Greek economy would be today if these concessions were given to the previous government? The consequent election would have been avoided, and the Greek economy would have returned to growth taking advantage of the positive dynamic emerging toward the end of 2014. Instead, economic activity has stalled, and tax revenues have collapsed causing the primary surplus to halve compared to last years’.

Europe has always taken pride in its respect toward the individual and her basic standards of living. Given the level of human tragedy in Greece, one would expect some demonstration of solidarity toward the Greek people. The poverty level has doubled since the onset of the crisis and now stands at 27 percent, youth unemployment hovers around a staggering 50 percent, while economic emigrants fleeing the country have hit 100,000. People are struggling with healthcare costs and are presented with ever increasing tax bills which they pay through their savings for lack of disposable income. Though discussed at times, no relief or growth plans were ever implemented to address the growing economic misery brought on by the unprecedented fiscal consolidation.

The most grievous mistake, however, rests with the Greek political leadership itself. Four successive Greek governments have failed to address the root of the problem: an uncompetitive economy and a bloated public sector. Even now, the latest proposal by the Greek government includes no mention of reducing the public sector or of any meaningful reform. Once again, the brunt of the adjustment will fall on overtaxing the narrow portion of Greek people who already pay their taxes.

Of course, it is now even more unlikely that these reforms will be implemented by the current government. A government, so out of touch with reality, so trapped in its undeliverable promises, that it continues to shift the blame for all things bad to interest groups outside Greece while hiding the ugly truth from the Greek people — that Greece lived above its means for some time, and to prosper again it will need to change.

Every day that passes without a deal being struck means more workers joining the unemployment pool, more businesses closing under asphyxiating liquidity conditions and a continually increasing decline in this year’s budget surplus. European and Greek leadership both need to take accountability for their mistakes and strike what will be a fair and sustainable deal for the country.

Concessions will be needed from both sides. The deal must offer the Greek people lower target surpluses and the potential of debt relief in the future against deep, meaningful reform. It must also deal with the Greek humanitarian crisis and contain some pro-growth component which will imminently increase employment. This can take many forms, including a specific appropriation of funds from the Junker plan or the EIB taking a more active role in funding small businesses or infrastructure projects in Greece.

Most importantly, the deal must signal the end of uncertainty taking once and for all the Grexit scenario out of the picture. There’s a lot of interest for investment in Greece both from abroad and within the country. But as long as the ghost of a potential euro exit hovers above the Greek economy, investors will refrain from deploying their much needed capital. Half of this protracted recession has been about uncertainty. A deal that will be the usual short term fix kind will not be enough.



Petros Stamatopoulos, Greece

About

Petros holds a BSc Economics from the London School of Economics and an MBA from Columbia Business School. He is also a CFA charterholder. Petros has held various positions in banking in the City of London, before joining the management consulting industry in Greece. He is currently performing his military service in Athens.


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