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Barry D. Wood

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Keep the Pressure on Greece

Posted: 08/05/2012 10:06 am

WASHINGTON -- Greece's unwieldy coalition government that took office after elections in June is facing its first big challenge.

On August 1 Christine Lagarde, who heads the international agency that is Greece's most important creditor, said that despite impressive achievements, "there is still a lot the country can do" to restore competitiveness and regain investor confidence. That same day finance minister Yannis Stournaris said, "cutting spending by € 11.5 billion has been set as a prerequisite for Greece to remain in the euro."

It's an open question whether the Greeks will implement the measures needed to retain support not only from Lagarde's International Monetary Fund but also from the European Central Bank and European Commission. This troika of creditors is providing financial life support that allows bankrupt Greece to avoid default and continue paying pensions and salaries.

Tragically, despite two years of austerity Greece has accomplished relatively little in getting its economic house in order. It is still spending too much, collecting too little in taxes, and has not yet undone the restrictions that arguably made its economy the most over-regulated in Europe.

Not surprisingly creditors are losing patience. Greece has been the beneficiary of unprecedented international assistance. The March 2010 loan from the International Monetary Fund was the biggest ever granted by the multi-lateral lender. This year's write down of €100 billion of debt was the biggest ever agreed to by commercial banks. And this year's expanded bailout is worth €130 billion, most of it coming from Greece's European Union partners.

But despite massive support Greek governments have only half-heartedly implemented promised reforms. By comparison, Latvian Prime Minister Valdis Dombrovskis says his country's painful restructuring in 2009/10 succeeded because reforms were front-loaded and the government maintained a constant social dialogue. Latvia's austerity program resulted in a 25% drop in GDP but a recovery has now taken hold with growth projected at 2% this year, likely to be the fastest in Europe.

Marek Tatala, an associate of Leszek Balcerowicz, who promulgated policies that built a market economy in Poland 20 years ago, blames "delays in structural reforms like lowering minimum wages, liberalizing restricted professions, easing rules in the public sector, deregulation and improving the environment for entrepreneurs" for holding back a Greek recovery.

Pro-growth measures have been key components of the bailout packages. They include improving tax collection by hiring 1,000 auditors, streamlining the tax system, ending supplementary wages for judges, diplomats, doctors and professors, improving public administration, ending rules restricting entry into professions, and privatizing ports, airports, railways, energy companies and real estate. Sadly, many of the reforms have not been carried out and the coalition government of conservatives and socialists that emerged from elections in June wants to roll back much of what has been achieved.

Athens economist Miranda Xafa, CEO of E.F. Consulting, says to recover Greece must tackle structural rigidities that made its economy dysfunctional. "What led Greece into this mess," she says, "is its ineffective, incompetent, and corrupt political establishment, which viewed politics as a means of providing favors to special interest groups in exchange for vote-buying." Xafa says it is inexcusable that one of every four jobs in Greece is in the public sector, which she believes should be cut by half. She has little hope that the unwieldy coalition led by conservative Antonis Samaras will succeed where others failed.

Since becoming prime minister a month ago, Samaras has backed off a campaign pledge to renegotiate Greece's bailout agreement. Instead, he now emphases that more time is needed to get the fiscal deficit down to targeted levels. The main opposition, the far-left Syriza Party of firebrand Alexis Tsipras, is attacking Samaras for embracing austerity. Tsipras says it is austerity that will lead to Greece exiting the euro. Previousl, he argued that that a Greek exit would be so costly for Europe that creditors were bluffing when they threatened to withhold loan disbursements. Should a rupture occur, Tsipras is adamant that the blame be placed on Germany and other creditors, not on Greece.

For now the charade goes on. Monitors from the IMF, European Union and European Central Bank are in Athens assessing progress or lack thereof. Their report, expected by September, will set the stage for the next phase of the drama. In the meantime the Greeks will say they have done a lot and can do no more. Creditors will say 'yes, you can have more time, but recovery won't occur without fiscal discipline and deeper structural reforms.'

An earlier version of this article appeared July 31 on marketwatch.com.

 
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