This letter was sent to European leaders and is published exclusively by The WorldPost.
Athens, February 14, 2015
ATHENS -- I write to you as a former Prime Minister of Greece, at a critical juncture for both the EU and my country.
The primary aim of this letter, is to be supportive of a difficult process and negotiation, at a time when Greece and the Greek people, represented by its newly elected government, are striving to achieve the best, most appropriate, solutions within our common European family.
It is near five years now since we jointly took the decision on Greece's access to EU/IMF funding, contingent on an adjustment program.
Huge efforts, major sacrifices by the Greek people have been key to major adjustments in our economy.
Greece has a newly elected government with a clear mandate to reach a new agreement with the EU.
Antics aside, it would indeed be a real waste to fail now.
Five years later and (hopefully) five years the wiser, I believe it is possible that Greece and the EU find an honest and mutually acceptable compromise, a way forward, and avoid a train crash.
A way forward should build on both the successes of the adjustment program but also seriously take into account the reasons for its shortfalls.
And this assessment should be the basis on which the EU and the newly elected Greek government develop a new common approach in this final phase of the adjustment program.
What were the successes?
1) Greece avoided the enormous economic and social costs of a bankruptcy
2) The EU/Eurozone contained a wider crisis, albeit belatedly.
3) Progress on creating the ESM, the beginnings of a banking union, a stronger monitoring of Member States and banks, a stronger role of the ECB in intervening in the volatile bond markets, have all contributed to a more stable union.
4) Greece has achieved a primary surplus from a primary deficit of 10,5 percent of GDP (15,7 percent of GDP general government deficit) in 2009. This is a record adjustment for any OECD country.
5) Only a few months earlier, the bond markets felt assured that Greece would soon be able to access the markets. The spreads on Greek debt had fallen close to sustainable levels. Interest in investment in the Greek economy was apparent.
6) The OECD has Greece in the #1 position concerning its reform efforts after the 2008 financial crisis. This record performance must be tempered by the reality that Greece was way behind many other countries in reforms, and needs to continue the reform effort.
What have been the shortfalls of this adjustment program?
1) The EU took too long to realize that this was not simply a Greek problem but was also a systemic problem of the euro and the financial system. In particular, Greece has been asked to "put her house in order" but has also been constrained by the wider issues in the Eurozone. Let me highlight a few of these:
- As the crisis developed, the bond markets saw two euro currencies not one. That belonging to the periphery and that belonging to the core. This affected our banking system, our borrowing capacity, our growth potential and in the end created strong headwinds as we tried to adjust.
- While the financial crisis took place in 2008, we still are trying to deal with problems of our banking system. Banks are still wary of investing in the real economy because of this.
- Major adjustment and reforms are being asked of countries while at the same time the EU pursues a policy of austerity rather than of investment (as has been done in the U.S. and China).
- Competitiveness of European countries cannot be seen only as an effort by each individual nation alone. Measures to make our single market work as well as serious investment in our shared European infrastructure and human capital is of paramount importance.
2) The required pace of fiscal adjustment led to a deep deflation which in turn made reforms harder to implement. Deflation has made recovery more difficult and has exacerbated the debt problem.
3) The continued discussion of Grexit undermined the adjustment program as it stalled any foreign or domestic investment, stopped banks from lending, companies from borrowing and created a huge deposit outflow to "safer" banks outside Greece, or to other assets.
4) While tax collection is of paramount importance in Greece, tax havens, offshore companies (in the EU or beyond) and tax competition between EU member states has heavily undermined the Greek state's capacity to capture tax evasion. This issue has been tabled by Greece in the European Council as early as 2010.
5) The troika believed that internal devaluation would be enough to jump start a more competitive Greece. But the real impediments to competitiveness (issues such as a highly centralized, bureaucratic state, overly legalistic micromanaging of the economy, an inefficient public sector, a political system beholden to powerful interests, a justice system which is painfully slow in meting our justice, an inefficient tax agency, an arcane education and training system) were never fully addressed. While there was an initial dynamic and implementation of important reforms, time constraints and lack of expertise in the public sector were impediments. Furthermore as time went on, as governments changed, the political will to tackle these issues -- head on -- waned.
It is crucial the above questions be addressed during the next phase of our country's program.
While the adjustment program did include important reforms, in practice, the troika and our creditors, prioritized fiscal austerity.
Fiscal responsibility is of great importance. However it alone does not deal with the underlying causes of the crisis.
It deals only with the symptoms of an ailing system, political and economic in Greece. One which continues to be in dire need of restructuring.
6) The fiscal adjustment we have accomplished was done much less through reform, i.e. reorganizing the management of our country, public sector and economy, and more through cuts and taxes. However this has placed an inordinate burden on the middle class, it has created an army of young unemployed and many households are under the poverty line. SME's are in great difficulty to restructure and become more competitive.
The outlines of a renewed adjustment program are now being discussed.
Allow me, however, from my experience, to highlight the basic elements of what I see as necessary.
The burden of fiscal adjustment need be lighter. This can be done particularly through restructuring the burden of the debt.
This is important for two reasons: First of all this would allow us to use much of the surpluses we are now producing for growth and social programs for the needy. Secondly this would imbue confidence in the markets that the heavy debt burden would not be an impediment to adjustment and growth.
These concessions from our creditors should be matched with a renewed determination on behalf of the government for major reforms in Greece.
These reforms should be owned by the Greek people.
I personally have called for a "Greek Plan" to change the country.
One owned and implemented by Greece.
This would be a guarantee that the Greek economy and country is on a path of real sustainability.
I believe that this Greek Plan (with the package agreed by our partners and creditors) needs to be put to a referendum.
One that would allow both the EU to have a clear guarantee that these reforms will be implemented -- no matter what or who is in government -- while this would also guarantee the Greek ownership of the program.
Ownership: A crucial element in its successful implementation, a lesson well learnt.
Of course the decision to go to a referendum is a sovereign one of the Greek government and of the parliamentary majority.
But I do believe it will contribute to consolidate and validate the agreement in the most effective and democratic way.
I need not stress that it is of utmost importance that we find a way forward.
I personally know how difficult this transition has been for Greece and its citizens, as well as the important contributions made by European institutions, governments as well as the citizens of our European Union.
Five years of efforts from all sides need to be consummated into a success. We owe this to our citizens and to the future of our Union. A Union being tried by populism, xenophobia and a resurging nationalism today needs to show that together we can prevail over complex and difficult challenges of our times.
It is in this spirit I outline my thoughts on a way forward, a framework which provides for a win-win scenario between Greece, the new Greek government and our EU and international partners.
George A. Papandreou
Former Prime Minister
President of Socialist International
President of Movement of Democrats Socialists