Greece: From Exit to Recovery? - Softcover

Pelagidis, Theodore

Softcover

ISBN 10: 0815725779 ISBN 13: 9780815725770

Publisher: Brookings Institution Press, 2014

Synopsis

Two Greek economic analysts explain the Greek financial crisis - from beginning to end. The first section of Greece: From Exit to Recovery? explores the lead up to Greece's adoption of the euro. Authors Theodore Pelagidis and Michael Mitsopoulos believe that the ensuing challenges were foreseeable. In fact, the authors posit that it was Greece's difficultly in dealing with those challenges that sparked the euro crisis. Section II analyzes discrete sectors of the economy, paying special attention to labor and finance - and the mistakes creditors made in focusing on reducing Greek incomes - rather than increasing competitiveness on non-labor costs. Section III investigates why Greek companies spend relatively little on research and development. The authors' analysis indicates that policy decisions largely determine R& D performance in the private sector, and they advance a number of specific policy proposals to improve the situation.

About this title

About the Author

Theodore Pelagidis is a professor of economics at the University of Piraeus, Greece, and a nonresident senior fellow in Global Economy and Development at Brookings. He has also been a NATO scholar at the Center for European Studies at Harvard University, a Fulbright scholar at Columbia University, and an NBG professorial fellow at the London School of Economics. Michael Mitsopoulos is an economist at the Hellenic Federation of Enterprises, Greece, and has taught at the Economic University of Athens and the University of Piraeus. Pelagidis and Mitsopoulos are coauthors of Understanding the Crisis in Greece: From Boom to Bust (Palgrave Macmillian, 2011).

Excerpt. © Reprinted by permission. All rights reserved.

Greece from Exit to Recovery?

By Theodore Pelagidis, Michael Mitsopoulos

Brookings Institution Press

Copyright © 2014 THE BROOKINGS INSTITUTION
All rights reserved.

ISBN: 978-0-8157-2577-0

Contents

Foreword Kemal Dervis, ix, 
Acknowledgments, xv, 
List of Abbreviations, xvii, 
Introduction, 1, 
1 From La Dolce Vita to Collapse: The Sins of the 1990s and 2000s That Led Greece into Free Fall, 4, 
2 The Depression of the Century: Prejudice and Misguided Policies, 41, 
3 Unlocking Growth: Innovation as a Driver of Competitiveness and Prosperity, 85, 
Appendixes, 
A. Cases of Corruption in the Greek Government, 2008-12, 127, 
B. Data and Statistical Analysis, 129, 
Notes, 139, 
References, 147, 
Index, 157, 

CHAPTER 1

From La Dolce Vita to Collapse The Sins of the 1990s and 2000s That Led Greece into Free Fall

The emergence of the current crisis and the way it has been handled by successive Greek governments once markets lost confidence in the Greek sovereigns has caused many opinion leaders and academics to doubt the wisdom of the Greek participation in the European Monetary Union (EMU). Similar doubts have been expressed about the decision of the European Union to accept Greece into the EMU.

This chapter addresses three aspects of these questions and doubts. The first one deals with whether the Greek politicians who put Greece on the path to accession were aware of the challenges the country would face and whether they thought that they had a strategy to address these challenges and make Greece's participation in the EMU worthwhile both for the country and for the European Union (EU) as a whole.

The second question is directly related to the possibility of addressing these challenges today. A thorough analysis of the legacy of the 1990-93 period—when the decision to join the euro area was made—documents the emergence of the factors that brought Greece more than a decade of fast growth. It also demonstrates the failure to end the nexus of special interest groups that thrive on the very practices responsible for the low competitiveness of the country and that even today are able to effectively undermine the reform agenda. These anticompetitive practices affect price and employment levels and corporate profits, among other things. An examination of the earlier pattern of fast growth—despite of the anticompetitive environment fostered by these special interest groups—enables us to identify the numerous paradoxes that undercut the applicability of widely cited statistics in the case of Greece.

A final question investigated in this chapter is what the international organizations, now the official lenders of Greece, believed both before Greece's accession to the EMU and thereafter. This applies especially to the perceived weaknesses of the country and the chances that these could be addressed before the onset of grave consequences, such as the current crisis.

Ratification of the Maastricht Treaty by the Greek Parliament

Here we offer a historical analysis of the views Greek politicians expressed with respect to the anticipated costs and benefits that would follow Greece's accession to the EMU, and the prospects of realistically minimizing the risks and costs of the structural and fiscal imbalances within the country. Since assessment of such costs and benefits is usually based on the theory of optimum currency areas, we also offer a summary of that theory.

The views of Greek politicians about the ability of the country to deal with its structural and fiscal imbalances and to adjust to the demands of a single currency area are drawn from the positions they expressed publicly in the Greek parliament during sessions that preceded the voting of key laws and the approval of the annual budget as well as important sessions such as the one preceding the vote of confidence for the incoming government in the early summer of 1990 and the ratification of the Maastricht Treaty, all of which are meticulously documented in the archives of the Greek parliament. This material was further supplemented by author interviews with key politicians from that period, a detailed reading of the relevant laws enacted back then, and the use of confidential material; although the last cannot be quoted, it was used to verify otherwise publicly available information.

It should be noted here that the government that introduced the Maastricht Treaty to the Greek parliament for ratification in 1992, but lost its majority in the parliament in late 1993, remains very controversial in Greek public opinion and among prominent Greek opinion leaders and is rarely mentioned or referred to. As a result, this administration has rarely been studied (another effort to collect the available evidence that documents the economic thinking that shaped the understanding of the Greek policymakers and politicians who put Greece on the path to EMU accession is Featherstone, Kazamias, and Papadimitriou 2000). The evidence reveals what Greek politicians regarded as the costs and benefits for Greece if it were to join the single currency and explains their statements that shaped public opinion about European integration. Today it is widely believed that the decision of Greece to join the euro area was made during 1998–99, when Greece fulfilled the inflation and deficit criteria set out in the Maastricht Treaty and consequently was invited to participate in the final stage of the EMU. The importance of satisfying these criteria should not be discounted. However, it was the summer of 1992 when the political system had to deliberate about whether it would be beneficial for Greece to join the effort toward deeper European integration and the establishment of a monetary union. This was the time when the critical decision regarding Greece's accession to the euro area was made.

Thus we start the analysis with the liberal government that lasted from summer 1990 until September 1993, not only because this government introduced the Maastricht Treaty for ratification to the Greek parliament during July 1992 but also because of its wide-ranging and ambitious strategy to implement structural reforms and rationalize public finances. This strategy was directly related to the government's narrative with respect to Greece's need to prepare itself adequately before the final stage of the EMU. Furthermore, the policy initiatives of this particular government bore a strong similarity to the structural reforms Greece was asked to implement as part of the conditionality program agreed upon in early 2010.

Two points must be kept in mind when evaluating the following material. First, the public speeches and actions of politicians are obviously driven by their political agendas and therefore often are not always well grounded in economic theory. Second, most members the 1990-93 parliament were doctors, lawyers, engineers, and officers of civil servant unions. Therefore, with few notable exceptions, they lacked the necessary background to argue effectively on economic cost-benefit terms with respect to the accession of Greece to the euro area, given that their staff also lacked the relevant knowledge based on financial and economic matters. Still, the interventions of those relatively few members of parliament (MPs) with the background to understand and argue constructively on the matter at hand, as well as the interventions of other MPs, provide information that allows us to explore their views with respect to the structural and fiscal challenges the country was facing.

Ratification of the Maastricht Treaty by Greece and the Economic Policy Context

The available material, which includes the discussion in the Greek parliament preceding the ratification of the Maastricht Treaty, reveals, on the part of Prime Minister Constantine Mitsotakis and the ministers directly involved in the shaping of fiscal and economic policy, an understanding of the significant structural and fiscal challenges the country would face in order to participate on equal terms in the common currency area. In the end, the prime minister and leading ministers appeared to be preoccupied mainly with how the country would manage to truthfully meet the economic policy benchmarks, the "nominal convergence criteria" as they were designated at the time, set by the treaty to ensure a sufficient level of coordination of economic and fiscal policies in the common currency area. Furthermore, they believed that these challenges could be dealt with if the Greek government resolutely implemented an ambitious reform strategy, in particular one that removed the privileges handed out to interest groups through "regulatory favoritism." They argued that such privileges constituted a significant drag on economic productivity and had to be eliminated to ensure the future prosperity of the country, regardless of the EMU accession. It is also clear that this administration realized that failure to implement this strategy would have grave consequences for the country in any case, but especially within the single currency area.

According to the available evidence, the government appears to have firmly believed that it did have a strategy that could address the existing structural and fiscal challenges and that this strategy would be implemented during its term in office and beyond that. This view seems to be supported by an analysis of the laws introduced by the government during the 1990–93 period, which confirms that Greece was rapidly reforming even as it implemented a fiscal consolidation of unprecedented size. Net borrowing (excluding interest) declined from 5.1 percent of gross domestic product (GDP) in 1990 to 0.7 percent of GDP in 1993, as shown by the European Commission (EC 2013a) data presented in figure 1-1.

The structural reforms and legislative initiatives are also reflected in the evolution of the indicators constructed by the OECD with regard to product markets. The OECD indicators on product market regulation, and in particular for telecommunications, show how most other European countries moved ahead with deregulation primarily after the mid-1990s, something also revealed by a reading of the relevant laws introduced at the time in most European countries. When Greece moved ahead with the deregulation of the mobile telecommunications sector during the early 1990s and attempted to genuinely privatize fixed-line telecommunications, only the United Kingdom, among the major European countries, had already created a competitive telecommunications market. The deregulation of certain product markets during this period contributed significantly to Greece's growth performance after the mid-1990s, even though the level of regulation after 1993 was still very stringent compared to that in other OECD countries (Conway and Nicoletti 2006). It should also be noted that the documented improvement in this index—that is, less stringent regulation—mainly reflected the issuance of mobile communications licenses in the early 1990s.

As for the other key network industries mentioned in the government's policy statements at the time, the law establishing an electricity market was passed in Greece in 1993 to complement a competitive tender to establish the first private electricity producer in Greece. The case of the electricity production market in Greece is not as well known as the deregulation of the telecommunications market (which is notorious due to its connection with the fall of the government). But the fact that Greece was already attempting to introduce a competitive market for the production of electricity in 1993 is notable given that similar reforms were not effectively started in Germany and the Netherlands until 1998; in Sweden, Finland, Italy, Belgium, and Spain such electrical sector reforms were not initiated until 1996, 1995, 2004, 2007, and 1995, respectively. Only the United Kingdom had started that process earlier, in 1990.

Among the regulatory reforms attempted or implemented in 1990–93, many were ultimately halted or reversed by subsequent governments. The privatization of the Athens bus lines, the deregulation of private hospitals and diagnostic centers, and the revision of the legal framework for strikes are indicative examples. But some reforms endured, such as important changes in company law; competitive tenders for marinas and casinos; the abolition of numerous price controls (including on fuel and bread, rents, and real estate agent fees); liberalization of bakeries, domestic air routes, and the fertilizer market; and creation of competitive markets for private insurance and chartered accountants.

In other cases, even before the fall of the Mitsotakis government in October 1993, progress was not commensurate with the ambitious goals set by the government. Thus numerous smaller obstacles to doing business—along with some flagship reforms like those affecting road haulage—were not addressed during the short term of the government, possibly deferred in anticipation of a second term that never materialized. And in spite of some key successes, a strategy to improve human resource management in the public sector had little visible impact. Even within the government, there was open resistance to this effort to reinstate accountability and to improve other aspects of human resource management; and the political opposition at the time actively encouraged resistance to reform from within the public administration. With the fall of the government, this reform effort ended prematurely; therefore implementation of this key initiative cannot be properly assessed. It remains, however, a prime example of how the government's strategy did not always secure the desired results during its term. It also demonstrates the power that rent-seeking interest groups had obtained from the mismanagement of the country, and how they succeeded in staring down a small but daring group of politicians determined to protect the interests of the public and rein in the profits of the interest groups.

To judge the credibility of the 1990–93 government's assertions that it had a plan to address the significant challenges faced by the country, one also has to assess the implementation of its fiscal consolidation strategy. The general government data tables, published by the European Commission (figure 1-1), show a fall of about 5 percent of GDP in the deficit of the general government budget excluding interest to GDP. This figure as well as those from other sources cited in this section demonstrate both the daunting challenges and successes of the implemented policies. Despite unavoidable failures, overall these policies managed to stabilize a situation that was clearly leading the country to the reality it eventually faced after 2010. The size of the problem faced by the government at the time is demonstrated by the fact that the Greek government actually had additional debts and liabilities, amounting to 30 percent of GDP, that simply had not been recorded as part of the official debt. As a result of acknowledging these debts, the ratio of government debt to GDP increased from 79 percent in 1992 to 99 percent in 1993 (see figure 1-1). The magnitude of the reform efforts undertaken is most clearly shown by the size of the fiscal consolidation and the fact that the final expenditure on salaries of public sector employees actually decreased as a percentage of GDP during the Mitsotakis government. The government objective to reduce the ratio of public debt to GDP to within the permissible limits of the debt criteria of the Maastricht Treaty was explicitly acknowledged to be extremely ambitious but considered feasible if the government made a determined and persistent effort to achieve it.

With regard to the opposition, it took an understandably negative stance, largely motivated by political tactics. But beyond that, key members of the opposition pointed out the crucial macroeconomic weaknesses in the design of the single currency area as well as the associated risks that could arise, both for weaker member states and for the union as a whole—especially if a member state failed to satisfy a sufficient level of economic policy coordination within the euro area. And that issue was quite separate from the need for Greece to implement progressive structural reforms to positively adjust to the realities of the common currency area. Whatever the motives of the opposition politicians, they did point out the dangers to the union stemming from the inability, within a common currency area, to address regional shocks with fiscal constraints for each member state in the absence of an effective central fiscal authority. The opposition pointed out that there was an inherent asymmetry in the system, which had a centralized monetary policy, deficit, and debt limits but no matching central fiscal authority. Once a country joined the monetary union, it would have no ability to execute countercyclical policies to address regional shocks—providing of course that its before-crisis debt and deficit levels were not excessive.

(Continues...)

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Edition details

• Publisher: Brookings Institution Press
• Publication date: 2014
• Language: English
• ISBN 10: 0815725779
• ISBN 13: 9780815725770
• Binding: Paperback
• Number of pages: 189