[MGSA-L] An Economic Strategy For Greece:
june.samaras at gmail.com
Sat Nov 29 20:48:33 PST 2014
An Economic Strategy For Greece: Acceleration of Growth Through Public
Posted on November 29, 2014 by Hellenic News in Business with 0 Comments
economides nicholas prof nyu
Prof. Nicholas Economides, Stern School of Business, NYU
As we reach the fall of the 5th year of the Greek economic crisis, Greece
has good fiscal news as it continues to build a primary surplus. In the
other three main economic problems (debt, reform, unemployment), Greece has
made only limited progress. Here is what needs to be done now.
Need to create a wise strategy and persistence in its implementation
Greece needs to set targets, to create a strategy, and above all to insist
in its implementation. The stakes are huge. Greece has a realistic
possibility of leaving the economic crisis behind it in 15 months. Failure
would be catastrophic, creating a political and economic crisis similar to
one of May 2012. As I have written before in Kathimerini in the beginning
of 2014, at the present juncture, Greece has choices. This requires wisdom
in the creation of a strategy, persistence in its implementation, and
regaining of credibility for Greece.
Economic program and strategy
The first and most important issue is growth. All agree on the need for
growth. In the long run, it will be created through the improvement of the
Greek economy through structural reforms. But how can it be achieved in the
short term? Through public investment. Greece is now able to borrow from
the international markets by issuing new bonds. All the money (€5 bil.
annually) from the new bonds should be put in public investment. Not even
one euro should be lost and buried in the general State budget. Through
these investments, Greece will create new employment positions, income, tax
receipts, and will rebound. And surely, through the boost of public
investment, private investors who have been waiting to buy “Greece”
cheaper, will now be pushed to invest in Greece by the fear that, if they
do not buy now, they will have to pay more in the future. Public investment
of €5 bil. yearly (3% of GDP) and 1-2% of GDP private investment will
surely make the Greek economy take off. Greece has to convince the Troika
to exempt public investment from fiscal restrictions since, through the
products and services investment produces, it decreases rather than
increases the percentage of debt to GDP. For those who foolishly ask why
should Greece borrow from the market at 3-5% interest rather than borrow
from the Europeans at 2%, I remind them that the Europeans and the IMF do
not lend to Greece all the money Greece wants.
Second, Greece should set up a crucial target to reduce unemployment from
27% to 13-15% in two years through the creation of new employment by the
investment program. Greece should convince the Troika that this is a
crucial target. After the deep fiscal consolidation, Greece has to
immediately act to reduce unemployment. However, this should be done
through investments that create new work positions and not through an
“employment program” that just subsidizes the unemployed and renames them
Third, Greece needs to persevere in implementing the structural reforms.
The recent quote of the Greek Economics Minister in the New York Times
“Greece has done most of the reforms” is unfortunate. Everyone knows that
only few reforms have been made, and most reforms are waiting to be done,
including the reduction of tax rates, the reduction of bureaucracy, the
increase in efficiency in the public sector, the evaluation of public
servants, and the shrinking of the public sector. Greece should say “yes”
to the structural reforms, and Greeks should be convinced that they want
them done even if they did not have the Troika to remind them to do them.
Of course this requires political support. It is crucial that citizens are
convinced that reforms are crucial for the long term prosperity of Greece.
Some may lose their privileges, but the public will win a lot and for a
long time. Surely there is need for prioritization in their substance and
time of implementation.
Fourth, Greece needs to tackle the very large public debt that was
accumulated from decades of corruption, populism, foolishness, and inertia.
Greece is in a good position since it pays small interest rates (average
1.82%, below 2%) on the largest part of its debt that is held by the
European Stability Mechanism and the European partners of Greece, and
additionally these lenders allow Greece to delay payment of interest for a
number of years. Moreover, Greece is lucky that worldwide interest rates
are at the lowest of the last 50 years. However, these are likely to
increase because of a change in policy of the Fed, possibly before the end
of the year.
Greek pubic debt is large as a percentage of GDP, and some worry that at
some point in the future it may not be serviceable/viable. This problem is
solved through growth, increasing the GDP as I propose above, and reducing
the ratio of debt to GDP. And to be sure that in the future Greece will be
able to pay interest on its debt, Greece should now ask its European
partners to convert the now variable low interest rates to low fixed rates.
And Greece should also ask for the reduction of the net present value of
the debt by 50% through the elongation of the maturity of the debt to 75
years. The Greek debt will stay the same as a number of Euros, but its net
present value will decrease by 50%. This change will give the opportunity
to future generations of Greeks to pay off a much smaller debt. To those
who say that the elongation of the maturity of the debt burdens future
generations, I should underline that, unfortunately, the present Greek
generation already (before 2009) has consumed the moneys of its children
and grandchildren. The elongation of debt maturity does not add any new
burden to future Greek generations. On the contrary, it reduces their
burden. Those (including SYRIZA) who advocate that Greece should not pay
its debts to friendly countries and should instead blackmail them, are not
grounded in reality. Such a move would lead to the exit of Greece from the
Euro, the collapse of Greek banks, hyperinflation, and shrinking of incomes
to the level of 1950s.
Greece’s relations with the Troika
The Troika came to Greece to supervise the fiscal consolidation of Greece
when suddenly the European Stability Mechanism, the EU partners, and the
IMF became Greece’s main creditors. Its second target was structural
The macroeconomic model of the Troika (that is, the IMF’s) was repeatedly
way off in its predictions (as the IMF has also admitted). On the other
side, Greece never proposed its own macroeconomic model in the negotiations
and never proposed qualitatively different targets than the Troika’s. That
is, the negotiations of Greece with the Troika were quantitative and not
qualitative, with Greece attempting to get a “discount” of 20% on the
proposals of the Troika. The frequent visits of the Troika, the many small
installments, and the inertia of the State mechanism cast a shadow on the
substance and the objectives of the program. Additionally, the constant
repetition of the dilemma for and against the Mnemonia (the agreements of
Greece with its creditors) without a real understanding of the content of
the Mnemonia denied the Greek people the possibility to take a serious part
in the discussion on the future of the Greek economy.
After four years of supervision, having created a primary surplus and the
possibility of borrowing from bond markets, Greece is in a much better
negotiating position than earlier. But it still lacks a comprehensive
strategy, and it still addicted to the quantitative negotiation.
What Greece should ask of the Troika
First, Greece should ask for the immediate start of the discussion for the
elongation of debt maturities and the conversion of the interest rates to
fixed ones. The elongation helps Greece. There is no substantial reason for
this issue not to be finished now.
Second, Greece should ask the Troika to exempt public investment from the
fiscal consolidation restrictions up to €5 billion, with the money coming
from new issues of bonds that will go exclusively to public investment.
Third, Greece should clearly tell the Troika that it does not need more
money and a new program, having achieved and sustained a primary surplus.
The fiscal consolidation has ended. Of course, Greece can make structural
reforms that decrease tax evasion, shrink the public sector and make it
Fourth, Greece should tell the Troika that it wants to make the structural
reforms and in fact it is implementing them. The government should
prioritize them. The quantitative negotiations on the forms (e.g. Greece
has done 80% rather than 70% of them) are ludicrous and should stop.
Fifth, the negotiation should stop focusing on details (e.g. where there
will be 50 or 40 installments), even though it helps the government giving
it the justification that specific measures were imposed by the Troika (and
Greece “succeeded” in negotiating for 50 installments while the Troika
wanted 40), and the middle level bureaucrats of the IMF and Brussels “live”
for the details. However, the focus on the details hurts Greece because it
is not focused on the crucial issues.
The end of the Troika, the possible departure of the IMF from Greece, and
the issue of growth
Some in the IMF and some in Greece want the IMF to leave Greece. This would
be politically expedient for the IMF because it now gives money to Greece
rather than poorer countries with perhaps bigger needs. It would also be
politically useful to the Greek government that hopes that IMF’s exit will
automatically mean the dissolution and exit of the Troika and an end to its
frequent supervisory visits. But, most likely the Europeans will continue
to check on the Greek economy hoping that Greece will pay off its loans to
them. This means that the supervisory visits will not end with the death of
There are two significant problems related to the possible exit of the IMF
from Greece. First, the IMF has already given 16 billion euros to Greece,
and, according to its rules, this debt has to remain “viable,” or the IMF
would need to immediately ask for its full repayment. This means that the
IMF will implement a supervision similar to that of the Troika, even if it
were not to make any additional loans to Greece. Therefore it is not
improbable that after the end of the Troika, two of its constituent parts,
the IMF and the EU, would conduct two separate supervisory checks!
Second, as part of the program, the IMF is expected to loan €12 billion to
Greece in 2015-16. These moneys are already budgeted and their lack has to
somehow be covered. At some point, there were thoughts to use the remaining
€11 billion of the moneys originally borrowed for the bank
recapitalization, but now it seems that they will be given to the banks for
partial coverage of non-performing loans that reach €80 billion.
There are thoughts for Greece to issue €12 billion new bonds to cover the
needs arising from IMF’s exit. In my opinion, such a move is in the wrong
direction. Instead, Greece should use all moneys from new bonds issuance
for public investment. Greece does not have the luxury to reject moneys
that have been promised to it years ago from the IMF, if this results in
killing the public investment program. To put it simply: as long as Greece
can draw money from the financial markets, it should put all these moneys
to public investment. But what should Greece do about the shortfall of €12
billion that would arise if the IMF exits? What does Greece really gain
from IMF’s exit? Either way, the IMF will send a team to check on the
viability of the Greek debt. This implies that Greece wins very little from
IMF’s exit, but Greece loses the unique possibility to finance its rebound
from the recession and growth by issuing new bonds.
In conclusion, I emphasize the most important point of this article. The
strategy that leads Greece quickly and with certainty to growth and
reduction of unemployment is simple. Greece borrows €5 billion per year
issuing new bonds and uses all the moneys in public investments. Greece
does not put a single euro from these moneys in the general budget, and the
money is not wasted to “pay” the IMF, which would send inspectors to Greece
even if it extends no further loans. With some attention and care, Greece
can reach a 3-5% growth in 2015 and higher in 2016. And by the end of 2016,
this growth would result in 600,000 new work positions. In contrast,
without insistence in reforms and without this specific program of fast
growth, Greece can easily stay in the swamp of recession, which will be
accompanied with huge dangers of political instability andnational crisis.
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E-mail : june.samaras at gmail.com
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