international analysis and commentary

Greece’s recovery: not before serious structural reform

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In recent months, international observers have been seeing green shoots of economic recovery in Greece. Not long since the height of the crisis in 2012, Athens has achieved a large-scale fiscal consolidation leading to last year’s primary fiscal surplus and a successful recapitalization of the country’s banks. It did it with a coalition government that, although embattled, managed to successfully run a modest EU presidency and pass the test of the recent European election.

The Greek central bank and the country’s international creditors now both predict that the economy will return to growth in 2014, albeit at a rate of only 0.5/0.6%. On paper, economic conditions have stopped deteriorating in Greece, and Greeks are glad that their country has taken a step back from the edge of the cliff. But after six painful years of recession that have shrunk its economy by 25% and with a youth unemployment rate still hovering at 57%, they are also pessimistic about the prospects of recovery.

A full economic recovery would require solutions to the chronic governance problems that lie behind Greece’s economic crash. From the onset of the crisis, the focus of discussions was mistakenly on the fiscal deficit at the expense of fixing the structures of Greece’s state and economy. At the heart of the country’s problems lay not the size but the functioning of public institutions, which remain ineffective, bureaucratic and politically controlled. As such, they continue to hold back the reform agenda and to undermine both public services and private initiative. Moreover, there is little evidence of change since the crisis erupted in 2010: from ministries to local authorities, civil servants continue to have jobs without job descriptions, and to enjoy immunity from dismissal even in cases of demonstrated corruption. Worryingly for an EU Member State, the OECD even found that Greek public servants were not in the habit of keeping records and unable to extract basic information from data.

Unfortunately, the centrality of these governance problems is still lost on many observers, including some Greek voters, who wonder why even reformist government ministers cannot effect change. But as long as public governance remains in tatters, policy will continue to fall prey to populism and strong vested interests. The complex challenges that still have to be faced include the backlog of 140,000 administrative cases in Greek courts and the dire state of the social security system, currently threatening 250,000 more businesses with bankruptcy.

Meanwhile, with the civil service captured by politics, interest groups close to the political class continue to defend rules that shield them from competition, keeping prices high and young people out of work. But in an atmosphere of political tension, even simple initiatives to eliminate guaranteed profit margins for pharmacists and a monopoly of the milk market for domestic dairy farmers have brought the government to the brink of collapse. 

Despite these challenges, the Greek economy boasts an array of strong cards in sectors like shipping, tourism, and agriculture. It enjoys a favorable geographic position and a well-educated young generation. It is the failure of the state and the economy to leverage these factors to the country’s advantage that explains why recovery has been so much more elusive in Greece than in the other bailout countries. With Greece’s domestic market faltering and public spending curtailed, the surest way to get the millions of unemployed Greeks back into work is to push forward with policies aimed at export-driven growth.

Athens has not displayed the necessary ambition. Over the course of the crisis, the Greek economy benefited from increased earnings from tourist arrivals, which peaked in 2013. But even factoring that in, Greece was the only bailout country that saw its current account adjust almost entirely through the compression of imports, rather than an expansion of exports, despite a 13% decrease in wage costs. In a recent paper the European Commission (“The Puzzle of the Missing Greek Exports” June 2014) finally drew the connection between weak exports and Greece’s governance and administrative problems, ranging from rule of law to customs and export clearance procedures.

In interventions aimed at correcting the fiscal deficit, chronic structural issues affecting the economy were overlooked by successive governments and EU creditors. A mismanaged pension system continues to place unbearable non-wage costs on employment, making it impossible for the younger generation to get a fair chance in the job market, while civil servants and privileged professionals have rushed to retire early. Welfare spending, although comparable to the EU average, fails to reduce poverty because of its faulty design and dysfunctional administration. A lack of joint projects between universities and business, and a ban on private universities, makes it nearly impossible for Greek researchers to create value out of innovation.

A large share of the blame lies with government politicians, who from 2010 onwards have presented structural reforms as a painful EU condition for financial assistance and have shied away from defending them on their merits. Many essential policies were either not attempted or never enforced. Tough political decisions are routinely swept away by a populist rhetoric that conflates austerity with reform and brands both as problems imposed from abroad.

The left-wing opposition party SYRIZA carries its own share of the blame. In his public appearances, the party’s leader Alexis Tsipras has reaped public disgruntlement with the old political class but avoided tackling thornier structural problems in the economy and the state. This has allowed the anti-bailout front to bypass tough political choices that would otherwise fragment its own political base and to lay the blame for Greece’s ills squarely on the EU and the IMF. The carefully crafted impression in the minds of Greek voters is that the crisis was caused not by the problems they themselves have experienced and lamented for decades, but by the terms of the bailout. Yet, despite their frustration with the bailout agreement, 70% of Greek voters want their country to remain anchored to the Eurozone “at any cost” and have reservations about SYRIZA’s promise to force Germany’s hand by tearing apart the agreement. The European election confirmed that if Tsipras is to appeal to the three quarters of voters that did not vote for SYRIZA, he will have to present a more comprehensive program of reform.

In the meantime, parliamentary elections before the end of the year, ahead of a lengthy negotiation with international creditors over debt relief, could spell a return to a period of instability similar to 2012. This would also be a return to the sterile screaming matches of party politics run wild. Greece does not need elections as much as it needs change.

Recovery would be better served by holding off elections until the current government’s mandate expires in 2016. Such a scenario would also offer SYRIZA, who came first in May’s election, the opportunity to put together a realistic program. Thus will be welcome, but will most certainly disappoint those who expect the party to shift towards a modern social democratic paradigm. With 6% of the vote, the newly formed centrist party The River will probably not reshape the political scene, but it may at least press for more ambitious policies, including a serious reform of the public administration. Both factors are conducive to a more substantive dialogue about Greece’s underlying problems, although solutions may still come later rather than sooner.