Friday, February 03, 2012

Greece's real challenge

The German idea of sending Athens a ‘budget commissioner’ was daft. Berlin itself could not tolerate such interference in its fiscal sovereignty (the constitutional court would never allow it). But to restrict such budgetary oversight to Greece alone would be disdainful and a political non-starter. The idea predictably caused outrage in Greece. Chancellor Angela Merkel has quietly dropped the proposal but the underlying problem persists: Greece’s donors – not only Germany but also other EU governments and the IMF, no longer trust Greek politicians to turn their country around.

Greece desperately needs a deal on a new bail-out package before March 20th when €14.4 billion in debt repayments are due. The IMF and eurozone governments insist that new money will only be forthcoming if there is a realistic prospect of Greek debt becoming sustainable in the foreseeable future. The IMF says that ‘sustainable’ would mean a debt level of 120 per cent of GDP by 2020 – although most economists think that 60-80 per cent is the most that a weak economy like Greece could cope with.

Even to reduce the debt level to 120 per cent from the current 160 would require a deep cut in existing debt, more fiscal austerity, lots of further outside help and a return to economic growth. Media attention has focused on the debt restructuring talks between Athens and it private creditors. But for Greece’s future prospects, the question of whether bond holders get 3.8 per cent or 4 per cent interest on their restructured portfolios is insignificant compared with the much bigger question of whether and when Greece emerges from its devastating recession.

There is now broad agreement among eurozone donors and the IMF that Greece will not be able to squeeze more revenue out of an economy that is in its fourth year of recession. The IMF forecasts GDP to fall by a further 3 per cent this year but private sector forecasters, such as the Economist Intelligence Unit, think that the economy may contract at twice this rate. In 2010, Greece went through the most savage austerity programme ever implemented by an OECD country. Yet the budget deficit at the end of 2011 stood at around 10 per cent of GDP, so adding to the already unsustainable level of debt.

The emphasis of Greece’s negotiations with the troika (IMF, ECB and European Commission) has shifted to structural reforms designed to boost growth. The good news is that there is lots of room for improvement: by many measures, Greece is the EU’s least efficient economy. The National Bank of Greece has calculated that a comprehensive reform package could boost the annual growth rate by 1.5 per cent over the medium term, although the OCED thinks an additional 0.5 per cent is more realistic.

The previous government of George Papandreou started making headway in various areas, for example by removing some of the protection enjoyed by truckers, lawyers, pharmacists and 140 other ‘closed shop professions’, by simplifying licensing procedures, making life easier for small businesses or giving workers and their bosses more wiggle room to set pay and conditions in Greece’s over-regulated and union-dominated labour market. Papandreou’s technocrat successor, Lukas Papademos, has continued along those lines.

The bad news is that most of these reforms so far only exist on paper – and even here they are often timid and riddled with loopholes. In many cases, the biggest obstacle to real progress is Greece’s bloated and inefficient state administration. According to an OECD analysis published in December, the central government is simply not capable of designing and implementing the growth-boosting reforms that Greece so desperately needs.

The ILO counts 390,000 civil servants in Greece. But add the 660,000 working for public corporations and other semi-state entities and the number swells to over 1 million – more than one-fifth of the workforce. Even that number may be too low since there are all manner of quasi-civil servants on outsourced or temporary contracts who enjoy similar pay levels and perks as full civil servants.

For many years, public sector salaries had outstripped those in the private sector; before the crisis they were on average 60-70 per cent higher. Public sector workers also enjoyed plenty of extra benefits, in addition to job security. Since the onset of the crisis, labour costs in the public administration, defence and social security have fallen by about 6 per cent, according to Greece's National Institute of Labour. In some parts of the private economy, such as hotels and restaurants, labour costs have fallen by 30 per cent. And unemployment has predominantly hit the private sector, too. “The real conflict is not between Greece and its donors. It is between the public sector and the rest of the population”, says one Athens think-tanker.

The troika demanded early on that Greece shrink the public sector by only replacing one of five of those retiring. But between early 2010 and mid-2011, the government added 20,000 people to the public sector payroll (which still amounts to 13 per cent of GDP). Now the troika insists that the government get serious about cutting the headcount by up to 150,000 over the next three years.

The December OECD report found that the main problem with Greece's state administration was not its size but the fact that it adds too little value. There is little sensible policy-making because ministerial bureaucracies do not collect or use data on which to base their policy designs. Moreover, ministries communicate badly with each other, if at all. And even within ministries most departments work in “silos” – they produce rules and regulations without much of an idea how they fit into any broader policy plans. The average Greek ministry has 440 different departments or administrative units. One in five of these do not have any staff other than the head of department and only one in ten have 20 staff or more. The central government alone is spread over 1,500 different buildings.

The OECD also found that civil servants care little if new rules and policies are implemented, monitored and enforced. The result is a state administration that is top-heavy, inflexible, obsessed with process and is basically busy having “a conversation with itself”, as the OECD puts it. Having watched the government’s laboured efforts to improve matters, the OECD now thinks that only a “big bang” reform could give Greece a public administration capable of planning and implementing meaningful change.

Similarly, a white paper that came out of a brainstorming at London Business School last year suggests that in some government areas a completely new start is needed. The most urgent is probably the tax administration. The authors of the white paper (Michael Jacobides , Richard Portes and Dimitri Vayanos) are sceptical whether the cronyism and corruption that pervades local tax offices can ever be tackled. Although the government has told its tax collectors to get tough on evaders (some €60 billion in taxes are outstanding), many have simply failed to heed orders to, for example, conduct audits on big tax debtors. Even former finance ministry officials admit that Greece would probably be better off to abolish the 300 local tax offices because they cost more than they collect. Instead, Greece should set up an independent central tax and social security collection agency.

The white paper suggests similar independent bodies in other areas: buying medicines and equipment for the healthcare sector (here, Greece’s spending per head has been the highest in Europe for many years); public procurement more generally (public contracts amount to 11 per cent of GDP but it takes on average 230 days to award such a contract); a corruption watchdog (although graft appears to be declining, according to Transparency International, one in ten Greeks said they paid a bribe in 2010, with public hospitals and tax inspectors being the most greedy); and a central steering group to supervise structural reform – a proposal also dear to the OECD’s experts.

Such independent bodies could potentially be established quickly and make a noticeable difference. However, the few new bodies that the government has so far set up, such as the privatisation agency and the parliamentary budget office, have been woefully understaffed. And they have encountered much political resistance when trying to carry out their assigned tasks.

Greece’s donors know that there are no quick fixes for the country’s deep-seated malaise. But they no longer trust the political class to carry out a sustained reform programme. Both big parties, Papandreou’s social-democrats (Pasok) and the conservative New Democracy, draw much of their support from public sector workers and other molly-coddled groups that resist change.

The new ‘technocrat’ government will hardly make a difference: Papademos has been given only five months before the next election is due. And unlike Mario Monti in Italy, who was free to fill ministerial posts with experts and other non-political types, Papademos is lumbered with 45 cabinet ministers, most of whom are career politicians from Pasok and New Democracy.

EU politicians now insist that all party leaders must commit to the new troika reform programme beyond the April election. But both Pasok leader Papandreou and New Democracy’s Antonis Samaras are opposing chunks of the troika programme while suggesting that there is an easier way out of the crisis than radical reform.

The negotiations for the new support programme are a good opportunity for a new deal: the troika eases demands for rapid fiscal consolidation and finds additional money for growth-boosting investments, for example from Greece’s €15 billion unspent EU funds or the EIB; Greek political leaders, in turn, get serious about public sector reform and opening up the economy. Ultimately, only the Greek people – not any kind of outside watchdog – can hold the country’s often self-serving politicians to account. To help the Greek people, Greece’s donors must make a bigger effort to improve their image in Greece and explain to the Greeks what needs to be done to put the country on a sustainable growth path.

Katinka Barysch is deputy director of the Centre for European Reform.

9 comments:

Georgios said...

Congrats! A pragmatic overview of the Greek case!

Anastasia said...

Everything you say is right and pretty much accurate.These problems are well-known for decades.The only thing everyone seems to only mention in passing is the outrageous conditions for private sector employees in Greece.As you mention in your article,the public sector offered a much better quality of life to its employees when private sector workers enjoyed little and sometimes were obliged to support whole familes with salaries not exceeding 1000 EUR/month in a country that has become too expensive particularly after it joined the eurozone.
What I'm saying is that a way to "restructure" Greek economy is to create and enforce a legal framework obliging big private sectors employers to offer decent salaries and benefits to their employees.It is well-known for example that while the tourism industry is doing relatively well even in times of crises,people employed therein earn very little and there have even been cases where they were not paid for six months!Meanwhile,the owners of big hotel chains were enjoying their profits,only paying big slaries to their own,aka friends and relatives employed in positions they have neither the qualifications nor the skills to perform.

K Bledowski said...

This is a sobering account.

The author is right that "ultimately, only the Greek people – not any kind of outside watchdog – can hold the country's often self-serving politicians to account."

The snag is how to do it. How can the Greek people hold the politicians to account when their political survival depends on the status quo - and that status quo appears to be the top priority of the strongest of the corporatist interests? In other words, what incentives would move both sides to adopt the painful reforms? Clearly the implied threat of a default has not concentrated minds, yet.

Istanbul academic said...

I read your "Greece" paper. I greatly enjoyed and learned from it. It was very informative but also scary. The Greeks have really painted themselves into an impossible corner economically and financially. Yet, more and more I feel that the Sultan's Turkey though might be doing better economically and financially is fast painting itself into a most undemocratic and repressive corner in a supposedly democratic room. This morning in Radikal I read how students are getting penalized by university administrations heavily for the simplist things like putting up a poster for a film festival of Yilmaz Guney films, if university students are fast losing their freedom of expression imagine where the rest of the society will heading for. I sometimes wonder where one is better off, in a Greece where the Greeks have long enjoyed their freedom of expression but suffer financially or in a country where freedom of expression is fast fizzling away but the economy is doing Okish but just OKish...

Antaeus said...

This is basically a collection of good samples of the information out there on the web, with a very strong analytic focus. Keep the pressure on, there is no way the Greek government can malign your institution as biased! We got so annoyed with Greek government inaction that we started a site last summer, called Reform Watch Greece. Google it if interested. Our main question though, is why the Troika allows this kind of deception re true reform to continue while the funding flows....

Anonymous said...

Having lived and worked in Greece for a while I have realized what a mess it it. That mayors, public servants and bankoffice staff consider normal citizen and normal employes a inferior. Many people still have a "humble" approach towards civil servants, they do not question anything. Furthermore there is no will to unite or stand up against the currupt circles nor to get engaged in united groups like in other countries. Ignorance is huge - the word "ti na kano?" (What can I do?) was and still is common. The owners and renters of properties, hoteliers, business keepers like lawyers, doctors, architects, the orthodox church with it's riches, the yacht-owners, the Greeks who got rich in Australia or America - they do not want to know have what really is going on politically and socially.
It is pure chaos, disaster and to live from one day to the next - with no actions taken to change the misery. Only words and trashing the European money lenders!

Allexia

Anonymous said...

I would sign and confirm ANY of Anastasia's words....
The clue is that the EU has given so much money to these hotel owners and tourist agencies while the employees are treated and paid very bad - not to speak of the many illigal workers from Bulgaria, Romania or Albania in these hotels ....

Alexia

Nicolas VĂ©ron said...

Thanks for this excellent piece. The irony of it is that you start by calling the German “Komissar” proposal daft, and then go on explaining why it is utterly relevant – the Greek state needs restructuring and the Greeks themselves cannot do it, so the lenders must take the lead. You may stop short of endorsing the Komissar concept but you eloquently give the rationale for it. Or is there something I misunderstood?

Kind regards,
Nicolas

Artemis G. said...

(cont.)

While detailed, your analysis does not appear to consider that with unemployment already over 21% and over 350,000 expected to add to that figure, the state will have to either honour its obligation to pay out unemployment benefits or let those people starve. What’s more, these figures exclude the self-employed (most of whom are not entitled to benefits and thus never appear on the Greek jobcentres' registers), so the real blow to the economy is probably far worse.

These data (which will become far bleaker when/if Greece defaults) suggest to me that even an ideally organised taxation system will have far fewer taxes to collect, either from (the non-existent) salaries or from business transactions and VAT. And that’s nothing to do with inefficiency, it’s to do with recession.

There's a lot of preaching, especially from some German quarters, about the evils of tax evasion and how these led to Greece's plight single-handedly. Again, while tax evasion has always been a major domestic problem, it is ridiculous for anyone to suggest that the crisis would have been averted if only the estimated 30-40% of the shadow economy (as a % of GDP; source: Hellenic Foundation of Enterprises
http://www.sev.org.gr/Uploads/News/PR_forologiki_pragmatikotita_041109.pdf) had been brought down to the European average. If the shadow economy alone is an indicator of the kind of nightmare Greece is experiencing, Europe ought to brace itself for a deluge of crises: if you check OECD figures, they show at least another 9 European countries with higher levels of shadow economy than Greece (and not exactly commendable levels of debt).

While we're at the shadow economy, I see no mention of the roughly 700,000 immigrants (source: http://www.oecd.org/dataoecd/6/34/45627967.pdf), of whom at least 200,000 are estimated to be illegal, while 50% of the lot, whether legal or illegal, are estimated to be illegally employed.

Leaving humanitarian issues (of which there are many), as well as the question of whether employing immigrants is an act of exploitation or compassion aside (it depends entirely on the circumstances, and you'll find both extremes), the fact is that there's another big chunk of the population who contribute nothing to the state coffers and who, out of necessity, accept work for far less than the standard rate for a job – rates that most Greeks found disgraceful, and rightly so. A tricky subject: employers who reject immigrants and prefer the more ‘expensive’ Greeks are likely to be accused of racism; employers who hire immigrants for less, thus barring Greeks (unless the latter are prepared to work for much less than what they used to), clearly contribute to the problem.

I’ll agree with everything you rightly brand as negative and anachronistic. But none of it explains why the influx of so many billions in the form of bailouts plunged Greece into a far worse crisis than before. If tax evasion, state incompetence and half-baked reforms were indeed the chief causes, the cash in those bailout packages should have at least slowed down the pace of the recession. But it hasn’t.

I don’t see how the same old cronyism, sluggish state mechanisms etc., plus several billions of euro equal a far deeper recession. There’s a factor missing from that equation, and, judging from the data and the pattern so far, the factor that made the crucial negative difference must lie in the design of the austerity measures, and the inflexible insistence of the Troika that more of the same will not only stop, but reverse the Greek crisis.

If this assessment is fair, the only thing that could halt the crisis is a radically different approach, with the emphasis on money invested in infrastructure, not in bailouts for bankers; with incentives and means for growth and, yes, with practical support in the shape of reliable, experienced advisers and auditors (German, Irish, Greek; nationality shouldn’t matter) who can help supervise the implementation of projects, not watchdogs imposed by the Troika to police Greece.