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Greece in the balance

Greece is back in the news, and it's not all bad. The country hasn't crashed out of the euro and there's even talk of "Grecovery".

By Michael G Jacobides 01 July 2013

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Major funds, including Third Point LLC, are poised to invest billions of euros in the country. Chinese giant Cosco has announced big investments in Greece's major port, Pireaus. Approval has been granted to build a new gas pipeline, which will pass from Azerbaijan through Greece.

Yet the recent kerfuffle around the national TV company and the near collapse of the government are reminders that the country still has a way to go before it's off the sick list. And there's a very real risk that the Greek financing programme may be derailed if negotiations between Greece and its creditors don't end well, leaving the continuation of its financial support programme up in the air. Even if the release of the next tranche of funding gets approved by the Eurogroup of July 8th, more will have to happen on the ground.

On the positive side, Greece has tidied up its balance sheet (at least the privately held debt), and nearly balanced its budget, excluding interest payments. But it hasn't yet tackled its operational challenges, the root causes of the country's crisis.

The fact is that Greece is monstrously inefficient as a manager of public services. It is unable to collect taxes fairly, thus imposing unreasonable tax burdens for the few who work and pay taxes; tax evasion is still rampant; and, perhaps more importantly, the excessive red tape, strong bias for incumbents, and weak competition authorities get in the way of the efficient functioning of the economy.

Precious few things have changed in this regard.

The previous government was a political compromise between the conservative ND, the socialist former ruling party PASOK, and the left-wing DIMAR party. True, to the surprise of many analysts, the prime minister, Antonis Samaras, abandoned his earlier populist rhetoric and tried to sort out public finances. But on the issue of administrative reform, his government procrastinated, wasting a valuable year.

Pressures from EU creditor nations have mounted steadily in the last few months, and the Government was asked to identify 14,000 job cuts by September, with the first 2,000 to be fired by the summer. This was to signal that Greece had the will and skill not only to cut salaries but also to reform. Predictably, Greece was unable to meet its commitment.

Two weeks ago the government got bad news on another front: Gazprom backed off from the purchase of DEPA, the Greek Petroleum state organization. To salvage his government's credibility in the wake of this, the prime minister decided to take a gamble. The restructuring of ERT, Greece's national radio and TV corporation, had been under discussion for a while but the unions and other entrenched interests had so far seen to it that the discussion had gone nowhere. Samaras unilaterally decided to shut it down altogether.

The political world was in shock. Bold move, said some. Undemocratic and reckless said others: shutting down ERT meant leaving news in the hands of private channels, partly owned by Greek oligarchs.

The move was meant to placate the EU creditor nations, by offering the 2,650 laid-off ERT employees to fill the summer's "firing" quota. It was also meant to show that, perhaps for the first time ever, Samaras and his government "meant business" on administrative redesign. And the majority of Greeks, as polls showed, broadly supported this drastic move.

Yet the plan backfired, as it was executed without much planning, without consulting the government's allies, and with no consideration to a recently commissioned plan on how to wrap up ERT and re-build it as a truly independent entity.

The most obvious impact was on the government itself. Rumours of fresh elections resurfaced, and after two weeks of political turmoil the socialist party DIMAR left the coalition government, and the former ruling party PASOK became a full partner. More serious was the effect on public service employees; any future effort to rationalize public services will now face very stiff resistance. Nonetheless, the cloud does have a silver lining. The long held taboo on firing public sector employees has been broken, and discussions about reforming the public sector have started in earnest.

It is past time. Change management is the current imperative for Greece. But as with any other turnaround situation, the nature and the magnitude of the crisis reveals the opportunity. The working of the public sector is so far off what it could and should be, and its existing human resources are so under-utilized that a solid rethink, pushed through with steely determination but also a deft touch could transform the entire nature of public service in Greece.

This is the challenge confronting the new minister charged with public sector reform, Kyriakos Mitsotakis. The Harvard MBA graduate will need all the skills developed as a McKinsey consultant and a Venture Capital executive — and then some. He'll need to redirect the discussion from whether and how to fire public sector employees, to how to rationalize the structures. And for this, he'll need to work both with the administration and the EU creditor nations. He'll need to focus on getting the structures right, and on empowering the capable people within the administration to push through reforms — all this against a recessionary backdrop and in a coalition government with a slim parliamentary majority.

Greece is hanging in the balance. If Samaras, Mitsotakis, and their colleagues dare to tackle the monster that their very own parties built, they will ensure their, and their country's, survival. To do so, they have a few short months. The clock is ticking, and we're on overtime.

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