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How to stop the slide before Greece becomes a failed state

08 Jul 2015

Leading economists urge direct assistance to raise state capacity

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Direct assistance to raise state capacity is urgent because Greece has clear symptoms of a failed state, unable to carry out its basic functions, three leading economists from London Business School have warned.

Richard Portes, Elias Papaioannou and Lucrezia Reichlin, economics faculty at London Business School, have said that although the “No” vote prevailed at the weekend, given the campaign and the ambiguous messages on both sides over whether and how Greece should repay its debts, the results cannot be read as a ‘no’ to Europe.

In an article published on Reuters, the economists said: “Europe needs Greece, and Greece needs Europe, regardless of the results of Sunday’s referendum. That reality must be the guiding principle in negotiations between Prime Minister Alexis Tsipras’ government and the European Union.

“Without confirmation from the European Union and evidence that good-faith negotiations have begun, the European Central Bank (ECB) will be compelled to withdraw support, and there will be a full, devastating banking crisis.

“In the short-run, the ECB needs to keep providing liquidity to the Greek banking system. Otherwise tourism will collapse; there will be shortages of basic consumer goods and medicines, and social tensions will rise.”

Aid could include direct financing of key projects to help government run properly, for example, funding information and communications technology in the justice system, administration and in customs, the economists said.

Richard Portes, Elias Papaioannou and Lucrezia Reichlin say a new programme, based on a new set of principles that focus on the structural deficiencies of the Greek economy, is needed. 

Priorities must include reforming the dysfunctional public administration, improving the inefficient court system, strengthening legal institutions, protecting investors and private property, liberalising cartelised product and services markets burdened by over-regulation, reducing red tape, privatising inefficient state firms and quickly starting key infrastructure projects.

 “Greece and its partners need a fresh start that combines realism with hope. The programme that ostensibly went to the referendum had neither. Europe can do better.”