Greece: austerity vs structural reform

After a narrow electoral victory, centre-right ND is in the process of forming a coalition government ...


With an aim to renegotiate the MOU and remain in the Euro, centre-right ND is in the process of forming a coalition government with centre-left PASOK and left-wing DIMAR.

Its medium term prospects remain bleak. The politics remain messy, the underlying structural issues persist, and Greece is in a contraction spiral that reduces its tax receipts and social security contributions. The government coalition will also rest on parties and people responsible for this mess, making the chances of a real turnaround doubtful. Greeks may have bought another summer in the Euro and the Eurozone may have bought time to better prepare for a potential Grexit.

Still, against these odds, there is a glimmer of hope, provided that the focus shifts from the MOU and the terms of fiscal adjustment alone, to the structural measures that can revitalize the Greek economy and rebuild the state. This could prove beneficial both to Greece and to its partners and creditors. So far, little progress has been made in fixing the Eurozone’s worst administrative infrastructure: an incompetent and often corrupt central government which wastes resources, fails to deliver on public goods and tackle tax evasion, and does a poor job at maintaining competition in the private sector.

Still distant is the potential upside from a thorough reorganization of Greek administration and from improving the rules and regulations that debilitate entrepreneurial initiative and growth. Greece’s creditors (the Troika) have neither pushed sufficiently, nor made the case persuasively. In Greece politics have been polarized between those “for” and “against” the MOU. The distinction between “austerity” and “structural reform” has been lost in the political debate. Whether ND failed to capitalize on this distinction because of an uninspired communications strategy or because it lacks the courage to engage in these drastic reform policies, remains to be seen.

Regardless, it is imperative for the pro-reform forces within and outside Greece to focus on hopelessly lagging structural reform. The EU taskforce should help curb tax evasion (Greece’s greatest social scandal), improve the judiciary, and reform the Greek public sector. Examples of such transformation exist, such as the turnaround of TRENOSE, the state-owned train company which used to lose €20M a month and is now breaking even, to the operational improvements of OTE, the former state-owned telco giant, now profitable and majority owned by Deutsche Telekom. A push to reform the central administration and change the way civilians interact with it is the only way to gain momentum. A clear distinction between austerity and structural reform measures is needed.

On austerity, the Troika should provide some leeway to help consumption to recover, as contraction increases the fiscal gap. A token change, at least by re-setting the fiscal target calendar, seems possible and is indispensible. On structural reform, the Troika needs to push the reform agenda, which will doubtless meet resistance: Privatizations and flexible working practices and curtailing entrenched unions, especially in lushly paid state-owned enterprises will meet resistance from the left. Rationalizing the government and cost-cutting in the publically owned companies and opening competition may meet with resistance from (parts of) ND, a party prone to clientelism and old-style politics. German hawks could productively focus their energies here, not just on austerity.

The Troika also needs to urgently upgrade its presence on the ground and links with the Greek government. There is currently no capacity for change in the ailing, understaffed, under-resourced and demoralized parts of the Greek government. There are no funds and no expertise – let alone mandate for the change-management project required. Yet if the administration is reformed, the tide of public sentiment may change, providing the glimmer of hope that is sorely needed.

Greece is currently in “septic shock” with consumption having nose-dived and investment having been halted due to the political and potential currency instability. If some headway is made both on the fiscal and the structural front and trust is restored, then a short-term spike of repressed consumption and investment may provide relief. Should this happen, then the risk of a debilitating, protest-based opposition from SYRIZA might be curtailed. Without this, any reprieve will be short-lived, and we will be headed for a fresh disaster. Once Greeks return from their summer holidays into a grim reality, patience running thin and misinformation rife, despair may be their unfortunate counsel.

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