Greece’s future needs to be underpinned by a credible plan that focuses on private sector-led growth, argues former Prime Minister John Bruton.
It is important to note that the recession in Greece has been much deeper than expected by those who agreed the original bailout package in 2010 — a 25% fall in output against a predicted 7% drop. The budgetary adjustments have been bigger than in other bailout countries.
It must be acknowledged that when Greece was bailed out by European governments and the International Monetary Fund (IMF), the ultimate beneficiaries included banks — not only in Europe, but also elsewhere. These banks had been lending to the Greek government long after they should have stopped doing so, and they have forced Greece to confront reality. They assumed that, because Greece was in the euro, someone, somewhere would ensure they were repaid.
Yes, some of the banks, who were thus saved from their errors, were indeed German. But many of the banks that were rescued from their embarrassment were British and American — and the British and American taxpayers have avoided a proportionate exposure to the costs, through the Greek bailout, of saving their banks. The eurozone is bearing the main burden, while the others offer free advice.
That said, it would have been in nobody’s interest for a panic about Greece to have infected banks around the world. Bank credit constitutes 95% of the money we use, and a collapse in confidence over money could have had devastating global consequences. Without confidence in banks, economic activity would have come to a shuddering halt. We would have had a crash, rather than just a crisis. Hindsight critics can ignore that now, but it was a real risk then.
The origins of the Greek problem are very deep and longstanding. For years, Greeks had been consuming more than they were producing, retiring on pensions earlier than is normal in other countries, and running an educational system that had few links with the real economy. All these gaps were bridged by borrowing money from foolish investors, who averted their eyes from the profound underlying problems of the Greek economy.
Meanwhile, Greece supported a cumbersome and slow courts system, and an equally inefficient system of public administration and of regulating entry to professions. These systems got in the way of growth, because growth needs a capacity to move human and other resources quickly from less to more profitable activities. Such systems might have been affordable in a very rich country, but Greece never was a rich country.
Greece failed to develop a broad, modern industrial sector. It relied too heavily on tourism and ship-building. Greeks made money selling things to each other Greeks, instead of the rest of the world.
Greek businesses stayed small, not big enough to become exporters. Indeed, the proportion of micro businesses in Greece is very large, and this sort of business frequently under-declares its income for tax purposes. This is part of the reason for poor tax collection in Greece.
But there is growth potential in the Greek economy. A McKinsey study back in 2011 suggested that Greece could develop medical tourism — it has a large population of dentists. I met someone recently who was waiting for ages to have treatment for tonsillitis in Ireland, but instead went to Greece and had the operation done in days.
McKinsey suggested a big scope for aquaculture and food processing in Greece. The country could develop its port infrastructure to provide a regional cargo hub. But none of these initiatives can be financed unless Greek business people have access to a healthy banking system.
The Greek banking system is far from healthy. Its capital is tied up in Greek government bonds. The credibility of these bonds has been called into question by the brinkmanship and loose rhetoric of the new Greek government. The uncertainty over whether Greece will still be in euro in a few months time also inhibits investment, while nationalist rhetoric in Germany on that topic has added greatly to that uncertainty.
Greece’s future needs to be underpinned by a credible plan that focuses on private sector-led growth — backed by a healthy European banking system — that invests in productive Greek businesses rather than just in Greek government bonds, as it did in the past.
If that is to happen, it is not just Greece that needs to do a lot of homework, but the entire European Union (EU). The EU needs a real banking union that allows banks to lend across borders to good projects wherever they are found in the eurozone. This needs common EU legislation on debt collection, collateral and the like.
The fact that Greek, Irish, Portuguese and Spanish taxpayers have borne large burdens to recapitalize their banks — or have undertaken new debts — as part of a project to sustain the global banking system needs to be recognized by the rest of the world.
This cannot, unfortunately, be done straight away. The problems that gave rise to the crisis must be understood, and fixed, first.
The Greece election result would not lead one to believe that Greeks understand the source of their problems. And the credence that many voters elsewhere give to rhetoric that suggests being “against austerity” constitutes an implementable policy — in a world of free capital movement — indicates that many do not understand what went wrong or what can realistically be done about it. But ultimately, there must be an honest attempt to find a fair settlement of these legacy issues.
A Global Debt Conference, some time before 2022 when Greece has to make huge repayments, should be considered. It could be sponsored by the IMF and might negotiate debt relief on the basis of the extent to which countries have, in the seven years between 2015 and 2022, implemented growth promoting reforms and achieved primary surpluses on their current budgets, taking into account the demography and the tax raising potential of each nation.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.