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EU Observatory

Modernizing Greece: which structural reforms?

17 February 2015 | by Dr. Georgios Papanagnou

 

Since the early 2000s political and academic debate in Greece has focused on the “structural reforms” that would allow Greece to put its economy on a healthy and sustainable (long-term) footing. Under the influence of the liberal spirit which has been the cornerstone of Europe’s Economic and Monetary Union (EMU), these reforms have been mostly understood as involving: the liberalization of the labour market, extensive privatizations and reducing the role and size of the state, the deregulation of capital and product markets, lowering taxes and social security contributions for businesses and (post-2010) increasing economic competitiveness through internal devaluation.1

Nonetheless, after almost 15 years of implementation – with admittedly greater levels of intensity in the post-2010 era of the Memorandum – these reforms have largely failed to lead Greece to the economic promised land. Some believe that this can be attributed to a lack of reform zeal on the part of the Greek governments of PASOK and Nea Dimokratia. Nonetheless, this is not the case. Despite political calculations and occasional inactions the governments of the last 15-odd years did put a great deal of effort into implementing this agenda; often at great political cost.

 Therefore, the problem seems to lie with the content of the reforms themselves. In particular, it seems that this agenda profoundly misunderstands the basic weaknesses of the Greek state-economy complex. Thus, Greece’s problem is not a lack of liberalization, deregulation and privatizations but rather the weakness of its public institutions, underpinned by a chronic revenue shortage. In effect, you may liberalize and deregulate as much as you want but this is not going to make things better for Greece.

Consequently, a progressive agenda aiming to cure the Greek malaise would have to address the following:

  1. A competitiveness deficit and by extension a huge current account deficit (14% of GDP in 2008 just before the onset of the crisis).2 The lack in competitiveness is largely due to the inflation differential (which characterizes most southern-European countries) vis-à-vis the northern Eurozone. One of the major causes of the higher inflation, however, is weak competition in the product and service markets.3 The reality is that the easy access of big capital to the centers of power, and its close ties with a big part of the political class and media, have fostered a model of development that is not very conducive (to put it mildly) to competition. While it is true that the Greek minimum wage cannot be higher than that of Spain, and while it is equally true that the Greek labour market does afford a rather privileged protection to some professions, changing these cannot be the only solutions to restoring competitiveness – especially if one wishes to return to growth after 5 years of recession.
  2. Low productivity, which is primarily caused by a severe deficit in innovation and technology. This is related to the fact that the Greek economy is dominated by a mass of internally oriented and labour intensive small enterprises. In addition, more often than not entrepreneurs have not invested in intra-company R&D (among the lowest in Europe), while public spending on R&D is equally meager. Nonetheless, Greece's future is inextricably tied to greater levels of spending in this field, especially in renewable energies. At the same time, the negative impact of temporary contracts on productivity should be a source of concern for those who advocate the further liberalization of the Greek labour market.4
  3. An overextended and terribly inefficient public sector. Prior to the crisis the public sector was indeed overpopulated.5 Nonetheless, what is most important is that the public sector was corrupt and its services were poor. If Greece wants a better public sector, it has to address poor service delivery, improve the quality of the public sector personnel, foster a more professional ethos, and above all impose and maintain heavy penalties on those who seek to curb legal procedures (both civil servants and citizens).
  4. A majoritarian electoral system that has fostered a “winner takes all” mentality and cultivated an atmosphere of unaccountability and corruption. The electoral law has to be changed with a view to enabling the formation of coalition governments. A culture of debate, bargaining and compromise will be more than beneficial for Greek politics.
  5. Tax evasion and the shadow economy. The principal cause of Greece’s problems is the incapacity/unwillingness of the Greek state to collect taxes (bolstered by the pro-business tax policies which have been the mantra of the EU in the last two decades). Other than the Church and the ship owners who have avoided contributing their fair share of the tax bill, the Greek state proved incapable of taxing the mass of the self-employed  (around 30% of the population) and small businesses. Total tax revenue at 32.6% of GDP just before the crisis (2008) was very low by European standards; and lower than that of Portugal, Italy and Spain.6 Uncollected government revenues in 2007 stood at EUR 31 billion (or 13.6% of GDP), and the shortfall was 22% higher than in 2006.
  6. To these one has to add an unjust tax system that puts a heavy emphasis on indirect taxes and pressures the middle classes, thus contributing to great income inequality after taxes.7

A government that wishes to profoundly alter the shape of Greece’s economics and politics would have to make deep-cutting reforms in all of the above fields. These may go counter to what most people have been used to understanding when talking about “structural reforms” in Greece, but this is not a bad thing.

 


1 Featherstone, Kevin (2005) Introduction: 'modernization' and the structural constraints of Greek politics West European Politics, 28 (2): 223-241.

2 OECD Economic Surveys: Greece 2009, p. 20, OECD, Paris 2010.

3 Ibid. p. 19

4 Juan Jose Dolado and Rodolfo Stucchi, ‘Do Temporary Contracts Affect TFP? Evidence from Spanish Manufacturing Firms’, CEPR Discussion Paper 7075, 2008.

5 See the data from the ILO in http://laborsta.ilo.org/. The user has to choose Greece from the menu.

6 OECD Economic Surveys: Greece 2009, pp. 29, 60, OECD Revenue Statistics 1965-2009, p. 19, OECD Paris 2010.

7 Georgios Papanagnou (forthcoming 2015), ‘From electoral dominance to crisis. The end of an era and path divergence for Southern European Socialism (PASOK and PSOE), Journal of Political Science Pole Sud no. 42 (May).  

 

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