Speech at the 17th Economist Roundtable with the Government of Greece by Poul Thomsen, Deputy Director in the IMF’s European Department
April 15, 2013by Poul Thomsen, Deputy Director in the IMF’s European Department
April 15, 2013
1. Greece has come a long way. Let me give three examples.
- First, as many other have said, the fiscal adjustment has been exceptional by any international comparison. Greece has consistently delivered on its fiscal commitments, repeatedly taking additional measures in the face of stronger than expected recession.
- In this regard, the current Government was undoubtedly dealt a difficult hand as it had to undertake very significant fiscal adjustment at a time when the scope for additional tax increases had been exhausted. It accepted to undertake painful cuts in pensions and wages amid strong political opposition.
- Nobody can seriously question Greece’s political commitment and determination when it comes to cutting fiscal deficits and meet ambitious medium-term targets.
- Second, we estimate that more than half of the cost competitiveness gap that had opened up has by now been closed. This reflects primarily notable labor market reforms, which have secured a significant realignment between nominal wages and productivity at enterprise levels. The ground has been laid for a similar improvement in price competitiveness as product and service market reforms take hold.
- The Greek economy has rebalanced considerably, with the external current account deficit is down by 10 percent of GDP.
- Again, the willingness of the Government to push through politically and socially difficult reforms in order to restore Greece’s ability to compete inside the Euro Zone cannot be in doubt.
- Third, financial sector stability—not least the safety of deposits—has been preserved despite the deep recession and the attendant large increase in NPLs and despite the large write down of public sector debt.
- While bank capital has had to be written down very significantly, the funds necessary for the HFSF to ensure that all banks remain adequately capitalized—about 50 billion Euro—has already by almost fully disbursed and placed in banks. Deposits remain safe.
2. But the adjustment has not always been achieved in the most optimal way, creating fairness issues that threaten the social and political support for the program. Let me give three examples here as well.
- First, tax evasion remains pervasive: too many of the rich and the self-employed still do not pay their fair shares. By implication, fiscal adjustment has relied too much on higher taxes on those who are paid a salary or pension—they are easy to tax—and across-the-board cuts in wages and pensions.
- This is not fair and has rightly caused great social resentment. It has also exacerbated the recession: the by now famous fiscal multiplier is higher when the burden falls disproportionally on people with lower incomes, because they spend a much larger share of their incomes.
- Second, while wages have declined significantly, this has only recently started to be reflected in lower prices. Reforms aimed at opening up the economy to competition, not least closed professions, have disappointed. There are far too many who still earn monopolistic rents or gains.
- Thus, the reduction in incomes inevitably associated with the rebalancing of the economy has fallen disproportionally on real wages. This is also not fair.
- Third, it is still a taboo to dismiss public employees. There have been no forced dismissals when employees are found not to perform or when positions are being eliminated.
- Thus, whereas the rebalancing of the economy has entailed a dramatic increase in unemployment in the private sector, public sector employees have been protected. This is another example of an unfair distribution of the burden of adjustment.
3. These problems must be addressed for the program to succeed. Without a much fairer distribution of the burden of adjustment, further painful cuts will be necessary and the already fragile social and political support for the program is unlikely to be maintained. Addressing these problems is now obviously a matter of urgency. The policy corrections agreed in the last round of discussions show, in my view, that the Government is keenly aware of this.
- First, we need a much stronger political commitment to tackle the rampant tax evasion. To be frank, we have provided huge technical assistance in this area since the start of the program and the authorities have the tools needed to improve tax collections. This is really a matter of political will.
- One problem among several is that the tax service has too many employees who have gotten their jobs because of political connections.
- In the current discussions, the focus has been on measures to increase the tax service’s independence, including in personnel management.
- Second, much more needs to be done to increase competition. This will be difficult. Compared to, say, labor market reforms, where the focus was on a few major easily monitored changes, product and service market reforms are a question of hundreds of smaller reforms, few of which are by themselves essential and most of which are subject to fierce challenges by vested interests at local levels that are difficult to monitor. A critical mass of such reforms will be possible only with a broad, forceful, and sustained political commitment.
- A key focus of the program in this area continues to be on opening up of closed professions and removing red tape that feeds corruption and strangles initiative. Another pillar that has met with too much resistance by vested political interest is the privatization program, where the HRADF has made big efforts but found itself stymied at every step.
- Third, public administration reforms must finally start in earnest. This will require mandatory dismissals. The notion that public employment levels can be adjusted over a prolonged period through voluntary attrition only, with no involuntary exits, is not realistic. The provision of important public services is hampered by lack of qualified staff, like banking supervision and tax administration.
- Considering that Greece has youth unemployment of more than 60 percent, with thousands and thousands of highly educated young people desperately looking for a job, it is astonishing that it is still somewhat of a taboo to make room for new and younger employees by dismissing even those who do not bother to show up for work, or who have committed serious legal offenses,.
- The Government has said that it is determined to break this taboo. This is much welcomed. Under the program, employees that are being dismissed will be replaced, on a one to one basis, by new and highly trained employees. Public sector reforms is about modernizing the Greek state to the benefit of all who needs public services, and it is about providing opportunities to the young and unemployed. Vested interests blocking such reforms should not get away with portraying themselves as victims of austerity.
4. You will ask if there is light at the end of the tunnel? Or are we going to have several more years of deepening recession and unemployment, with more socially painful measures in order to meet fiscal targets? We believe determined implementation of the program will set the stage for a recovery to start taking hold next year.
- In this regard, let’s not have illusions about why the economy contracted so deeply. Growth and investments require confidence. The continued deepening of the recession reflected a prolonged period with a steadily growing lack of confidence in Greece’s ability to do whatever it takes to stay in the Euro Zone, because of growing loss of political support for the program inside Greece, and attendant doubts whether Europe would continue to stand by Greece.
- I believe that recent developments have shown that such concerns are misplaced, and I am confident that investors will gradually begin to realize this. Let me make five points:
- First, and most important, nobody who has seen the current broad coalition Government’s willingness to undertake socially painful measures, at high political cost in the face of mounting social discontent, can say that the Greek body politics is unwilling to do whatever it takes. I think that investors are beginning to take note of this.
- Second, realizing that the patience and tolerance of the Greek population is obviously not unlimited, I take further confidence from the fact that Greece is closing in on its fiscal goals and will now begin to run primary surpluses.
- Moreover, with the very ambitious fiscal program now in place, the remaining adjustment can be achieved without further across-the-board wage and pension cuts, provided that structural reforms, inside and outside the public sector, are implemented as planned.
- Third, with banks fully and strongly capitalized, and—which is quite exceptional—with virtually no Government debt on their balance sheets, the deep and prolonged de-leveraging should soon come to an end, and the stage should be set for a gradual recovery in credit as deposits return. The increase in deposits by more than 15 billion since mid-2012 is evidence of the return of confidence.
- Fourth, for those of you who are concerned about the admittedly very high level of public sector debt and the attendant vulnerabilities, let me remind you that Europe has underscored that it will do whatever it takes to keep debt on the targeted path, provided Greece implements the program. I believe that investors will realize that with virtually all debt on public sector balance sheets—again, Greek banks hold virtually no government debt—there is now on the table a credible framework for dealing with the debt problem.
- Fifth, for those who you still doubt the credibility of Europe’s commitment to stand by Greece, let me just remind you that Europe has disbursed some 130 billion Euro into a 185 billion Euro economy during the first year of the current program. This is truly unprecedented.
In short, the glass is much more than half full.