Greece Program on Track, but Challenges AheadInterview Published in Kathimerini , August 08, 2010
While major challenges lie ahead, the program is off to a strong start and progress has been made, stated Poul Tomsen who is in charge of the IMF team, to “Kathimerini”.
How would you evaluate Greece’s progress, three months after the signing of the memorandum?
Greece has done well--the program has started very strongly. You will recall that, from the outset, Greece faced two fundamental problems: a high fiscal deficit—which threatened its access to capital markets; and a lack of competitiveness—which threatened the country’s future growth and development. There has been significant progress on both these fronts. In the short term, emphasis has been rightly given to the urgent issue of fiscal adjustment. Here, while there have been some difficulties containing the expenditures of local government organizations, the government has exceeded expectations at a national level. As a result, the overall deficit target for the end of June was met.
Challenges and risks remain, of course. But in this first phase of the program, it can be said that there has been encouraging progress on the deficit issue. While maintaining this momentum, the next phase of the program will need to place even greater emphasis on the structural reforms needed to promote growth, competitiveness and jobs—and to ensure that the program is socially fair and balanced, which has been a major objective from the beginning.
What about the progress of structural reforms?
These reforms are aimed at restoring growth and competitiveness—which are key to increase jobs and ensure a rise in people’s living standards. And again, Greece has made an impressive start in this area. In fact, I would venture that there are really very few European countries that have promoted so many reforms in such a short timeframe. The pension reform is significant and places Greece at the European forefront in terms of addressing this issue. Together with significant reforms in the labor market, this signifies a really impressive beginning.
But there is a long road ahead and no room for complacency. It will be crucial in the next phase of the program to push even further with the structural reforms that are essential for growth and employment.
What are the next steps that need to be taken?
As I said, the priority now is to advance further the reforms that can restore growth-- such as liberalizing closed professions, overcoming obstacles to development of the tourism sector, and of the retail market. At the same time, it is imperative that the reforms take place in a socially fair way. Employees and pensioners have contributed to the program in a major way by accepting painful reductions in wages and pensions. It is absolutely vital to ensure that all other elements of Greek society also pay their fair share.
This means, for example, acting aggressively to improve tax collection and the enforcement of taxation legislation—particularly to reduce tax evasion by high-income and wealthy individuals. This is a big challenge and the government’s efforts in this direction are ongoing. This momentum must be maintained because it is essential both to secure increased revenue as well as fairness in who is carrying the burden of adjustment.
You mentioned closed professions. Do you think that the way in which the government has handled the truckers’ issue was correct?
This was a very difficult issue to handle but, yes, I think the government showed decisiveness and sent powerful messages to other sectors as well. The government showed that it is determined to implement the reforms needed to do what is right for the future growth of the country and to give more opportunities to all the Greek people--even if some vested interests are against them.
What is happening as far as the high costs of the healthcare sector are concerned?
Steps have been taken, such as the placement of chartered auditors in hospitals, transparency in drafting balance sheets and the rationalization of medical supplies.
What changes are required regarding the local government organizations?
The “Kallikratis” reform is really significant. We think that it will bring a significant containment in expenses--which could reach as much as €1.5 billion in the next three years. There is a rationalization process with the cut-down of many layers of bureaucracy, unnecessary activities, and costs. Certainly this reform is an important part of the program.
Will more taxes – direct or indirect – be needed?
We all recognize that it is difficult to increase revenues in a shrinking economy—and we were expecting this from the beginning. The government is taking steps to increase tax revenues—for example, with the establishment of five special units focused on improving the fight against tax evasion. So, the revenues will increase without increasing tax rates beyond what is already in the program.
Should there be mergers of banks? And should foreign banks enter the Greek market?
Greek banks are well capitalized. The Financial Stability Fund—established under the program—has €10 billion to help backstop any problems that might arise, which we feel is adequate. I would also note that, in the recent European stress tests, only one Greek bank was reported as having problem. That said, the consolidation of the Greek banking sector is expected to be a crucial element of the strategy for the further reinforcement of the banks. The participation of foreign banks can be important in this context.
What are the main causes for an inflation rate that is higher compared to what was expected?
It’s true that inflation has been higher than originally expected—and we have revised our estimate for 2010 to 4-3/4 percent. We underestimated the consequences of the higher indirect taxes that were front-loaded at the beginning of the program. However, we do not see signs of second-round effects or of an inflationary spiral. The true meaning of “inflation” is that there is a longer-term trend to increase prices—and again, we do not see that. What we do see—and what the increase in inflation shows us--is that there is not enough competition in the Greek economy since taxes are fully incorporated into final prices.
You are pressing for the shut-down of some state-controlled organizations and for the rationalization of others.
Let me be clear on this point: we are not pressing for the shut-down of any state-controlled organization. We are talking about reforms. Two major ones are coming in the areas of energy and transportation. These are significant reforms and we are discussing various options with the Greek government. It is still too early to get into the details and, at the end of the day, the decision will be that of the Greek government.
Are you requesting the privatization of 40% of PPC? Many analysts raise doubt over the benefit of such a move.
Well, discussions are ongoing but I can say that it is not true that we are requesting the sale of a specific stake. The objective on which we fully agree with the Greek government is clear: to increase efficiency; to get more clean energy. It is too soon to get into the details of all the possible options for achieving this goal. But again, everyone should be very clear: we are not “imposing” something to be done in this or that manner. That is simply not the way we work..
After the progress that you have seen, do you think that Greece has avoided a credit default risk?
It is encouraging that during the last weeks, even the markets – where many had been speaking of such an event – are indicating that this is not a viable option. This would not benefit Greece or its European counterparts. Greece’s main problem is competitiveness and growth, not credit default.
You have met with Mr. Samaras, who voted against the memorandum. What is your impression?
I do not want to talk about specific discussions or contacts. I have met many people, both inside and outside the government. Right from the start, I have said that this is a decisive moment for Greece. The program is excellent. The government has shown impressive commitment and it enjoys impressive international support. I would say that the global community would expect there to be wider political support in Greece and, certainly, these are not times for playing politics with the issues.