Greece needs new targeted measures, says IMF's Poul Thomsen, Interview by Greek newspaper Kathimerini with IMF Mission Chief for Greece Poul Thomsen
November 24, 2013Interview by Greek newspaper Kathimerini with IMF Mission Chief for Greece Poul Thomsen
Published on November 24, 2013
Why has the IMF been repeatedly too optimistic on growth, and how do you see the outlook for the economy now?
During the first year of the program, in 2010, the economy was on track with program projections. However, growth began to disappoint in step with growing political uncertainty and instability, which prompted fears of euro exit and drained deposits from the banks, liquidity from the economy, and confidence from investors.
Looking forward, the good news is that we are finally seeing clear signs the recession is bottoming out. We now expect that the decline in output will be less severe this year than projected a year ago—we have for the first time revised our estimates up rather than down—and I am confident that growth will turn positive next year. This is happening in large part because the Greek authorities’ determination to persist with difficult adjustment and reform policies, despite the challenging political and social environment, has significantly eased the fundamental uncertainty that until recently was weighing so heavily on investment and growth. Above all, the Government’s determination, together with continued strong support from Greece’s European partners, has dramatically reduced fears of euro exit.
But this does not mean that it is time to declare victory. The recovery is fragile and will falter unless the authorities continue to push ahead with fiscal consolidation and structural reforms. This is what we have been discussing in recent weeks: the policies needed to build on what has been achieved—to strengthen confidence and ensure that the recovery finally takes hold.
Why do you want more fiscal measures? Aren't you concerned about a social and political backlash?
First, let me be clear that Greece has made enormous progress in restoring fiscal sustainability. This year we expect there will be a primary surplus, which is a major milestone. By most international comparisons, Greece’s fiscal adjustment has been unprecedented. But this, of course, was a necessary response to an equally unprecedented deficit when the crisis began.
The reality is that, while most of the fiscal adjustment is behind us, we are still not quite there. Some further adjustment is needed. Part of the improvement will come from the return of growth, which will translate into higher revenues. Better tax collection will also help, and we are already starting to see encouraging results in that regard. Even so, these sources by themselves will not likely be enough. This is why further measures will be needed over the 2014-16 period. But this need for further measures is quite small compared to the past.
We understand that new fiscal measures are very difficult politically and socially. And we agree with the authorities that horizontal measures should be avoided, with measures instead focused on areas where inefficiencies or excess spending remain, and targeted carefully to protect the most vulnerable.
Are you satisfied with the progress on public administration reforms? Will there be more mandatory dismissals?
The ultimate goal of public administration reform is a more efficient and affordable public sector that provides better service to the citizens and a friendlier environment for growth. Important progress has been made since the program began. For instance, the size of the public workforce and public sector wage levels have been reduced significantly, a major restructuring exercise across all ministries is almost complete, and the government now has IT systems in place to track employment and control payments across the public sector.
Still, much needs to be done. Greece had for many years an extreme system as far as patronage in public employment is concerned, and the legacy of this is still with us. Much of the public sector remains very inefficient and it is still somewhat of a taboo to talk about laying off non-performing workers. While it is not uncommon in other countries that public employees have a larger measure of employment protection than in the private sector, this is usually “paid for” by asking them to accept lower wages than in the private sector. But in Greece public employees do not only enjoy an exceptional degree of employment protection, but they also earn wages that are very high relative to wages in the private sector. Is this fair?
It puzzles me that in a country with about 60 percent youth unemployment, and with often poor public services, the political system is so reluctant to accept that non-performing public sector workers can be replaced by young and well-educated people desperate to get a chance. So, yes, I think that the flexibility to use mandatory dismissals when needed is a critical feature of the program, not only from an economic perspective, but also from the perspective of social fairness.
You are insisting on changes to the rules for collective dismissals? Why?
Yes, we are advocating easing the restrictions on collective dismissals, and I know that this must be difficult to understand, especially in a country where so many people are already out of work. But this is exactly what it is about: making the changes that will create more jobs, investment, and growth. When businesses start up and hire workers, they know that they face risks and may need to scale back if things don’t turn out as planned. If the rules prevent them from doing this, or impose excessive costs, they are less likely to invest in the first place. By giving them the flexibility to manage their workforces, this may allow them to avoid going bankrupt and shutting down entirely. As the restrictions on collective dismissals are exceptionally intrusive in the case of Greece—in fact, as far as I understand, no collective dismissals have been approved for more than 30 years—lifting these restrictions is likely to have a particularly strong beneficial impact on investments and job creation in Greece. The high unemployment is, if anything, an argument for moving boldly in this area, not for doing nothing.
Are the banks in good health? Will they need more capital after the stress tests?
The banks have been fully recapitalized through a combination of public and private investment.
The stress tests are intended to ensure the banks are robust enough to handle even significant adverse scenarios in the future. These tests will be finished and the results known in December. The HFSF still retains a significant buffer of resources that will be available if needed to meet additional capital requirements that could result from the stress tests, if these are not satisfied by private investors. This will help safeguard the continued health of bank balance sheets and the safety of customer deposits. So, yes, the banking system is in good health.
You are also reported to argue against an extension of the moratorium on auctioning of foreclosed properties? Is this correct?
This is a difficult subject. We are seeing that the moratorium is causing a sharp rise in strategic defaults, that is, in decisions by individuals to stop paying even if they can afford to pay. This is a potentially serious threat to the banking system and stopping this must be a matter of priority. And since the banking system is ultimately back-stopped by the public sector, it is once again also a question of fairness, of avoiding that the tax payer ultimately ends up paying for what in some cases is nothing more than a life-style choice of people who could afford to pay but do not.
At the same time, there are many people who have genuine payment problems, and the authorities must ensure that there is a system for protection of debtors, for encouraging banks to restructure debt of individuals that have temporary payment difficulties, but are still fundamentally solvent. And they must also ensure that there is a system for protecting the most vulnerable. But the latter should be a task of the public sector, not of the banking system. So yes, we believe that it is essential for the stability of the banking system that the moratorium is lifted, but at the same time we need to put in place a system that affords protection to debtors and the vulnerable. This is, politically and technically, one of the most challenging tasks facing us in the context of the current review of the program.
Why is this Troika review taking so long -- what are the problems, and when will Greece receive the next installment?
There are an unusually large number of complex issues that need to be resolved in the course of this review—for instance, in the fiscal area alone, the 2014 budget, 2014-17 fiscal strategy, and the new property tax. And the aforementioned issues relating to collective dismissals and the moratorium raise complex social and political concerns that complicate design of policies.
It is taking time to work through these issues, both at the technical and policy levels. I cannot predict exactly how long it will take to conclude the review, but we are committed to working intensively with the authorities to complete the review as quickly as possible.
There seems to be a reform fatigue. What are some of the structural reforms not yet implemented that would contribute to growth?
The record on structural reforms has been mixed. Much progress has certainly been made in important areas, for instance labor market reforms, but there are other areas where progress has been insufficient. For instance, efforts to liberalize closed professions, which will reduce costs and prices, are still incomplete despite two years of effort. Many professions have not yet been touched, and even where legal restrictions have been lifted, new administrative or other barriers often crop up.
The OECD has studied restrictions in four key sectors (retail, tourism, food processing, and building materials) and has identified over 300 restrictions. These restrictions have the effect of keeping consumer prices in Greece much higher than in most other EU countries for many goods. Some examples, among many, are fresh milk and over-the-counter goods that may be sold only in pharmacies. Lifting these restrictions will have a significant positive impact on the standard of living of most people.
We have urged the government to pass legislation to remove all the restrictions identified by the OECD, despite what undoubtedly will be fierce resistance from vested interest in some areas. The willingness to resist such opposition, by insisting on full implementation of the OECD recommendation, will in our view be an important test of the resolve to advance reforms.
Does the IMF insist that there should be a "haircut" or can the Greek Debt become sustainable through other means?
There is a framework agreed with the Euro Group last year to reduce Greece’s debt , with the first installment due in mid-2014, provided Greece remains on track with the economic program. We expect the Eurogroup to reconfirm this framework.
Will Greece be able to return to the markets in the second half of 2014?
We are already seeing renewed investor interests in some segments of the economy, notably the financial system. With determined policy implementation, such confidence will undoubtedly spread, including to the market for Greek Government debt. I shall not speculate on when this might happen—the uncertainty is still large—but our experience suggests that once a virtuous cycle gets underway confidence can return quite fast. The key to this happening remains continued strong program implementation.
Why is the IMF and you personally so unpopular in Greece?
I understand the exceptionally deep social hardship that Greece is going through. Moreover, the recession was much deeper than expected, much deeper than necessary—for the reasons explained before—and I understand why people are getting exhausted and losing patience with the program. It is to be expected in such circumstances that people blame the adjustment program—the “memorandum’—as well as the IMF. But the reality is that the difficult adjustments under the program were needed to correct past mistakes and restore economic stability, and I believe that many people deep down understand this. As to my own role, it means in some ways little, in the sense that I speak for the institution and its policies. This is not about persons, but about bringing the IMF’s experience in dealing with crisis to the table.