Greece: Reform Agenda Essential for Growth
IMF Survey online
July 15, 2011
- IMF approves €3.2 billion for Greece
- Restoring competitiveness and growth remain key goals
- Maintaining momentum of reforms is essential for turning economy around
Amid continued market turmoil in Europe, the IMF’s Executive Board approved July 8 the disbursement of about €3.2 billion to Greece as part of the three-year lending arrangement that was agreed in May 2010.
According to the IMF’s assessment, while the program includes some very difficult measures, reforms have slowly started to deliver results. The economy is rebalancing, and competitiveness is improving. A return to positive economic growth is currently projected for the first half of 2012, with that scenario depending on full implementation of difficult structural reforms.
“Greece’s debt sustainability hinges critically on timely and vigorous implementation of the adjustment program, with no margin for slippage, and continued support from European partners and private sector involvement,” the IMF’s new Managing Director Christine Lagarde said in a statement following a meeting of the Fund’s Executive Board.
In an interview, Poul Thomsen, head of the IMF’s team, explains what has been achieved so far and discusses the challenges ahead for Greece.
IMF Survey online: The prevailing view in the markets appears to be that political and social support for the program is waning. Will the Greek government be able to deliver on its reform program?
Thomsen: There is no doubt that the program has entered a crucial phase―the part where the tough measures are beginning to take effect, and yet the benefits are not yet manifest in a way that everyone can see and feel. And reforms have slowed down somewhat in the face of intense pressure from some vested interests.
That said, the government deserves credit for persevering with a number of difficult reforms during the past year, and the fact is that the program has up to now delivered most of what it set out to do. The economy is rebalancing, according to the most recent data. Exports have increased by 22 percent, and competitiveness is improving, in part because of a decline in labor costs. Inflation, adjusted for taxes, is running well below the euro zone average.
Greece has also made progress on structural reforms that were unthinkable before. Pension reforms are the most far-reaching that virtually any country has done in one step. Labor market reforms are also very comprehensive, and the government has started opening up closed professions.
On fiscal policy, the authorities have met all quarterly fiscal targets since the start of the program, and continue to do so, most recently those for March 2011. There has been a reduction in the fiscal deficit of more than 5 percent in 2010, an impressive achievement in a country experiencing a severe recession.
IMF Survey online: But there have been problems along the way?
Thomsen: As we have said from the beginning, this is a very ambitious program. With respect to fiscal policy, it proved difficult to control spending at lower levels of government. Mindful of these risks, the government has kept developments under close review, and under-executed the budget at the state level, thereby ensuring that the overall targets were met.
In the medium and long term, however, this is not a viable strategy. Without structural changes to fiscal policy, there is a risk that the budget deficit will become entrenched at 10 percent or more. And without broader-based structural reforms to promote growth, the chances of a recovery by the end of the year or early next year would be diminished.
Responding to this, the government has formulated an impressive fiscal program, which has been approved by Parliament. The targets would see Greece achieve a deficit of 7½ percent of GDP in 2011, and a deficit below 3 percent of GDP by 2014, as required by the Maastricht treaty.
IMF Survey online: Even with these new measures, there is a need for more external financing. What has been agreed?
Thomsen: In light of the current difficult financing circumstances, Greece would be unlikely to regain access to private markets by early 2012, as initially envisaged under the program. The ambitious privatization program that the government has now committed to will help reduce the need for additional financing, but a notable residual gap still remains to be closed through the end of 2013, when the current IMF-supported program is due to expire.
A strategy to address the financing gap has been agreed with the government and its European partners. The modalities are still being worked out, but it will likely involve a combination of voluntary private sector involvement and additional official support from euro area member states.
In a statement on July 11, the 17 finance ministers of the Eurogroup said they recognized the need for a broader and more forward-looking policy response to assist the Greek government in its efforts to bolster debt sustainability. For its part, the IMF said it would continue to work closely with Greece and European partners to support these objectives.
IMF Survey online: Why have reforms to restore growth not yet delivered tangible benefits?
Thomsen: As you know, the government launched an ambitious reform program in 2010, and further reforms have just been approved by the Greek parliament. So there is an ambitious set of reforms, set to continue during the period ahead. These include efforts to address the high tax burden on labor, which discourages hiring, making the judicial system more efficient, and removing barriers to growth in specific sectors.
But we have to recognize that it will take time for these reforms to take hold and yield their full benefits. More broadly, it is also a question of building up a critical mass of reforms and better exploiting potential synergies, for instance between creating investment opportunities through privatization and the opening up of closed professions, and removing red tape that delays potential investment in these sectors.
Finally, one of the challenges facing Greece is that there is a need to strengthen capacity in key ministries and institutions with the skill sets needed to implement the reforms that have been agreed. The government is aware of this issue, and has asked its partners for technical assistance, which we will provide.
IMF Survey online: Greek people are continuing to protest against the economic program. Are the measures too harsh?
Thomsen: This is certainly a very difficult and ambitious program and it is understandable that people are expressing their concern and voicing their views. We have to remember where Greece was before the program even began: facing economic disaster. I think that the majority of people understand that the reforms are necessary to develop a more dynamic and competitive economy that creates jobs and new opportunities.
One other key point: from the beginning, we have stressed that the program needs to be fair and protect the most vulnerable groups of society. Take tax evasion―which everyone knows is pervasive in Greece―as an example. It is absolutely essential to develop a well-functioning tax administration, together with the necessary judicial backing, that is able to hold those accountable that have exploited the weaknesses of the system for years. This is an essential element of the program.
IMF Survey online: Is the debt burden simply too high for Greece to manage on its own?
Thomsen: There has been a strong focus on the debt burden recently, and the Greek authorities and the Europeans are working on a comprehensive solution to manage it and give Greece further breathing space to implement the reforms.
While supporting these efforts, we should not forget the real objective here, which is for Greece to restore growth. Once Greece is on that path, it will be able to reduce debt to sustainable levels. And to return to sustainable growth, Greece’s economy needs to become more competitive, and less rigid and protective of vested interests. So it all hinges on the implementation of the economic reform program.