Tuesday, February 24, 2015

Directions and Challenges for the Greek Economy

Greece has now agreed with the EU creditor nations to a four month extension of the stability program with some amendments in commitments and processes. Whether the crisis is finally defused or not is unclear. There will be several milestones during the next four months which could rekindle scenarios of an impasse in Greece's relations with the EU and the Eurozone. The media clamor now is focused on an analysis of whether the agreement to provide a four month interim for further discussion and negotiation is a victory for the new government or a climb down from campaign promises. Unfortunately such discussions amount to political narcissism. They miss the point. The appropriate focus should be on what it will take to achieve an economic rebound in the country.

There are two aspects of economic policy for Greece and the Eurozone that are crucial (quite probably necessary and sufficient) to an economic rebound. The first issue relates to the need for economic reforms within Greece. Greece has now committed to producing a detailed list of such reforms for scrutiny by the Eurogroup. We may well learn over the coming days that Greece and its partners have very different concepts of what reforms are needed. The new government may intend to focus primarily on issues of tax collection and containment of the grey economy and tax avoidance. Certainly such measures are worthwhile. But the broader question is what additional reforms are necessary. I have insisted for several years now that the more essential focus for reforms should be on tackling the problem of inefficiency and low productivity within the public sector. The fact is that Greece has a very expensive public sector and yet low levels of service quality. (You get what you pay for doesn't seem to apply.)

There is a desperate need to reengineer all of the processes within the public sector. For example, some time ago I had to visit IKA, the Greek social security organization, to arrange a change to my profile on the system. Parts of their process have been automated, so the initial experience was favorable. I went to a service window where an employee entered the change on a computer screen and then printed out the application. I then was told to take the application to the office supervisor where I signed the application. But then when I returned to the service window the employee handed me an additional sheet, which required a signature from the supervisor. After visiting the supervisor this second time he said I needed to take the paper to the protocol department. This was a small room at the other end of the hall where a woman opened her large transaction book and entered the details of my request in long hand. She then signed my application as well. Then it was back to the supervisor for his signature and one last visit to the service window to complete the process. Quaint you might say, but such bureaucratic  problems are endemic to Greece's public sector. The current Minister of the Economy, Mr. Varoufakis, often sites the example of public sector processes where one bureau asks for a confirmatory letter issued by another bureau. Surely they should be able to access such data themselves. But citizens are forced to spend unproductive hours visiting various offices in order to complete their dealings. Without doubt these anachronistic procedures weigh heavily on attempts to raise productivity within the Greek economy as a whole and not just the public sector. One hopes that such a project to reengineer public sector process will feature prominently on the government's reform list. However, even if this is the case, the design and implementation of such a mammoth task will take years to complete.

Another perspective on low public sector productivity relates to the extended or periphery state sector. During the 80s, while Andreas Papandreou was PM, numerous private sector companies were nationalized. Most of them were on the verge of bankruptcy and were 'saved.' Since then those companies have been poorly managed by political appointees, but the companies have been kept afloat with consequent drain on public funds. In fact the amount of such drain on public funds from nationalized companies and various service organizations under public sector supervision remains poorly accounted for. During the previous government's tenure there was an admission that the state was not in position to determine how many staff were employed in the quasi public sector nor what salaries those staff were paid. Apparently the preference was not to resolve this slanderous lack of management information, but rather to maintain it so as to enable continuing political patronage. Proposals have been presented over the years to deal with this problem via privatization. SYRIZA, the party leading the current government, has been opposed to privatizations. In one sense they have a point. The present conditions within Greece's political economy will result in a fire sale of government owned assets. However, such political debates miss sight of the pressing economic reality. If the government owned assets are not for sale, it is still essential that measures be taken to stop the bleeding, which results in continuing drain on public funds. A case in point is Olympic Airways. The airline was poorly managed for decades. The government was funneling money to the company to cover losses. That practice was under investigation by the EU for illegal subsidies. When the airline was finally privatized, however, staff that were not hired at the new airline were either granted early pensions or absorbed into the public sector. So, the bleeding never stops. Consequently the lack of productivity within the broader public sector continues to weigh heavily on the entire economy. And, of course, the barrage of surtaxes and property taxes introduced by the previous government are seen as unjust and ultimately ineffective in dealing with the true problem.

The second aspect of the crisis relates to EU and Eurozone policies. The crux of the matter is that the German export juggernaut has a huge trade surplus with the rest of the world and with other Eurozone states. The result is a flow of capital from other Eurozone countries to Germany. Obviously policies are needed to promote the reverse flow of capital in order to promote economic development in depressed areas. Prior to the financial crisis the mechanism for such recycling of capital was that German banks bought government bonds issued by peripheral countries. That practice was not sustainable, as we have learned (the hard way). In fact the previous mechanism proved detrimental to peripheral economic development. As the Greek government was able to access almost limitless and cheap capital, they chose to expand public sector salaries by taking on additional debt. The result was no increase in productivity or competitive advantage. The question before us now is what to do next. The preferred solution of the Eurogroup has been to insist that states facing a debt crisis implement an austerity program in order to reduce expenses. But such measures do nothing to resolve the problem of capital flows. In fact, since the onset of the debt crisis there has been a flight to quality, so that ever more capital is concentrated in the developed North. What is needed of course is a program to encourage private sector investment of capital in the South. There are of course EU programs that intermediate such flows, but these are woefully inadequate. Unfortunately, the debate over the Greek program failed to address this need. The debate focused instead on procedure as opposed to substance. Now the counter argument of course is that with or without policies aiming to recycle capital little of the proceeds would end up in Greece due to political and economic instability as well as to issues of productivity and tax burdens here, which we analyzed above. So, again a first priority for the new government must be to reengineer the rules of the economic playing field.

A related question in examining EU policies is whether the Union will be capable of introducing new policies aimed at pan European growth and capital recycling. We may well have seen a peak in such policies supporting cohesion and economic convergence. The trend today within the EU is more toward nationalism than toward deeper union. A telling example is that the EU provided funds for the recapitalization of Greek banks (which were bankrupt as a result of the haircut on GGBs held by the private sector).. However, rather than take on the management of those banks themselves, as one might expect a new shareholder to do, they passed the funds through a national holding company, thus adding additional debt on to Greece's already unserviceable debt level. A further aspect of the question over EU policies is the continuing dearth of common Eurozone institutions. Pension systems across the EU continue to be national affairs. Greece is in an especially poor position, but other Eurozone economies also have hidden actuarial deficits. One of the first measures introduced during Greece's austerity program was a cut in pensions. Yes, in the short term that measure provided some liquidity relief to the pension fund, but it also was a deflationary measure. All of Europe needs well funded pension schemes, but most don't have them. It would seem to be an urgent need for all of Europe to run actuarial studies to determine the facts and subsequently to devise pan European policies to deal with the impending crisis before it happens. Here again there seems to be little desire to deal with the problem or even to analyze and publish findings. Without such Eurozone institutions, however, future crisis will prove impossible to confront.

No comments:

Post a Comment