Growth for Greece, but at a High Price

Ralitsa Kovacheva, April 24, 2012

On 18 April the European Commission issued a Communication, setting out the measures to promote growth of the Greek economy. In fact, there is nothing new in the Communication - it summarises the main areas where reforms are necessary, as stated in the Memorandum of Understanding on the second Greek bailout, focusing on short-term measures to be taken by the end of 2012, and explains again how the EU is helping the country to achieve these goals. So if you wonder what is the purpose of the Communication since there is nothing new, as I was wondering while reading it, the answer is: to focus on that part of the second economic adjustment programme, agreed between Greece and the Troika, which is dedicated to growth.

Thus the Commission shifts the focus from budget discipline to growth, in response to the criticism that the rescue programme is focused mainly on budget cuts. In addition, through its Communication to the European Parliament, the European Central Bank, the Committee of Regions, the Economic and Social Committee and the European Central Bank the Commission secures support for its actions and legitimises the programme, criticised of being designed by the Troika under opaque conditions and insufficient democratic legitimacy. This approach appears to be successful, as demonstrated by the reactions of the main political groups in the European Parliament, in expression of approval and support for the Commission's actions. Only the Greek Liberal MEP Theodoros Skylakakis admitted: "Unfortunately the Commission's efforts, though well-intended, do not result in anything substantially new on Greece."

The Communication from the Commission recalls that the total amount of EU financial support for Greece, including the bailout loans, write-downs on private sector debt holdings and grants from EU funds, is close to 380 billion euros. This unprecedented support is equivalent to 177% of the Greek GDP (the US Marshall Plan for post-war reconstruction was equivalent to 2.1% of GDP of the recipient countries), 3% of European GDP and divided per capita, the amount means 33,600 for every Greek citizen.

The Commission emphasises again that the reform measures put forward in the second economic adjustment programme “are designed to restore the growth and job creating potential of the Greek economy and to do away with the value-destroying rules and opportunities for corruption and bureaucracy". Stressing that the programme must be delivered in full, the Commission identifies three areas where the Greek authorities must take measures by the end of 2012: getting control over public finances; bank recapitalisation and providing financing to the real economy; improvement of the business environment and the labour market. I will not go into details since euinside wrote in detail about all necessary measures, both in the context of the approval of the second bailout, as well as the second report of the Task Force for Greece. However, the important things are:

Greece is expected to make further budget cuts amounting to 5.5% of GDP to fill in the fiscal gaps for 2013 and 2014, thus reducing its debt to 117% of GDP by 2020. At their meeting on 13 March the EU finance ministers have amended the fiscal targets for Greece in the light of the deal with private creditors and the adoption of the second rescue loan. Greece must reduce its deficit to 7.3 percent of GDP in 2012, to 4.7% in 2013 and to 2.2% in 2014.

Bank recapitalisation should be completed by September 2012, the Communication states, which is also no news. There are 50 billion euros in the second bailout aimed especially for recapitalisation of Greek banks. The Memorandum of Understanding contains a detailed timetable for assessment of the viability of the Greek banks (by April 2012) and the possibility to raise market funding or to request state aid by the end of the third quarter. Not all banks will survive, but this will not create any turbulence, ECB Vice President Vitor Constancio explained at the institution’s latest briefing on 4 April.

"Everything will happen in an orderly fashion and according to the plans that have been approved with the Troika. So, no surprises there. That is very important because, in the implementation of these restructuring plans, several things will happen along the way. Some banks, that have had a big impact as a result of the PSI, because they had a lot of Greek bonds and so on, may have to be restructured, meaning merging with others, resolved and so on. And as this plan is being applied, some of them may, for a temporary period, lose access to normal monetary operations. They will get ELA [Emergency Liquidity Assistance] and then they will be “solved” according to the plan. The whole plan will be implemented in an orderly fashion without creating any turbulence in Greece as a result of this process. This process was studied in detail in preparation for the second programme."

The recovery of the banking system is vital to provide lending to the real economy, the EC highlights. In the next eight months the Greek banks and the administration need to accelerate the payment of 4 billion euros from the EU structural funds provided for small and medium enterprises (SMEs). “The change in EU rules to permit the co-financing of working capital should be implemented in Greek legislation.” The European Investment Bank (EIB) will disburse loans to SMEs backed by a special fund, worth 160 million euros this year, 400 million euros in 2013 and 440 million euros by 2015. In addition, this year the EIB will provide an additional 440 million euros for SMEs guaranteed by the Greek government.

As regards growth enhancing structural reforms (they are formulated exactly the same way in the Memorandum of Understanding too), the EC highlights restoring the cost competitiveness of the Greek economy, i.e. to adjust wages according to productivity. “A timetable for an overhaul of the national collective agreement for the wage-setting system should be prepared by end July 2012”. The Greek authorities should implement measures “to reduce social contributions weighing on the cost of labour in a budget-neutral way”, in other words, without decreasing budget revenues.

The Communication lists the main measures in terms of public administration reform; tax reform (focused on better tax collection); health and pension systems reform; judicial reform (aimed at clearing the case backlog in courts and especially tax cases); facilitating exports by reducing bureaucratic burden; stimulating new investment by reducing time and cost for starting a new business; modernising public procurement (12% of Greek GDP) to reduce time and increase efficiency; unleashing competition and liberalising prices by eliminating protected sectors and professions that receive protected income streams maintaining higher prices; implementation of the privatisation programme worth 50 billion euros, which is lagging far behind due to lack of legislative base.

As if to bring relief namely to the MEPs, the EC's Communication contains also a brief section called "Tackling the Social Impact of the Crisis ", stating that “an action plan to promote youth employment, including through training and entrepreneurship, should be finalised and implemented before the end of 2012” and calling for more efficient use of the European Social Fund`s resources. In terms of EU support, the Communication cites data that have already been published in the second report of the Task Force for Greece, as euinside wrote in details. It again emphasises on 181 major infrastructure projects, outlined as being of priority and totalling 11.5 billion euros, which, according to the EC and the Greek authorities, have the greatest potential to stimulate growth and employment.

The Commission also recalls that last October it has proposed the creation of a Risk Sharing Instrument to support large infrastructure projects in transport, energy and environment. It will be managed by the EIB and the EC and part of the resources distributed to the Member States will be transfered there to be used to back loans and guarantees, granted by the EIB or other financial institutions. Political agreement on the instrument is expected to be reached in May 2012. The EP adopted a legislative report on the matter. During the debates Bulgarian MEP Iliana Ivanova (EPP) raised the issue that the Risk Sharing Instrument had to be available to all member states, in order to encourage those of them that observe budgetary discipline.

And while everyone is happy with the Commission`s "new approach" to Greece, the catch is that the proposed measures must ultimately be implemented by the Greek government. As the representatives of the Troika warned during their hearing in the European Parliament, there was a high risk the second rescue programme not to be implemented, as was the case of the first one. A month before the upcoming Greek elections on 6 May, these words of EU Economic Affairs Commissioner Olli Rehn sound particularly relevant: "At the end of the day, it is the Greeks themselves who need to take the action to reform their country and carry the responsibility for it."