Time presses. Given the acute emergency in Greece, the threat of the banking sector’s collapse and the Greek government’s request for a new aid programme, rapid and sustainable economic policy decisions are vital. So the key thing is to concentrate on the core of the matter.
A defining perspective is the extremely urgent time sequence. By posing its request for a new aid programme, the Greek government is letting it be known that it doesn’t just want to stay in the Eurozone but to stick to its rules and regulations.
That gives the ECB the green light to take the vitally necessary first step of potentially increasing emergency lending (ELA) to the Greek banking system or, at the very least, prolonging it. Without this move it’d be only a question of days before the payments system in Greece goes under and all measures other than humanitarian aid will be in vain.
What happens next will follow the acknowledgment that a sustainable debt reduction is only feasible if the economy grows. That’s the only way to make the financial resources available on a sustained basis that can make this debt reduction happen. With zero growth a haircut is unavoidable sooner or later. But, should the creditors refuse to give up on loan repayment, then the next steps have got to be about engendering the right stimulus for growth.
That means Greece must rapidly be given access to the €35bn investment monies that are, come what may, due to it from the EU’s Structural Fund and were apparently on offer during the recent negotiations. Greece couldn’t call on this money in recent years because it needed to co-finance the spending and simply didn’t have the money.
So one should enable Greece to gain access without co-financing for, say, only one year, thereby enabling the government to start up an investment programme straight away – as the pressure of time demands. These EU monies would be, moreover, available to Greece whether or not it stayed in the Eurozone (assuming it has the right infrastructure to make good use of them).
In a framework of growth stimuli, a haircut is no longer mandatory. But this does, either way, require a debt regulation in order to sketch out a credible path towards debt reduction. First, the Greek government must commit to a budgetary stance that involves primary surpluses (that is, without interest payments). That way, the government will prevent future budgets from being piled up with ever more financial burdens. But that’s not enough.
Second, a way must be found to reduce the legacy debts threatening to overwhelm Greece and do so in a consequential manner that avoids any haircut. That can happen under realistic conditions if Greece – after a year’s transitional phase – undertakes to achieve a primary surplus of 2% of GDP for the four years thereafter. A binding step of this kind is subject to economic risks since a worse-than-expected economic environment always brings spending cuts that damage the economy or push up debt. The economic risk, therefore, should be attached to the mode of debt repayment. A prolonged mode of repayment linked to growth would be the right kind of model here.
This, too, would be a credible strategy since it foresees revenue yields through growth – and might even bring about a strengthened repayment schedule. Such a deal would put Greece on a credible path of debt reduction that would, in turn, cut back the risk premia on private lending to the Greek economy and hence encourage private investment.
Future negotiations would be easier if this debt regulation also entailed concentrating Greek debts within the ESM. This would relieve the IMF of its obligations in the case of Greece – ones of which it is already keen to get shot of because of its ground-rules. This would relieve the ECB at the same time and it might start sheltering Greece once more under the protective umbrella of bond purchases should the financial markets turn turbulent once again. This would increase the security of financial investors buying Greek equities and that might enable Greece to swiftly regain access to the private capital market.
These elements might help provide a short-term stabilisation of the Greek economy while the long-term structural problems that can always provoke new crises would, however, remain in place. But it requires time to overcome these so they would have to be the last step to be undertaken. Here lies objectively the greatest common interest between creditors and borrowers since no side would gain from any further crisis. On the other hand, this topic would unleash huge conflicts of interest inside Greece since we’re talking about the removal of numerous social privileges. So, the consequences of any long-term reforms will have to be examined in advance.
One first step would be to start anew the tax agency and supply it with reliable staff. At the same time, taxation law would be changed in a way that substantially limits the ability of any protests to postpone collection. Only then would it be sensible to consider changing taxation rates. And all of this should increase the state’s tax-take.
Secondly, one should set about bringing in a basic insurance scheme including general health insurance. This would make it much harder to take early retirement that currently acts as a proxy form of basic insurance. The combination of these two measures could be made cost-neutral.
Finally, we need fresh reforms of the labour market, enabling a fair way of setting wages. With the drastic cuts of recent years Greece no longer has an economic problem associated with wages. So the task now is to go for European standards in growth of pay such as a clear link to productivity gains. But that means employers and employees meeting face-to-face. That’s the only long-term way to keep conditions of supply and demand in balance.
This sequence of measures would help Greece gradually to regain economic stability. Step by step.