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Interview of Panos Tsakloglou, Chairman of the Council of Economic Experts, to Dimitris Katsikas, Head of the Observatory

Mr. Tsakloglou, as Chairman of the Council of Economic Experts, you have a significant role in economic policy making. Can you briefly explain to us what the Council of Economic Experts and its Chairman do?

Essentially, the Council of Economic Experts is the think tank of the government in economic issues. It comprises a board composed of academics, which meet regularly, and a scientific team that operates on a daily basis. Practically, it is responsible for representing our country in EU and other international organizations’ working groups, for monitoring the implementation of the memorandum, for carrying out ad hoc operations of the Ministry of Finance and for providing expertise to the Greek government on individual issues, upon request. In recent years, or rather for many years now, the chairman of the Council represents our country in EU working-groups and the Economic and Financial Committee (EFC), while at the same time he is the deputy member of Greece at the Eurogroup and the ECOFIN. Furthermore, you correctly mentioned that Council and its chairman are involved in the formulation of economic policy. Of course, this involvement takes the form that I mentioned earlier, namely the provision of expertise and recommendations on policy making. Obviously, the process of political decision making – i.e. which policy recommendation will be adopted- is a matter for the political leadership.

Given the role of the Council of Economic Experts, as you described it, I assume that your involvement in the process of negotiations with the Troika is continuous and systematic. Based on this experience, what would you say to those who criticize the current framework of cooperation with the Troika, that is, the criticism that the Greek government has no saying in economic policy making? How much room is there for the Greek government to exercise autonomous economic policy making in the context of the adjustment programme, and to what extent are policies imposed on it?

There is no doubt that currently our autonomy is not what it would be if we were formulating alone our economic policy. On the other hand, we often hear in public debates that this policy is a “ready-made policy,” upon which we have no influence. This is not true of course. During discussions with the Troika there is room for negotiation – more than enough I could add. In addition, we must not delude ourselves: many of the measures that were allegedly imposed on us should have been already in place long ago. Take for example the pension system. We are all aware that reforms in this area should have taken place many years ago. With or without a troika, it should have been done. The same goes for the liberalization of various professions, which had to be done sooner or later, without any outside imposition.

What is the impression primarily of our European partners, but also of the IMF of Greece? Do you think that it has changed during the course of the crisis?

Essentially, I have been representing our country in the European institutions since July 2012. Indeed, in the first meetings that I attended, the atmosphere was very negative for Greece. I think that the situation has substantially improved ever since, as a consequence of several factors. It became apparent that several of the measures adopted at earlier stages, aiming to promote fiscal adjustment, have now started to yield results, such as the reduction of the deficit, the primary deficit and, more importantly, of what we call cyclically adjusted primary deficit. Moreover, the measures promoting our competitiveness started bearing results, thus leading to an improvement of the balance of payments, as well as those related to structural reforms, an area where people often believe that nothing has been done, which is not true. Thereby, the climate gradually improved for Greece. It would be a lie if I told you that mistrust towards Greece has been totally eradicated, but it is my belief that its eradication is a dynamic process that takes time. Do not forget that there have been doubts concerning Greece at all levels, from Greek statistics to the implementation of reforms.

Is it true that the Greek government has “relaxed” after the December tranche? Do you get such a feeling from your discussions with the Troika representatives?

The truth of the matter is that no government could operate for a long period of time under so much pressure, as was the case with the Greek government in the second semester of 2012, at least the way I experienced it, in terms of negotiations and policy making. It was truly an overwhelming effort. One could say that there is some degree of relaxation after that, but I wouldn’t say that it is significant. It is not something that could have a negative impact. Thus, although there is a grain of truth in that statement, it does not change the fact that the effort continues unabated.

Recently, we have been hearing a lot about the continuing shortfall in the public revenues area. Are you optimistic that the programme will succeed, given the difficulty to raise revenues?

Let us see what the data says about the first two months of this year. In the first two months the programme is overall on track, from the point of view of both the overall result and the public revenues as such. What has happened is that the composition of the revenues is different than what we had expected. That is, we had higher collection rates in some categories, like direct taxation, whereas there were delays in the collection of VAT, and social security contributions. In the case of VAT, there is no doubt that delays are due to the ongoing crisis; in the case of social security contributions, besides the effects of the crisis, a factor that contributed to the delays are expectations for a new government payment plan to help companies settle previous debts. This is something that we know to happen. Given that this plan is going to be unveiled soon, we believe that once the related measures are announced the deficit will be covered in a relatively short time period.

I would like to insist on the issue of tax revenues. Don’t you think that if reforms in the taxation framework and the tax collection mechanism had been promoted in the previous years, the fiscal situation today would be different? And if so why did these reforms stall? Did political cost considerations weigh too heavily?

I agree that there is a problem with our tax collection mechanism. Actually, one of the bravest reforms that have been promoted in this area is taking place at this moment; I mean the creation of a public revenues semi-independent secretariat. This is a process that is currently taking place and we hope that it will bring results, primarily through the reduction of tax evasion, which will increase public revenues without having to raise tax rates.

There is no doubt that a well-designed tax system can really enhance a country’s growth potential. However, in a country that finds itself in such a dire fiscal situation as Greece is at the moment, it is difficult to talk about reducing tax rates. I would very much like to be able to reduce tax rates, especially in the area of capital taxation, as this would improve investment incentives. At this time however, such a move would automatically result in greater cuts in salaries, pensions and benefits.

In relation to the other part of your question, it is true that in most cases –not always- it takes time before reforms can start yielding results. It is logical to say that if the reform process had started earlier, it would also yield results sooner. On the other hand, we should not forget that the economy does not exist in a vacuum, but in a societal context, where there is opposition, such that it could have derailed the entire programme and not only the reforms in this specific area.

Since you mentioned the societal context, I would like to ask you whether, given the depth of the recession, the explosion of unemployment and the consequent impoverishment of entire segments of Greek society, do you believe that even if everything goes according to plan from now on and the programme projections are realized, is it possible to talk about a successful adjustment programme?  

First of all, there is no doubt about the image that you just described. If we assume that towards the end of this year or the beginning of the next we have a recovery of the Greek economy, then the cumulative reduction of GDP, to the lowest point of the crisis, will be bigger than that experienced by European countries during the Great Depression, with the exception of Germany, and on a similar level with the reduction that occurred in the United States. Therefore, it is true that the Greek crisis is extremely deep and one could perhaps argue that the measures adopted were more than what might have been necessary, a remark which is to some degree related with the issue of fiscal multipliers.

On the other hand of course, we should consider how dire the economic situation in Greece was, when it started implementing the adjustment programme. In 2009, the fiscal deficit was more than 15% of GDP and most importantly the primary fiscal deficit was close to 10.5% of GDP. In other words, even if our debt was completely forgiven, this would still not solve our problems, since given our fiscal deficit we would still continue to produce new debts. At the same time, we had two other major challenges. The fist, which was clearly visible and related to what I just told you, was the competitiveness deficit. In 2008, the current account deficit of Greece reached 15% of GDP, which is unbelievably high. These are levels, for both deficits, that are usually recorded in countries that are engaged in war. Moreover, there was something else, which is often overlooked. Even if our fiscal and competitiveness deficits were under control, the problems of the pension system, by itself, were enough to endanger the entire Greek economy. According to all available projections, without reform, in a span of two decades, the pension system would lead to a deficit in the order of 9-10% of GDP. Therefore, Greece needed to resolve the problems mentioned above, the fiscal and competitiveness problems, and also promote structural reforms. Of course, this discussion is entirely different when the primary deficit is 1-2% of GDP, than when it is 10% of GDP; it is also different when the current account deficit is 5-6% of GDP and different when it is 15% of GDP.

How probable do you consider the adoption of new austerity measures, if after all, the public revenues’ targets are missed? Do you believe that the imposition of new austerity measures is politically feasible?

First of all, I think that we cannot afford new measures, nor do we need them. I believe that the measures that have already been approved by the Greek parliament, provided that they are implemented, are sufficient. In other words, the programme is designed to succeed, without additional measures. Of course, there is one factor which could affect the entire programme, which is outside Greece and has to do with the external sector. Generally, austerity and fiscal adjustment programmes work much better when the rest of the world implements expansive fiscal policies. Right now, Greece tries to achieve something very difficult, in the sense that most countries and its principal trading partners are also implementing fiscal adjustment programmes. In my view, the only scenario where we miss the targets is if we do not implement the agreed measures –I want to be clear no new measures- or if there is a substantial deterioration of the international macroeconomic environment.

Is Cyprus such a factor? Can developments in Cyprus derail the programme?

We have to admit that Cyprus was not part of the original assumptions of the programme. Cyprus is a significant trading partner of Greece, while there are many links between the two countries in terms of investment, politics and social relations. Still, Greek companies do not seem to be overly exposed to Cyprus, that is, to a degree capable of derailing the programme. Of course, it is definitely a negative development and one that does not help our effort.

Are Greek banks and deposits in risk?

No, on the contrary we were able to ring-fence the Greek banking system quite successfully, as demonstrated by the fact that there was no panic in the Cypriot branches in Greece, when these opened under a new owner. Withdrawals were quite limited and there is a substantial probability that this money will return to the banking system once the situation is stabilized, which I think has already happened.

When do you believe we will be able to see the first signs of recovery of the Greek economy? Is the projection for a return to growth towards the end of this year still valid and if so, what is the evidence that supports this projection?

Look, if things develop without any surprises, we believe that by the end of the year or at the beginning of the next we will achieve a positive rate of growth. On what evidence do we base this projection? There are some preliminary positive signs from tourism, Greece’s heavy industry, based on bookings’ data, which show that we may have a very good year. Furthermore, a very important factor is the elimination, or at least the substantial retreat of the probability of “Grexit”, since last December. This is something that we cannot capture in an economic model. The uncertainty concerning a potential Grexit had two effects: a complete paralysis of all investment activity and most importantly a deposit flight. No one is going to buy an asset for 100 euros, when they know that they can buy it tomorrow for 50 euros. In relation to the deposit flight, according to data from the Bank of Greece, one third of that money left the country, another third was stored away in safety deposit boxes and the final third was consumed. Gradually we see that the funds that were held outside the banking system or to a lesser degree those that had left the country, are returning to the Greek banks. From this point of view the Cypriot crisis could be a negative development in the sense that it could affect adversely this trend.

We should also take into account the fact that a significant part of the money that we borrowed will be used for the recapitalization of Greek banks; it should also be noted, that Greek banks are gradually leaving the ELA mechanism, which is relatively expensive. Moreover, the Greek government has been able to reduce borrowing based on short-term Treasury Bills, which has improved liquidity, while the government has also started repaying arrears to domestic, private sector suppliers, accumulated over the last two years. In other words, we are now in a much better position, liquidity-wise, compared to the situation we were in, just a few months ago. I would like to add that this process will be accelerated, due to the flow of EU structural funds.

Since you mentioned the EU structural funds, are you satisfied with the operation of the National Strategic Reference Framework? We get the feeling that there are delays and perhaps sometimes the priorities of the programmes are not appropriate. For example, we recently saw the launch of programmes for subsidizing new investments, whereas what most companies need right now are funds to cover working capital needs and liquidity in order to repay accumulated debts.

We cannot use the resources of the EU structural funds as “helicopter money”. There are certain rules and procedures that have to be respected. The absorption rates of EU resources have increased substantially in recent months. This of course, to be honest, is something that we have also observed in previous European funding frameworks, that is, absorption rates tend to increase in the latter years of each programming period. Nonetheless, I believe that in this case the trend is even stronger. Still, we should have no illusions; in many investment projects we have not been able to contribute even the reduced national contribution. Until the renegotiation of the level of national contribution was concluded, many projects had been blocked. In addition, for some projects the new circumstances, following the crisis, have created a new situation. For example, it is possible that for some projects the demand for the produced service is now reduced. All these considerations have to be taken into account for the redesign of policy in this area.

Going back to the poverty issue in Greece, as an academic you have researched extensively the concept of guaranteed minimum income. Are you in favour of such a policy for Greece?

Yes. I think that the lack of such a policy has been intensely felt during the crisis. While social expenditures as a percentage of GDP have increased substantially in Greece during the past twenty years, their effectiveness has been really low. Why is that? Social expenditures are intended mainly for the payment of pensions, which is a paradox because at the same time we observe that many older people live in poverty. We have been spending large amounts of money on pensions, giving in essence money to people to retire earlier. Of course, this situation has been aggravated further by another big problem that we have in Greece, which is social security contributions’ evasion and which can be readily seen by looking at the data. Greeks retire on average a few months after their 60th year, as is the case in Germany. The problem is, that the years of social security contributions in Greece are a substantially fewer than the years in work.

Getting back to your question, one of the shock absorption mechanisms for the negative consequences of the crisis is family. In many households today live people who earn their income through the pension system, like retirees, and people who earn their income through work. The problem with the current crisis is that we have had a breakdown of this relationship, that is, we have many households without any members in work. In Greece, the level unemployment benefits is low and has a limited duration; after the period when someone is entitled to receive unemployment benefits ends, what follows could only be described as a “free fall”. Here, we can see how necessary a system of guaranteed minimum income is. However, the problem is that under the current circumstances, while we are in dire need of such a policy, we do not have the resources to implement it. We will try moving towards that direction with a pilot programme, which will start next year.

Let us briefly turn to Europe. Are you satisfied with the management of the crisis in general, not only in Greece? Do you believe that the recession would be as intense, if there was a different model of handling the crisis, with different design and priorities?

There is no doubt that Europe was not prepared for a crisis like this. This is evident from the fact that, until recently, that there was no crisis management mechanism in place. Until 2008, we would only hear that all a country needed to do is to follow the Stability and Growth Pact and nothing else. In the current crisis, the EU has progressed through “learning by doing”, with many delays and much ambivalence. Consider, for example, how long it took us to set up the EFSF and particularly the ESM; we still have no definitive rules for the recapitalization of banks. As for ambivalence, the effort to save Greece was followed by the famous Deauville “affair”, which apparently has had very negative results.

Do you think that a change in the model of crisis management by the EU is possible? Could a very big crisis in Cyprus mark a change, or is it unlikely in the light of recent decisions?

I think that at some point some kind of change will be necessary. All players in a game behave according to the benefits they expect to gain. I think that the European project is a strongly positive sum game, provided that we are willing to look at the whole picture and take its political and economic benefits into account. The truth is, however, that in the last few years many players have been focusing on short-term and solely economic benefits. Allow me to remark that many of these players behave in a “myopic” way. Much debate is going on as to whether particular countries benefit from the crisis; many (analysts) refer to countries at the core of Europe and particularly Germany. The cost of capital is indeed much lower for German enterprises than it is for enterprises in the South; as a result, the former are in an advantageous position compared to the latter. However, if the crisis puts in danger the existence of the Euro itself, leading to a return to national currencies, then those countries whose export sector is the steam engine of their economy, would be faced with extremely high exchange rates, one could say stratospherically high. As a result, the cost would be excessively high for these countries.

There is also a broader political question that arises: do we want a strong Europe on the world map? If so, the only way to succeed requires that we stay united. Let us not forget that Europe is an aged continent. Some of its countries are currently considered as important players in the global economy, but this is only due to their participation in the EU. It is not clear to me whether the elites of these countries have realized this, considering that what they appear to be doing, is to achieve the maximum short-term benefits, with the minimum possible cost.

Thank you!

Me too.