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Greece: Back on Track?

Schrader, Κ., Benček, D. and Laaser, C.F., (2013), “Greece: Back on Track?”, Kiel Institute of the World Economy, Kiel Policy Brief 68, 14 November.

The message of Greek and European policy at the end of 2012 was clear: The worst of the crisis in Greece was overcome and the government had “delivered” in terms of saving and reforms. But will this image of a recovered Greece that has risen from a severe crisis like a “phoenix from the ashes” stand up to rigorous scrutiny? IfW economists Klaus Schrader, David Benček and Claus-Friedrich Laaser are looking at this issue in their latest analysis on the position of Greece, which has now been issued as Kiel Policy Brief 68. They have come to the conclusion that the situation in Greece is less hopeful than the image conveyed to the public at the turn of the year—because Greek economy continues to shrink and above all shows some precarious structural weak points. Greek policy has not resolved reform matters by a long shot and the Greek debt problem is still stifling. Mass unemployment is turning into a solid problem and particularly the employment perspectives of the young generation are more than dim. In view of the observed structural weaknesses, the authors believe that a new business model for Greece—one that could end the slack in growth long term and prevent an erosion of the Greek standard of living—is not in sight anytime soon.

The analysis made it clear that Greece has to speed up the structural change that it has neglected for decades and without which there will be no lasting economic recovery. There will be no more growth from the cheap credits that have allowed public and private consumption to get out of hand in the past. But it will also be impossible to simply flip the switch: Current economic structures will not allow Greece to outgrow the crisis with the help of exports in the short term. Strong value-adding industrial firms and service providers like those that justify the raised standard of living that Greece has allowed itself thus far, have to first be established on a larger scale in Greece. The export of raw-material and labor-intensive goods as well as services in the low-income sector will not make this possible.

The analysis of the IfW economists also shows that Greece will probably not be able to manage its overwhelming mountain of debt on its own without additional help. The weak growth in Greece makes the required primary surplus in the national budget of 4.5 percent that the saviors of Greece consider essential to achieve sustainable debt nearly impossible—despite the debt cut and debt buyback that have already taken place.

The authors therefore recommend, despite some reform progress, to not let up on the pressure on Greek policy to finally resolve reform matters. But they also emphasize that overly high expectations would rather complicate the overcoming of the structural crisis in Greece. The insight that the implementation of structural reforms needs time, especially if functioning public administration has to first be established, needs to be developed. Against this backdrop, the authors are in favor of additional measures to facilitate crisis management and to restore Greece’s economic perspective. They consider it meaningful to entrust domestic and foreign experts with the implementation of reform measures to a greater extent than before in order to improve the speed and professsionalism of reform processes.

Moreover, another debt cut is deemed to be necessary to achieve a situation that is sustainable for Greece. Such a debt cut, which would directly affect the taxpayers of Euro countries, would require strict terms. National fiscal sovereignty would have to be limited for the period of further consolidation. Ongoing rescue with a succession of bail-out packages is not recommended though because such a transfer mechanism would also be attractive for other crisis-ridden countries.

 For the full policy brief, press here.



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