Greek Business File, June-July-August 2020, No 126
By Alexander S. Kritikos
Greece cannot take on another decade of slow economic progress. Professor Alexander S. Kritikos in this article points out that the current economic break, as terrible as it also is for all economic life, is a second chance for Greece. Now is the time to break up structures and put the country on a new economic foundation. To make Greece more competitive and innovative, not only are investments needed but also the structural reforms that have been delayed for a decade.
In the ten years since Greece stood on the precipice of bankruptcy, with Prime Minister Georgios Papandreou asking the EU for financial support, the country has made limited progress toward recovery.
Then, just as Greece started seeing some economic growth since last summer –light at the end of the tunnel, as it were– like the rest of the world, it was hit by the Covid-19 pandemic.
Still working through many of the self-inflicted consequences of a recession turned into depression, Greece cannot take on another decade of slow economic progress.
First, it is safe to say –as highlighted by many observers– that the current Greek government has handled the health crisis better than virtually all other Western European governments. The early lockdown and strong enforcement of rules not only saved many lives in Greece but also will likely limit the negative impact of the pandemic on the Greek economy in the medium term.
The big shock to the Greek economy
Nevertheless, and this is the key point, the Greek economy is expected –according to EU commission figures– to plunge by another 10 percentage points in GDP, simultaneously pushing the public debt ratio toward 200 percent of GDP. The shock to the Greek economy will be percentage-wise stronger than in any other EU country. This in a situation where the 2019 economy, measured as GDP, was still less than 80 percent of what it was in 2008.
The main reason why the Greek economy is so strongly affected by the pandemic is simple, it relies heavily on one sector: tourism. By far the most important sector of the Greek economy, it currently contributes about a quarter to the annual Greek GDP.
In this sense, tourism is both a curse and a blessing. Tourism’s strong growth saved Greece over the last five years. However, focusing on it will secure at best limited growth for the Greek economy because tourism produces only low added value, never enough to create sustainable, growing wealth for the entire Greek society. Beyond its low growth potentials, the current crisis vividly demonstrates the vulnerabilities of tourism oriented economies.
This brings us back to the origins of the financial crisis. There is a long list of politicians who claimed in the past that they understood the message of the Greek economic crisis. Coincidently, there is also a long list of politicians who have failed until the summer 2019 to implement regulatory reforms in Greece in response to the previous crisis – reforms that would have made the Greek economy more competitive.
A bitter pill for the Greek population
The poor rankings from various indicator systems, like the OECD, the EU, and the World Bank, confirm that major regulatory reforms in Greece are still needed; too little has changed over the last ten years.
It is a bitter pill for the Greek population that previous Greek governments –in contrast to governments in several other European countries that were also hit by the financial crisis– did not really care about the low competitiveness of their own economy. Until 2019, Greek talents, Greek innovators, and Greek firms continued to leave the country, migrating to more attractive regulatory environments.
Had Greece created a better business environment and cut red tape, its transformation toward an innovation-driven economy would be well underway. Instead, Greece remains an economy based on tourism, which is precisely why it is now particularly affected by the current crisis. One can easily describe the last ten years as the decade of missed opportunities.
The current economic break, as terrible as it is for all economic life, is also a second chance for Greece. Now is the time to break up structures and to put the country on a new economic foundation. To make Greece more competitive and innovative, not only are investments needed but also the structural reforms that have been delayed for a decade.
To promote entrepreneurship and innovation, while also stimulating the introduction of innovative products into the Greek economic fabric, the Greek government should now start cutting red tape. It should develop an efficient set of commercial laws and systematically codify the Greek legal framework. This must also apply to administrative regulations, which are often more Byzantine than laws.
Greece must reduce burdens and lengthy procedures, by helping new, innovative firms and businesses to succeed. The government must also accelerate and digitize public planning and approval processes. Similarly, it would be wise to reduce the excessive reporting duties of firms. Cost-effective ways to protect intellectual property rights should be added.
The Baltic countries are excellent examples: all implemented reforms around bureaucracy, red tape, and regulation within 12 months. Given that the current Greek government successfully mastered the Corona crisis, it can clearly master and complete the economic reform process that it initiated last autumn.
The next day
Of course, such a reform process can only happen if a large number of the existing companies survive the crisis. The most important short-term goal, even if the lockdown measures are now relaxed, is to avoid a wave of bankruptcies among those companies that are structurally successful and sound, regardless of the Corona crisis. The threat of bankruptcy is growing ever more serious, especially if the recovery process develops more slowly than expected. There will be no such thing as “the next day”. Firms will continue to need liquidity support to avoid fi ring their workforce on a large scale or, even worse, ceasing all operations completely.
Therefore, also with the help of the various new European support programs like the SURE initiative, the Greek government should provide Greek firms with a second round of liquidity support and extend the short-time working compensation scheme (“Kurzarbeit”). The advantages of the combination of the two instruments are many: it freezes jobs and the economic structure until the end of the crisis. This protects employees from job cuts and employers from the cost of staff turnover, such as the search for new employees after the crisis and the training costs. An economic upward trend after the containment of the virus can be realized much faster with an intact firm structure.
However, once these support measures are in place, it is not sufficient to implement only regulatory reforms. Greece also needs to invest in its innovation system and expand on the excellent work that has been done in the small number of mostly basic research institutes in Greece. These institutes do not just produce considerable research output, they are also starting to attract innovators and investors from abroad. Therefore, investments from European Recovery Funds (ERF) will fall on fertile grounds if the regulatory reforms described above are put in place and if future investments based on the ERF are made jointly with the existing research landscape in Greece. The focus of the European investments from the ERF, like electro-mobility, climate protection, and digitization, open fields where Greek firms would have a chance to successfully compete, especially if the country succeeds in attracting its talented diaspora back to Greece.
Greece has a chance to get out of this crisis in a better shape than it was before.