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What is needed for Greece’s recovery

There is the need to restore investments and faith, both decimated by seven years of debt’s deflation (2008-2015). But how can this be done? How can we restore investments and faith in line with disengagement speed?

By: EBR - Posted: Friday, June 12, 2015

So, my question is the following: What do you ladies and gentlemen believe is in the interest of Europe? What would help Europe to be integrated in the future?   A Greek and European failure in the implementation of this program that will lead us all in an uncharted territory? Or the successful implementation of our program? I leave it up to you to decide.
So, my question is the following: What do you ladies and gentlemen believe is in the interest of Europe? What would help Europe to be integrated in the future? A Greek and European failure in the implementation of this program that will lead us all in an uncharted territory? Or the successful implementation of our program? I leave it up to you to decide.

by Yianis Varoufakis* 

Imagine a Development Bank that leverages guarantees consisting of funds that the state will retain after the privatizations and other assets as well (e.g. real estate) with their value easily being reinforced (and providing additional guarantees) through reform of property rights. Imagine that this connects the EIB, the “Juncker plan” etc. with the Greek private sector. Privatization suddenly is being relieved of all relations based on sellouts and is becoming a part of an ambitious development partnership of the public and private sector. 

In addition, imagine a Bad Bank which helps the banks to get rid of the legacy of the non-performing mortgage loans and decongests their financial networking. In collaboration with the virtuous effect of the Development Bank, credit and investment flows will flood the hitherto barren areas of the Greek economy, so in the end of the process to help the Bad Bank to make a profit and be turned into... a “Good Bank”. 

The next piece of the puzzle is of course related to the real economy. 

Products' market 

The government is considering the possibility of: 

• Liberalizing the gas market.

• Considering the model of the French bilateral agreements for the regulation of the industry of production and distribution of electric energy (without, though, privatizing the existing electricity production company).

• Releasing the product specifications (e.g. of dairy products and non-prescription medicines).

• Simplifying the licensing of businesses (in close cooperation with the World Bank).

• Legislating the inclusion of all discounts on invoices of retail trade (for limiting the oligopolistic power of supermarkets towards local suppliers).

• Strengthening the Competition Committee by equipping it with its own budget and ability to raise revenue. 

Labor market 

Recent calculations show that undeclared work is one third of the total employed labor. If one adds to this figure the fact that fewer than 10% of the unemployed workers sometimes receive any unemployment allowance, it is obvious that the Greek labor market is more liberated than most other European labor markets. Further limitations to the protection of workers will have no positive impact on high-quality employees, who will certainly be damaged and forced to compete against competitors who hire undeclared workers. 

In a few words, the labor market needs an adjustment for formalizing the undeclared workforce with positive externalities on pension assets and revenues of the state. That is why most employers' organizations in Greece are in favor of a new legislation for collective bargaining and higher minimum wages. For this purpose, the Government has already begun a fruitful dialogue with the International Labor Office (ILO) to shape the appropriate legislation. 

Pension scheme 

When the 2012 haircut (PSI) was concluded, pension funds lost 26 billion Euros. They also lost one third of the contributions due to the collapse of the declared paid employment. Shortly afterwards, pensions were slashed up to 44% in the private sector and up to 48% in the public sector. As a consequence, the average pensioner in Greece is just one euro away of the official poverty line defined by the 60% of the median income. 

It is obvious that only a return to a growth with abundant labor supply may make viable again the pension system and any attempt of cutting pensions now for balancing their accounting records will lead to more unprivileged people and to another cycle of debt deflation. 

Of course, this does not mean that we should not reform the system while we expect to return to growth. 

• Early retirements.

• Consolidation of smaller funds. 


Can one imagine Greece recovering dynamically as a result to these measures? Absolutely! In a world of very low yields, Greece will be seen as an ideal opportunity for investments, causing a steady foreign direct investment flow. 

As overly negative expectations are being turned into positive, the problem will be to restrain the "irrational enthusiasm." The danger then would be to repeat the invasion of capital of the pre-2008 era which led to a growth of speculation funded by debts. 

To assure that this time things will be different, Greece will need to reform its social economy and its political system. The creation of a new growth bubble is not the growth model of our government. 

Democratic governance reforms 

During the cycle of the Greek development which was based in debts, capital flows were being directed from the commercial banks in consumerism frenzy and from the state in an orgy of illicit supplies and general waste. This time will be different. 

The new Development Bank will take the lead in targeting scarce local raw materials in selected productive investments by new companies, IT companies which use local domestic human capital, small and medium-sized enterprises which are being active in organic agricultural products, export-oriented pharmaceutical companies, attractants of the international film industry at Greek sites, education programs that leverage the Greek intellectual production and the unparalleled historical monuments etc. 

Meanwhile, the supervisory authorities will monitor carefully the commercial lending practices while a debt brake will prevent our government from giving in bad old habits, ensuring that our state is not going to slide back to primary deficits. Cartels, non-competitive pricing practices, the without reason closed professions and bureaucracy, which traditionally had made the state the number one public enemy, will soon discover that our government is their worst enemy. 

Let us imagine for a moment the effects of announcement of such an agreement for the financial, fiscal and insurance ecosystem of Greece: 

With the banks’ shares to be projected in the heavens, losses of our state from the recapitalization will be eliminated as its participation these shares will be overestimated and the pension funds will be out again in the markets coming from the dividends of the Development Bank and the contributions from the recently legalized employees. 

Suddenly the society which was mired in debt and deflation and remained “un-reformed” by a reforms’ agenda which was rejected by the majority, will begin to be corrected and, thus, ready to adopt - as its own- the reforms we all try to agree on.

So, my question is the following: What do you ladies and gentlemen believe is in the interest of Europe? What would help Europe to be integrated in the future? 

A Greek and European failure in the implementation of this program that will lead us all in an uncharted territory? Or the successful implementation of our program? I leave it up to you to decide. 

For my part, I will conclude with what I consider the triptych of the dangerous myths which put the Eurozone and Greece at huge risk. 

1. A Greek exit from the Eurozone could be good for the Eurozone and for Greece as well.

2. Greece does not have enough [money] during the last five years and insists to compel other countries, some of them poorer than itself to pay for its squandering.

3. The Greek new government has not negotiated in good faith, has not offered serious recommendations to the institutions and has no credible plan to help the Greek economy stand on its feet among the Eurozone. 

None of the above is correct. 

1. A Greek failure even in the beginning is being controlled by an active ECB, will leave the Eurozone to resemble to the Golden Rule of the interwar period: A hard currency and fixed rate regime which rejects economies burdened with the largest adjustment obligation. After the realization of this will flood our hearts and minds, it will be only a matter of time before the Eurozone will be fragmented with huge costs for each European nation. As for Greece, an enforcement to exit [the Eurozone] will lead to making even poorer another million of Greeks - as if the current poverty crisis is not enough! 

2. The idea that Greece has not done enough for consolidating its public finances is nonsense. As we have seen, no economy has been stabilized more in a period of peace during the last three centuries. Moreover, Greece has a primary surplus and the new Greek government has been committed to lessen the deficit which will guarantee that it will not slide into a primary deficit. Thus, the claim that the Greek State requires loans to pay salaries and pensions is simply wrong. 

3. The Greek government insists, at least from the Eurogroup’s agreement of February 20th 2015, on the immediate implementation of a number of important reforms. With joy I certify that much progress has been made in Brussels in this area. 

Eventually, the program which you kindly gave me the opportunity to present to you today puts forward an invested driven recovery plan which is based on multi-planar socio-economic reforms which promote freedom, justice, shared prosperity and the idea that democracy can turn a vicious circle into a virtuous one. 

In 2010, our failures have cost Europe enough. If we succeed together with this program, a different process can unfold with Greece being the messenger of good things which will happen throughout Europe.    

* Yianis Varoufakis is Greek Minister of Finance and Professor of Economics

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