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The Economic Reform Path Greece Must Now Follow

26 Feb 2015
Partha Gangopadhyay
Image Credit: Flickr (Fraktion DIE LINKE. im Bundestag) Creative Commons.

The world may have heaved a sigh of relief over Greece’s last minute debt deal, but in Greece the conditional four-month extension is widely viewed as a major retraction for the new government.

Syriza came to power on the promise of reversing crippling budget cuts, but must now play a game of compromises. As with any bad marriage, more surprises are likely on the way.

Greece must now submit a formal letter to the Eurogroup, delineating the exact economic policy measures it will take.

The new bailout period will not be approved by the European Commission, the European Central Bank and the International Monetary Fund (IMF) until they endorse the policy reforms as a quid-pro-quo for the extension. In a rare act of kindness, the Eurogroup also intimated to Greece that its government does not have to waste resources travelling for formal meetings, since a teleconference will be organised to endorse the reform package.

There is a tiny problem as eurozone member states will need to ratify the extension through their parliaments, however with the blessing of the IMF, the ratification should not pose any serious threat.

Greek officials are now in overdrive, creating a laundry list for endorsement by the troika. In the heat of the moment, during intense negotiations, the Greek government has inadvertently drowned the valiant idea of ending the bailout. In an equally interesting twist, the troika have become trusted partners of the Greek government.

The Greek government has learnt a few new things from the recent negotiations, seemingly triggering a cultural shift from the politics of disagreement to the economics of conformity. The evolution of the Greek government’s preferences is fathomable and hence predictable.

The hawks in the Eurogroup maintained relentless pressure on the Greek government by planning a meeting of the Eurogroup in Brussels if the Greek government fails to plan and deliver a credible reform program.

In a rather jubilant manner, Greek Prime Minister Alexis Tspiras announced on Saturday: “We won a battle, not the war”. Perhaps he meant to say: “We lost a battle, not the war”. Tsipras knows how hard it will be to sell this new bailout program to his political constituency. The reform package must be acceptable to the eurozone, but should also be approved by the majority of Syriza voters. How can such a fine balance between two intransigent parties be struck?

First and foremost, despite the labour market crumbling under a record 25% unemployment rate, and youth unemployment heading beyond 50%, labour market reforms to enhance flexibility will be a very bitter pill for Syriza voters. Yet this is where the Eurogroup will seek serious attention from the Greek government. In order to placate the eurozone, Greece is expected to compromise by listing future labour market reforms on the agenda. Yet there will be little real change in the manner in which the current labour market is organised. It will be a real victory for the Greek government if it can avoid costly labour market reforms at this stage.

Secondly, for every dollar generated by the Greek economy, roughly one fourth is hidden in the parallel, or black, economy. This means the Greek government is leaking about €20 billion in tax collection every year. It is widely held that 70% of self-employed people under-report their incomes to avoid taxes. From misreporting of incomes by lawyers and doctors only, the national exchequer loses taxes worth €25-30 billion. If there is no plan for serious and effective tax reforms, the current government will be seen as a lame duck.

Thirdly, it is estimated that about 15% of Greeks pay annual fakelaki (bribery in the form of cash in sealed envelopes), which accounts for €1 billion in yearly payments on rent seeking. At the same time it is estimated that roughly another €1 billion is wasted by companies on rent-seeking expenditures mainly to bribe public institutions. The effect of rent-seeking activities on the Greek economy is mammoth. There will be demand for serious reforms to lower corruption in Greece.

Fourth, though Greece has made significant progress in improving its regulatory environment, there is still scope for improving the ease of doing business in the current reform program.

In summary the items on the wish list are expected to be:

  • Improved tax system to create more revenues, promote motives for increasing the funds inflow, entice foreign capital and control the cost of doing business in Greece
  • Improved governance, free from political party interventions and with the state-of-the-art know how from the private sector
  • Effective privatisations, public and private partnerships and trusts for the transformation of the public sector’s transactional activities
  • Removal of obstacles to entrepreneurship by establishing institutional stability mainly through law reform
  • An effective mechanism for dispute resolution
  • Better monitoring of budgetary figures
  • Minimalist measures to initiate health sector reform.

Partha Gangopadhyay is Associate Professor of Economics at the University of Western Sydney. This article was originally published in The Conversation on 24 February 2015. It is republished with permission.