Issue No.
13375
The sites of the Athens 2004 Olympic Games form a prize component of 71,000 Greek state-owned properties
Yannis Stournaras believes the valuation of Greek state properties can contribute to the reduction of the cost ofstateborrowing
George Bitros
Theodoros Lianos
THE PRESENT financial crisis could be turned into an opportunity to promote fiscal consolidation and competitiveness of the Greek economy by enhancing long-overdue reforms, the country’s top economists told the prime minister in separate open letters on January 10 and 21.
In the letter to Prime Minister George Papandreou published in several Greek newspapers and websites this month, 24 economics professors from Greek, European and North American universities spoke with unanimity.
“[They] decided to set aside their ideological, political and philosophical differences to voice their agreement on the urgency for structural reforms which the Greek economy needs,” Professor George Bitros of the Economic University of Athens (EUA) told the Athens News.
And then another
Shortly after the economists’ letter was published on January 10, the executive committee of the Institute for Economic and Industrial Studies (IOBE) issued its own open letter to the prime minister.
“Unless the negative developments of recent months are swiftly reversed by drastic measures, the economic crisis risks turning into a social crisis and a crisis of values,” the IOBE said.
IOBE director-general Yannis Stournaras, an Athens University professor of economics, said “financial markets remained unconvinced that the government is determined enough to implement the structural measures necessary to bring the budget deficit down” from 12.7 percent to below 3 percent of GDP within three years.
“Without a show of resolve, the markets will defeat the government’s purpose by raising the cost of borrowing to unserviceable levels,” Stournaras said.
Bitros, who coordinated the 24 economists’ initiative, together with his EUA colleague Theodoros Lianos, said that in order to curb budget deficits, restore the country’s credibility and boost its competitiveness, the government must simultaneously tackle three interrelated challenges detailed in the economists’ letter.
Waste not...
They are a substantial reduction of public expenditures, which include huge amounts of outright waste; a crackdown on tax evasion, which has not only harmed the public sector and tax-paying citizens but is also spreading corruption; and the deregulation of domestic markets by abolishing closed-shop sectors such as those that prevent competition in commercial transport (truck licensing), mandatory notary and attorney fees on civil contracts, or the cabotage in coastal shipping (limited to Greek-registered ships).
Both the IOBE and the professors’ letters emphasised several areas of reform which promise a lasting fiscal consolidation and an improvement in the country’s investment climate.
The targeted areas include a reduction in the number of civil servants by hiring one new employee for every five that leave the service; abolition of special taxes which burden the cost of utilities for the benefit of third parties (such as the special journalists’ levy on all advertisement bills); abolition of subsidies to all sorts of private agencies, NGOs, foundations, music halls, theatre troupes and art galleries; doing away with the luxury cars and other expense allowances for MPs, bishops, university rectors, heads of utilities and state-run companies, etc; and, finally, statutory break-even balance sheets for local council administrations funded exclusively by residents’ contributions.
Help the EU help us
George Bitros - professor emeritus at the Economic University of Athens
“The first thing which should be made absolutely clear is that the EU will not allow Greece to go bankrupt - for a very simple reason: the eurozone directorate cannot calculate the risks and costs involved in a member-state’s bankruptcy, affecting both the strength of the euro and the stability of EU financial markets.
“Secondly, as German Chancellor Angela Merkel recently said, the EU bears enormous responsibility for the current state of Greece’s public finances because it tolerated the squandering of its ‘cohesion funds’ by successive Greek governments since the 1980s... The notion that the European Commission knew nothing because it had fallen prey to the Greek ‘cooking of the books’ for 30 years is ludicrous... The EU knew exactly what was going on, but preferred to turn a blind eye because its leaders placed greater emphasis on the political benefits of European integration than on the economic risks of fund mismanagement.
“It is therefore a moral duty of the EU to stop the strangulation of the Greek economy by the financial markets with the enormous interest premium that speculators are charging on Greek government bonds. EU authorities should tell the markets that Greece’s solvency is firmly guaranteed by the eurozone, not least because that’s the only way to rescue the euro from its current downslide.
“Brussels should then assist Greece with a debt-rescheduling plan. But EU aid in the form of a special low-interest loan should not come easy for the Greek establishment. The loan should be administered by a European agency similar to the International Monetary Fund and under the strictest terms to enforce the implementation of drastic deficit- and debt-cutting measures like the ones we proposed in our open letter to the government.”
How to trim the civil service
Theodoros Lianos - professor emeritus at the Economic University of Athens
“It is relatively easy to cut down on public sector employment without resorting to unconstitutional measures like dismissals or early retirements. Assume that the normal time span for employment is 35 years. If an average of one in every 35 employees retires from service every year without being replaced, this is equivalent to an annual reduction of the state’s workforce by 3 percent.
“In five years the reduction would reach 15 percent. Of course, there will always be exceptions requiring immediate replacement of a retiree, as in health services or education. But since the state workforce is already vastly overcrowded and underemployed, the emphasis should be placed in the replacement of the retirees from within the service rather than by hiring new employees.
“All that the government has to do is to stick to a statutory rule of hiring - say, only one new civil servant for every five leaving the public sector, and encouraging the rest to work more productively in the posts vacated by retirees. The point is that taxpayers cannot sustain a public sector that employs 25 percent of the Greek workforce any more.”
One-offs are not structural reforms
Professor Yannis Stournaras, IOBE director-general
“The debilitating cost of servicing fresh debt is presently the single most important obstacle to Greece’s plans for fiscal consolidation and economic recovery. If the government continues to borrow at the prevailing annual rates of over 6 percent for the rest of the year, the budget will be burdened with an additional annual interest charge of more than 3 billion euros for the next five years.
“This situation is due to the skepticism with which the financial markets are viewing the Greek pledges to cut the budget deficit by 9 percentage points in three years. In order to convince financial markets that its targets are achievable, the government must undertake drastic structural reforms that differ from the one-off measures (like the heavy taxes on homeowners) it has vowed to implement this year. The latter may improve the picture at the end of 2010 but the fiscal imbalances of 2009 are bound to resurface with the same force in 2011 and 2012.
“By structural measures we mean those that have lasting effects on the size of the public sector and the boosting of competition in domestic markets. Once such measures are unambiguously adopted by the government, the EU can firmly guarantee the value of Greek bonds. This will calm the markets and bring the cost of borrowing down to the average eurozone levels.”
ATHENS NEWS 30/08/2010, page: 7
