Ladies and gentlemen,
Let me welcome you at the headquarters of the Federation of Greek Enterprises and Industries. I hope that you will find the next 90 minutes that we are going to spend together fruitful –in terms of obtaining a better understanding of the situation here in our country. I will have to pleasure of taking you through this small voyage into Greek realities and then George Tsopelas, the head of the McKinsey office in Athens will present the highlights of a study commissioned by the Federation. It is a study that tries to delineate a new export and investment oriented growth model for Greece. We will then be at your disposal to answer questions.
You have arrived in Greece at a very critical time. The nation is in turmoil. The possibility of an official default is on most lips. How did we get here? I will try to be as objective as possible in briefly describing the descent into this modern version of hell.
I will be the first one to admit that our profligate ways have led us to these hard times. Client politics were the driving force in the expansion of the size of the public sector and of the degree of state intervention. Upon joining the euro, we enjoyed a plentiful supply of cheap capital, offered to us with the encouragement and compliments of our partners –who were more than happy to join in the days of wine and roses.
I would argue that, at some point in time, our luck run out. In our case it is the old English saying “it never rains, it pours” that applies with a vengeance.
From its very inception the euro zone was subject to a strong criticism: it had no mechanism to deal with “black swans” –i.e. unforeseen events of a critical nature. In the jargon, it could not effectively overcome asymmetrical threats. Events, since the break out of the world financial crisis, have proved the validity of this criticism and the real issue has now become European solidarity, the sustainability of the euro and even about the future of Europe.
The world financial crisis of 2008 changed the investors’ perception of risk. All European countries suffered as a result. Greece more so, because it was the most serious offender with respect to the Union’s accepted wisdom. The EU’s indecision on how to deal with the crisis was interpreted by the markets as a signal that not all euro-country debts carried a euro guarantee.
Because of its deep rooted weaknesses Greece was the first to seek help. Ireland and Portugal followed closely behind. Spain came under attack, Italy is now moving into the center of the storm and French banks are under strong suspicion. It would be very easy to attribute all of these developments to the issue of contagion. Allow me to say that this would be a greatly simplistic attitude –because it ignores all of the structural problems that are inherent in the creation of the euro.
I will also be the first one to admit that Greece has been remiss in carrying out its obligations versus its partners and debtors. We have zero to show in privatizations –that would reduce the debt and open up the market to new comers. We have half-hearted attempts to show in opening up markets and professions –acts that will eventually reduce prices and create new business opportunities. And we have very little to show in reducing the size of the public sector and in reigning in the degree of state intervention in all aspects of economic life.
However, Greece has done a lot in the last two years. There is no single country in the world that has managed, in the spate of 24 months, to reduce its fiscal deficit by more than 7 percentage points of GDP while facing a cumulative decline of 10% in its growth. Admittedly by necessity, this was done in a brutal way. But this cannot take away from the fact that social cohesion has been seriously undermined as a result. These achievements are rarely if ever acknowledged.
With equal circumspection should one approach the current accusation against Greece –i.e. that fiscal consolidation has been put on hold. I will counter-argue that the inability to bring down the deficit to the levels foreseen in the Memorandum is due to the following valid reasons.
First, the troika seriously underestimated the depth and longevity of the recession. This implies that a greater effort is now needed, especially because build-in stabilizers have kicked in –unemployment benefits are up, social security funds evaluations are down.
Secondly, interest expenditure is up by about 20% as compared to last year.
We need more time as well as a more sympathetic ear from our partners to go with a better understanding of both the achievements and the realities of Greece.
A new social agreement is now needed and it is this new consensus that we are now pursuing in Greece so that its people can upend anachronistic attitudes, institutions and stereotypes and embrace the changes that economic reality mandates. Otherwise, these changes will not produce wealth, jobs and growth.
Even more, because of their nature, the beneficial effects of the structural reforms will become visible only gradually.
In this, Greece is no different from its European partner countries whose societies exhibit equally strong resistance to much less painful measures. Lest we should forget it, however, the real convergence of European economies entails the convergence of European societies.
I dare say that the European Union’s responses to the crisis represented in effect a case of “learning by doing”. Inevitably, Greece became the European Union’s guinea pig. And it has suffered –like all guinea pigs.
This leads to an inescapable conclusion: the very fact that Greece’s problem carries a very high risk of proving a poison pill for the whole of the euro zone –and maybe even the world economy– is a reflection, a symptom of the deeper political and institutional problems faced by the Union today. The simple truth is that the EU is in deep need of equally deep reforms that will turn it into a proper monetary and fiscal union and a truly competitive economic player on the world stage. The creation of a European Financial Mechanism able to deal with the financial crises that will be a near-permanent feature of our economic landscape for a few years to come, is a step in the right direction.
The time has come for political vision, innovative thinking and daring actions that will enable our institutions –like the euro zone and the European Central Bank– to meet the heightened challenges of our times.
This can and should be our response to the markets –a response which will also move European integration another critical step forward.
The choice for the EU is stark. It either proceeds on this road or it will be faced with the failure of the euro experiment and its return to a glorified customs union –even if that.
Europe needs to move towards a truly unified economic union.