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Greece has moved from recession to depression

06 March 2013 / 22:03:44  GRReporter
4921 reads

Victoria Mindova

The lenders’ mission of the International Monetary Fund, the European Central Bank and the European Commission is back in Athens to inspect the implementation of the financial recovery programme. Although the programme of the government and the supervisory Troika aims at restoring the economic growth in the country, Greece is still facing serious difficulties. The gross domestic product is shrinking, unemployment is rising, tax revenues are not meeting the rates set and the foreign debt is growing.

GRReporter sought Michalis Vassiliadis, who is Head of Macroeconomic Analysis and Policy Unit at the Foundation for Economic and Industrial Research (IOBE), to present his expert opinion on the economic development of the country.

Greece is in its sixth year of recession. Does this mean that the country has moved to economic depression?

From 2008 to 2013, the gross domestic product will lose another 24% and unemployment for the same period will be three times higher, which shows that we are not talking about a simple crisis but about a real economic depression. There is no easy solution to emerge from such a situation although there is what to be done to improve the environment.

What measures should the government take to improve the condition of the country?

It should attract investment through both the privatisation programme and the improvement of the general business climate. It is not necessary to sell public property but to offer it for long-term use by private enterprises and this will revive the economy. European funds provide another option of investment but for now, they will not play a major role in this process.

The real business whose investments we are awaiting today states that Greece still seems unattractive because it lacks a stable tax framework. Do you agree with this statement?

Of course I do. The tax system is changing rapidly. Tax rates are being constantly changed, new taxes are being imposed and others are being unexpectedly increased. This does not inspire confidence in investors. There are other problems besides the ever-changing tax policy. The country does not yet have a single urban development plan. There is no clear cadastre, if someone wants to invest in a particular region. Obtaining a permit to operate takes quite a long time and the procedures are cumbersome and expensive.

This should change now. All other countries have a clear land planning, faster procedures for starting a business and obtaining permits to operate whereas the situation here is quite the opposite and it is not changing. Greece does not have to do anything special in this regard. These are reforms required to improve the condition of the country. Currently, the focus is on fiscal consolidation without taking into account the importance of structural reforms.

One of the key measures imposed by the lenders to the Greek government is to reduce the salaries in the country in order for the competitiveness of Greek enterprises to improve. What is the position of IOBE as regards the level of salaries in the country? Should they be further cut or is their reduction sufficient?

Improving the competitiveness does not depend only on the cuts of salaries. The implementation of various measures, not just the reduction of labour cost in the country, can improve it too. We can stimulate higher productivity through an improved educational system and these are measures, which can be applied both at the state level and in enterprises. This is what Greece lacks.

Introducing innovations in Greek enterprises will also positively affect the competitiveness. This will increase the productivity and optimize the performance of smaller companies, where the cost of labour is not so important. Cheap labour is not a panacea for competitiveness.

Nevertheless, we see a trend pressing for further cuts of salaries.

This is not the government's insistence. Most likely, it is the insistence of some members of the supervisory Troika of the lenders. When comparing the data on the minimum and maximum salary, the balance of trade and competitiveness of the euro zone countries, we find that the countries with trade surpluses have higher average salaries than the countries with trade deficits. Often their competitiveness is higher than that of countries with cheap labour. On the other hand, European Union countries that maintain low salaries in the private sector usually have trade deficit.

Then, why was it necessary to reduce the salaries in Greece so drastically if you think that the cost of labour is not crucial for the competitiveness?

There are different theories on how to improve the competitiveness. One of them is the introduction of an internal devaluation through the reduction of labour costs. Apparently, the supervisory mission of lenders has chosen this approach. It can improve Greece’s level of competitiveness but it cannot make us truly competitive regardless of how much we reduce the labour costs.

What additional measures can the government take to improve the medium-term competitiveness of the country?

Tags: EconomyMarketsAnalysesGreeceCost of labourCompetition
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