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In an interview with Maria S. Topalova the well-known professor at the Economic University of Athens admits that the Euro should be back where it started - $ 0.80 and this will benefit not only Germany but also Bulgaria, Greece, Spain

- Mr. Bitros, do you think that the measures taken by the Greek Government are sufficient to reduce unreasonable spending in the public sector?
 
- Let’s divide the measures taken into two categories. These are the measures which the government hopes will bring sufficient state revenue to reduce budget deficits. They include the VAT increase, the elimination of Easter and other bonuses, housing measures, regularization of illegal buildings, etc. Of course, these measures are implemented gradually, and therefore their results will appear gradually. We do not have the results so far. These are, say, the measures for increase in revenues. On the other hand, they are about to take and different structural measures – they speak of privatization, liberalization of professions. Of course, they have not yet begun to implement them, but at some point they – I mean the Government – have made specific commitments to proceed to all those processes. These measures are expected to regain the competitiveness of the Greek economy, to improve exports and balance of payments. The budget will take a breath through improving the balance of payments and the increase in revenue.

- I'll repeat the question for the public sector. It should be reduced, it is quite clear. Are the measures announced enough to reduce the public sector?
 
- My opinion, many people don’t share it, is that ultimately the public sector should not be kept in size. The number of employees in the public sector will be reduced. We will see whether this will happen smoothly, as the Government plans it, ie by appointing only one employee against five that go into retirement or will happen a little more forcefully through dismissals or at least by not renewing fixed contracts of employees. I think the government postponed it for next year as currently it has other priorities. In my opinion, the public sector will not be the same after the end of this program. It will be much smaller, more organized, more efficient, and only this optimization will start to optimize the salaries of the employees in the public sector.

- The second reason for the large deficit of Greece is tax evasion. In your opinion is there a cure for this disease, dominant in the Greek society?

- Surely there is a cure. There is no need to find new ways to cope with tax evasion. We can learn from Western countries, from what they have done to reduce it. Tax evasion indicates the ineffectiveness of the Greek state. It exists because the Greek state has not done its job well. What's your impression - that there would not be tax evasion in America or Sweden or Germany if the state has failed to implement laws? Taxes are being hidden everywhere. The state has one obligation - to apply the laws it has created. And to apply these laws procedures and monitoring are necessary. And the Greek state has failed there, ie there were no procedures for law implementation or monitoring. If you catch 10 people who evade taxes and send them to jail, I'm sure the others will think twice and three times before absconding taxes. There was a period, a much longer period, say 50 years after the war, when the state was turning a blind eye to tax evasion. And it was very tactful to infringers – no penalty, no nothing for them. I think tax evasion in Greece will cease if the state, by using the procedures of the new legislation, catches those who evade taxes and punishes them for example, as in other Western countries. Of course, there is some tax evasion everywhere, even in America, even in Germany. Informal economy is part of the economies based on market mechanism, because while the country imposes restrictions the market finds ways to avoid the government constraints. And this leads to tax evasion and corruption. The big problem in Greece is not tax evasion, Greece's biggest problem is government spending. There is no way to close the “scissors” of deficit without reducing public expenditure. The state tries to reduce tax evasion by law enforcement and it is good. And where tax evasion is crossed, of course, the rates should be reduced in order to create incentives in people to declare their income. However, the funds raised from tax evasion won’t be sufficient. This has huge side effects on the economy, because the cut of tax evasion is increasing tax revenues, but since it takes revenue from the private economy the demand falls resulting in a recession. The best, most effective method is to reduce government spending. The state spends a lot of money, spend it aimlessly and inefficiently. Therefore, the government should reduce its spending, and not only reduce it but make it more efficient.

- Yes, but how can this happen?

- Ο, how can it happen? In many ways. All countries could reduce government spending, which has increased greatly in all countries. How could government spending be reduced? We have a health care system and 1 million immigrants who go to Greek hospitals and do not pay anything. Is it possible to go to a hospital and get free medical care? You pay a minimum price for each visit to the hospital or for each service. I'm not saying that government hospitals should work for a profit. At least and Greeks, and immigrants could contribute by paying for their treatment or a small percentage. This is one example. Another example is public education. Did you know that here we even give textbooks to the students. Textbooks are free. Do you understand? All right. Is it appropriate all students, irrespective of their financial status, to receive free books? Why? There are people who very well may buy their books, not the state to pay for them. Some, of course, may need to receive free textbooks, because the income of their parents is low and they can not pay for the books. Let them get free books. But should there be a general policy of providing free textbooks to all regardless of income? You know, my calculations show that you can cut 40% of government spending without reducing the offered services. Government spending is just a tool used by politicians to demonstrate their strength. And they do not reduce government spending, because this – according to them – will decline their power, or their conviction, or their ability to collect votes in the elections, etc. etc. In a democracy, parties, in their struggle for power, are constantly increasing government expenditure. This must stop. It is not possible for the economies to create that growth, which is necessary to maintain this constant, this endless increase in government spending.

- The Greek social security system is considered to be the most expensive one in the EU. On the other hand, we can not say that Greeks take very large pensions. Where exactly is the problem with the social security system? On one hand, the state grants much money, on the other, why pensioners do not take such large pensions?  

- The problem with the pension system should be examined by groups of secured. There are social security funds, say the sailors fund – as you know Greece has one of the largest merchant marine in the world. The Sailors Pension Fund was one of the most stable social security funds in Greece, because the Greek sailors and shipowners pooled their contributions. They were invested and generated income and there were no problems. The problem with the pension fund of the veteran sailors appeared in the 80's, when governments began to retire through it, but did it with other funds and with people who did not pay any contribution in their lives nor to the sailors’ fund or to the pension fund of farmers or any other fund. How is it possible to increase the number of pensioners when they have paid nothing in their entire working life? Therefore, the problem occured because those who contributed to the pension funds and expected to get a pension at the end of their working lives saw that their contributions become pensions for people who have not contributed anything. When you divide one loaf to many people, you are forced to give a little to all, right? If this bad political choice from the 80's, 90's and today was not made, many of the funds would not be in the state they are now. Simply the Greek governments, and many other governments around the world, have followed a bad social security policy, because they were thinking politically rather than economically. Pensions should be directed to those who have contributed. You can not receive a pension without making any contributions throughout your working life. You must contribute, your contributions to be invested, the investments to multiply, so you can get a better pension. The problem is that the ones who have paid contributions are not so many but are many those who receive a pension. Therefore, here the state should say: “OK, we know we followed a very bad policy the last 30 years, so now we will start to give some contributions to the social security funds from the budget.” But these contributions, of course, are not sufficient. As a result, there is a major problem with the social security system now. It is not only a Greek problem, but of all social security funds, of the French Social Security Fund. And the problems are because the social security funds do not function on the base of return, ie, the more you contribute, the more you get. They function on the old base. They were distributing social security systems, waiting for future generations to enter the labor market so that their contributions can pay the future contracts. This system can no longer be maintained, because the age structure of population has changed. So now, as you know, we move to a mixed system in which there will be a social pension and a pension as a reward. So, we hope that after 10-15-20 years, this structural problem in the social security system will be eliminated.

- To complete this cycle of deficit and state debt, there are different scenarios, one of them is the restructuring of public debt. How possible is this in your opinion?
 
- I think your readers should perceive it as a matter of time. The debt restructuring will happen in one way or another. Whether it will happen after one, two or three years, this is an issue to be decided by the EU in cooperation, of course, with the Greek government. Restructuring may be limited to an extension of the term for debt repayment. If the average repayment term of the Greek debt is 10 years it may be decided to extend the restructuring terms of maturity of the bonds and the average term to become 20 or 25 years. This would be the less painful way of restructuring. I think this issue should have certainly stricken the minds of European policy makers. But perhaps we are ahead and they have not been able to consider it properly so far. Anyway, my opinion is that restructuring will be made at some time, in one form or another. What I appreciate, however, is that most likely the restructuring will not be in the form of capital loss for creditors of Greece, organizations and individuals holding Greek bonds, due to the help of the EU. Restructuring is likely to become an EU initiative which will not cause creditors to lose money.  

- Besides the state debt, the Greek economy has another problem called competitiveness. How do you think  the Greek economy will again become competitive in international markets?

- The Greek economy, and I say it because I know it, can become competitive very quickly if the government decides that Greece will have a free market where markets will play a major role. And the government will have to eliminate all taxes for the benefit of third parties. Do you know what taxes to third parties means? Taxes in favor of third parties are the taxes that I pay here and they do not go in the Ministry of Finance, in the government, but to a lawyer, a notary, a third party. If taxes in favor of third parties are eliminated, and professions are liberalized, the Greek economy will be very competitive after 2-3 years. But I doubt that will happen. It could only happen under the pressure of two factors - the EU pressure on the political system, and the pressure of international markets upon the political system of Greece, under the threat of bankruptcy. Nothing else can exert pressure on the Greek government. I wrote about it in the past 30 years, I wrote about 800 newspaper articles on it. And I warned that the distorted structure of the Greek economy would harm the competitiveness, will made the balance of payments “explode” and now we are all experiencing it. And I think it is too late because we have a very serious problem. But it is never too late; let's start now with the right acts. Liberalisation of occupation, elimination of taxes in favor of third parties - we wrote this two months ago. We gathered 24 economists from around the world, Greeks, and made a statement which was published in Greek newspapers. It said what the Greek government should have done two or three months ago to begin to overcome the problems of the Greek economy. I hope that we have influenced the Greek government's way of thinking and determination to proceed and take the measures which I recommended. The EU insisted upon almost the same measures and the Greek government is not in a position to deny. So, I hope what could not happen in the last 30 years will happen in one, two or three years.

- I smiled because I thought you would say something about the Eurozone leaving. And if we return to the drachma, it would also help the competitiveness of Greek economy. What do you think of such a scenario, is it possible?

- I think this scenario is very unlikely because I have the feeling that the leading powers in Europe do not want and would not allow anything like that to happen. Europe can not break down to the countries forming it. Europe is forced to continue the formation of a federation, because global forces and strategies of major powers are pushing in it in this direction. So, what I expect, is that Europe will accelerate some changes planned for the coming years. It will proceed with the consolidation of state economies, which will support the countries facing problems. But these countries will no longer be allowed to follow the path of fiscal irresponsibility and to “accommodate” under the umbrella of European subsidies. This act of fiscal unity will force the countries, facing particular problems, to adapt to conditions that will make their economies competitive and fiscally sustainable. I support that policy and I think it is on its way, because Europe can not decompose to the countries that make it up. It would be a historic mistake for Europe to fall apart and become Europe of separate countries. Europe must move forward towards a federation, where each country has its own culture, language, manners and customs, but people will feel more Europeans, because Europe will protect them, provide security services and support to them. And this is the European dream. I fully support the European dream. And I want to make your readers think that there is room for Bulgaria, and Romania, and all other Balkan countries in Europe, and this is our destiny.  

- How do you see the evolvement of the Euro in the coming years?

- I personally do not mind the Euro to reach the dollar rates from the beginning - to 0.80. Ie € 1 to buy $ 0.80. Now it buys $ 1.20. I see no reason to worry. Of course, the value reduction of the Euro will result in serious problems in Europe. At the same time, there will be many advantages for Europe's competitiveness will be terrible, right? Naturally, we must watch what happens with inflation, the public finances of individual countries. But if the Euro starts to fall, it will not benefit only Germany, it will benefit Bulgaria, and Greece, and Spain. You would say that the value of a currency reflects to a great extent the reliability of the governments that support it and it is not correct the currency value to fall. I would say that we should look things from the other side. European governments should take care to put public finances in order. They should reduce the budget deficit, but not by laying down conditions, but by reducing government spending. They should allow the private economies of the countries to take the issue of economic growth in their hands again. Let the market determines the way of the Euro. Let us not worry about the Euro, let it go where the markets lead it. Let us, as good proprietors, arrange the public finances, reduce the size of the government sector, which is counter-productive and squander. Let the more productive private economy contribute, with its dynamics, for the rapid economic growth of the countries. Countries in Europe have a lot of work to do. They have to arrange a bunch of issues to facilitate investment. If countries do not work hard to make procedures for transactions with the private sector transparent, to develop environmental policies with more confidence, how the investment will be encouraged to come to support development? I have the feeling that many investment would be made here if Greece was now able to settle all the outstanding issues on land use, the impact of investments on the environment, sea, rivers. But no investments are made because there is uncertainty regarding these issues. Therefore, governments can do a lot of work on different level, fiscal and structural. They can do a lot of work to facilitate and encourage investment.

- Will there be consequences of economic crisis on the Greek banking system? A lot was said and written about mergers, strategic investors from abroad. How do you see things in this area?

- I do not exclude this possibility for, as you know, the Greek banks' capitalization has dropped significantly, because their share prices have decreased significantly and this decreased their capitalization. It is not precluded foreign investors to buy a Greek bank or make more investments in the Greek stock exchange, etc. while capitalization is decreasing and the situation in Greece stabilizes to some extent. The drop of these prices creates incentives. I feel, however, that the Greek banks are not very much subject to the impact of the actions of the Greek government. Rather, they are under the management supervision of the Central European Bank. I do not think the banks have any problems given that Mr. Trichet has taken significant steps in recent weeks to facilitate the liquidity of Greek banks. Then it is the Central European Bank assuring and offering us all the liquidity the banks need. Of course, Greek banks have an extremely important problem - that ill-managed portfolios in the sense that they invested most of their available capital in Greek bonds. Someone might say it’s too much. However, now they must make some steps to offset the risks arising from the structure of their portfolios, to neutralize them in a more efficient manner. But I believe that this commitment of the Central European Bank is in force and it will offer all the liquidity needed by Greek banks to cope with this difficult situation. As for the mergers, you know, I believe, in terms of principles and in terms of economic theory, that there should be no major banking institutions. The classic example is that the banking system custodians in the USA were not careful. As result, 3-4 banks became very large. And these 3-4 banks were likely to drag the entire financial and credit system to fail, when they began to encounter problems. And we know that one of the policies developed in America is to divide, fragment the banks into smaller ones. Therefore, I am against the merger, I am “for” the small banks. After the war the banks claimed for economies of scale, of large-scale, in order to become bigger. There are no such economies. It was simply a pretext to make the banking market oligopoly and gain extreme profits. The public interest requires banks are medium in size. On one hand to cover all existing economies of scale and, on the other, not to create problems to the government. Because the larger the banks the less is the relevant force of government.   

- Foreign, and particularly the neighboring countries, are concerned that there might be consequences for the Greek investment in Greece's neighboring countries. Do you think such a thing could happen?
 
- For several years, due to the measures taken, the Greek economy will undergo a period of recession in which personal income will decline, but competitiveness will increase. And because of this uncertain environment, investors, both in Greece and beyond, will be reserved. But if countries like Bulgaria, Serbia, Romania recover faster, Greek investors from those countries would again consider investing in my opinion. Because there is a gap in time, ie when the Greek economy goes into recession, the Bulgarian, or Romanian, or Serbian economy can begin to recover faster. I am not aware of the nature of the problems facing these countries now. But I just feel that the trend is different. That is, while the trend in Greece is a downward, it might be flat or even slightly upward there. So, if the first signs of economic growth in these countries appear, Greek investors, who have invested there, will see the need to strengthen their positions, because the economy will begin to recover. But there will be a downward movement here. Therefore, I think the answer depends very much on the behavior of these economies in the next 2-3 years. If they start to go up more quickly than Greece, they will attract investments.
  
- How long do you think the recession will continue in Greece?

- Recession in Greece, according to the traditional methods of measurement, will continue perhaps two years. But the return to the 2009 or 2008 prosperity probably will take 5 or 10 years. The Greek economy in no way will resemble the economy of 2000 after this test.

- In what sense?

- The economy will be more competitive, economic growth will be easier to maintain, public finances will be well arranged and the government debt is on track to decline. Greek industry, Greek services, Greek tourism will be more competitive. It will be a more vibrant and stronger economy. Not that there will be no problems, there will be problems. The problem with the social security system will not be solved. Once we have left the social security system to go down 50 years, we will need as many 30-40-50 years to solve it. Because this is a problem of whole generations, the problem of social security is a specific one. But the Greek economy, when it comes out from the recession and starts to slowly recover, will be very competitive. I'm optimistic about it. Because the Greeks bear the spirit of entrepreneurship. If only they weren’t under the feet of the government so much ... This does not mean that the Greek businessmen should not work under legislative frameworks,  frameworks that respect the environment and labor market laws. But the Greeks are mostly small businessmen. They employ 5-10 people and they are very dynamic. And the economy of Greece will go very well when they regain their courage and vigor.