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On the eve of the vote on the mid-term recovery program on which the future of the Greek economy directly depends, the President of the Bank of Greece George Provopoulos severely criticized the government in his interview for the Greek edition of Kathimerini. He noted that delaying the reforms and the failures in implementing the Memorandum are the reasons for the decline in confidence in the country and the current uncertainty. The top banker of Greece called on political and social forces to get to work and to support the necessary reforms. Provopoulos criticizes the final version of the mid-term recovery plan that by increasing taxes rather than cutting the budget spending would make taxpayers carry the burden of reforms.

 
Did the Memorandum fail or was it not properly implemented?

First, the aid contract prevented the failure that was inevitable in April 2010. On the other hand, important conditions were not implemented, which certainly affected the final results. How could we say that something has failed when it was not implemented in part? I would like to remind you, without ignoring or diminishing what has been done so far, that the state's role is not limited as much as needed, privatization has not begun, unnecessary and costly state institutions continue to exist and many legislative initiatives are not implemented and remain just on paper.

The delays and gaps in the program broke the confidence in the country, which has intensified the uncertainty and reinforced the distrust of the markets and of our partners (the creditors of Greece). We are running out of time. So, we should act immediately and with very fast pace. The adoption of the fiscal adjustment program is only the first step, but it is not enough. As I said at the start, we need serious restructuring reforms from the beginning of April as it will fill the gaps in the delayed recovery plan so far and will give new incentives. Now we should act to prove that Greece is not self-destructing. Let us leave the rhetoric and start the reforms.

Many are those arguing that the implementation of the program with extremely severe fiscal adjustments in times of recession would only intensify the problem. Do you agree with this statement?

The crisis we are experiencing today is a reflection of the collapse of an economic model that can not be supported any longer. This model is based on artificial prosperity through borrowing and is widely accepted by society. The price we are paying today is the price of action and inaction in many cases of the past. Fiscal consolidation is not the main cause of recession, although it has its contribution. In all cases, however, it is the main condition for restoring the confidence in the country and its returning to healthy growth. As international experience shows us, there can be no economic growth, while there are large public deficits and debts, coupled with low competitiveness.

We have to move quickly and decisively in a direction different from our old habits that resulted in high deficits, eternal debt and state system – they all brought us to the brink. Of course, to make this happen we should support them all - the political and social forces.

But how did we get to talking about unsustainable foreign debt?

We believed for many years in the illusion that the public sector may be the engine of social support. Thus, funds were constantly transferred to it over the years. They were spent and often were of almost no social use. I'll give you two examples. The first is that if there had been no appointments in the public sector in the period 2000-2010 and increase in the cost of salaries, today the level of debt would be 31 basis points lower. At the same time, if the share of tax revenue to GDP had not dropped and had remained at the 2000 level, then the debt would now be another 26 basis points lower. In other words, if we had applied reasonable and achievable fiscal policy during this period, the debt could now be less than 100% of the GDP.

The mid-term recovery program suggests that the deficit would be reduced by applying half of the measures on the revenue side and the other half on the expenditure side. Do you agree?

The Bank of Greece has stressed even in 2008 that the budget reduction should be based on a two-thirds reduction in spending and a third of broadening the tax base. Tax measures of increasing the values are largely keeping the economic policy now. Moreover, in my opinion, the mid-term recovery program does not give particular importance to the reduction of spending. The permanent tax burden on taxpayers has reached its limit. If further steps to reduce tax fraud and evasion are made there would be additional opportunities to reduce tax rates and to create conditions for economic growth. I would like to tell you what I said on another occasion: the management of tax unfairness is extremely important to increase the sense of fairness in society and reach a level of understanding concerning the recovery program.

Do you think that it ultimately could limit the effect of the recession and boost the growth prospects in the country, which is the main problem?

This could happen if we have a common policy that could provide growth opportunities without threatening the objectives of fiscal consolidation. The Bank of Greece presented in October 2010 a detailed action plan for creating a favourable environment for the Greek enterprises to operate in. And because the internal resources that could be involved in the development of the local market are extremely limited, it is necessary to encourage the imports of foreign direct investment. Today, there are two main options for strengthening growth, which should be used by all means: privatization, which will help reduce the debt and to increase foreign direct investment by using the European Union funds.

Overall, economic development should make the turn from consumption to savings and investments, from the state apparatus to free competition, to export and entrepreneurial will. This also implies restoring of lost competitiveness. The analysis of the Bank of Greece shows that the country's competitiveness has declined by almost 20% in the period 2000-2010. This difference acts today as an additional obstacle to the attempts of restoring our competitiveness. You should remember that the country has two problems: huge imbalances, both in the public sector and external structure in the form of large and persistent deficits.

Some believe that debt restructuring is inevitable anyway. So, it is better to happen now not later to avoid the recession that will deepen with the new measures. What would be the consequences of such an action?

I stated last October that such a move is neither desirable, nor necessary. All those who support the idea that failure is inevitable do not take into account the positive effect of the accelerated recovery program and even the exceeded targets. Such a development would drastically change the negative climate, improve the funding of the country and would attract new funds. Besides improving the environment, the debt dynamics would also change. I am talking about the assets of the Greek government, which exceed 300 billion euros and should be compared with the volume of the foreign debt which reaches 340 billion euros. If some of those assets are put into action as the government made a commitment some time ago, the debt would be reduced rapidly and significantly.

Debt restructuring is not desirable because the consequences would be tragic, both to the society and the economy. Moreover, such an action would create insurmountable obstacles in our relations with the European Union and would threaten the country's EU membership. Therefore, it is extremely important not to resort to debt restructuring to keep the European perspective of Greece.

Banks are accused for not providing cash for the real economy despite the state guarantees thus intensifying the crisis. Is that right?

First, we should clarify that liquidity problems in the economy did not come from the banking sector. Unlike the problems abroad, everything in Greece started from the financial condition of the country, not from the banks. From early 2010 until now, the banks have been facing with a steady decrease in deposits and have been expelled from capital markets due to the downgrading. Without emergency funding from the European system and the public guarantees, banks would be forced to tighten their requirements to their customers, to stop credit refinancing, to limit the measures to facilitate the customers and to reject the applications of new customers, even if they are solvent. The recession would be much deeper than now.

There is a decision to apply stricter laws on capital adequacy of banks. Are the financial institutions at risk if they are unable to meet the requirements and accumulate the necessary capital because of the current situation?

Banks are not at risk. If there is a need of additional capital rising, but the bank has no access to capital markets, it should turn to the Financial Stability Facility, which was established precisely for this reason. This, of course, should not be an excuse to find additional solutions on the market. The current reality of the market is clear as well as the message for the future. So, banks need to adapt to the environment according to the business model, in which they are operating. The changes in the banking sector would contribute to the process of development and support of financial stability.

The policy pursued so far caused serious public responses, and many of the Greek people do not want to hear about the Memorandum today.
 
According to the people, the socio-political system of recent years is mostly responsible for the crisis today. Furthermore, there is no doubt that the problems of this system are the main obstacle to implement policies that would largely prevent the current situation. On the other hand, it should be noted that a large part of the same society adopted and even fed the pathologies of the system by gaining privileges for itself in an ever-growing state structure.

There is no return to this old structure and it would be a big mistake to think things would be back after the "Memorandum leaves". I would like to add that the Memorandum is often perceived as the culprit of the crisis, rather than an inevitable tool for dealing with it. Moreover, it was not explained well that the Memorandum actually reduced the symptoms of the crisis, which would have been much more serious without it.

We could say that people are not informed properly in fact. Is that the reason for the recent public reactions?

We could certainly say that there is a serious deficiency in the level of information, especially given that there has not been an analytical and honest conversation about the state of the economy so far. There were illusions what might happen and the impression that there was a way to escape from this unpleasant reality. However, there are no such ways and keeping the illusion is only undermining the attempts to pull the society together in the efforts to change. And in these efforts to change, we all must take our responsibility.