The prospect of default may be a possibility once again. European leaders and international lenders will likely come to an eleventh-hour agreement, but it may not be a bad idea to keep Greek politicians wondering in the interim.
Greece has become complacent about making necessary structural changes, having received two bailouts, interest rate support from the European Central Bank (ECB), and an internationally sanctioned private debt restructuring earlier this year. It has failed to reform its public sector, privatise state-owned companies, increase competitiveness — all conditions for receiving additional international support. The resurgent spectre of default would send a strong message to Greek politicians that their cowardly approach to reform is both unacceptable to creditors and unsustainable for Greece’s balance sheet in the long-run.
Greece’s public sector is as bloated now as it was upon agreement to its first bailout in May 2010. Public expenditure as a percentage of GDP remains at a whopping 51 per cent, according to IMF figures. Some European countries do have a higher proportion, but without Greece’s abysmal level of government inefficiency.
Since financial turmoil hit Greek shores, the private sector has lost roughly 770,000 jobs. The government’s response? In June it reneged on its promise to lay off 150,000 public sector workers by 2015. While the private sector has been hemorrhaging jobs, its public counterpart actually grew by 30,000, according to data from the ECB and EUbusiness.
Privatisation is woefully behind schedule. The Greek government pledged €4.5bn in privatisation revenues by the end of this year and €15bn by 2015, yet it has collected less than €1bn over the past three years. It’s no wonder that institutional creditors are sceptical of a €3.5bn breakthrough this year and a €14bn miracle by 2015.
Greek competitiveness is still severely lacking. Between 2000 and 2008, wage growth outpaced labour productivity growth by roughly 3 percentage points. This gap has increased to 7 percentage points since 2008, as labour productivity took a dive and wages decreased only slightly. Labour productivity in 2011 was 46 per cent below the Eurozone average; it was 39 per cent below in 2008.
Despite the lack of reform, Greeks complain about “savage” austerity. They should look to Estonia — which slashed government expenditures and public wages — to see what real cuts look like. Moreover, flexible labour laws allowed businesses to make painful but necessary pay cuts. Estonia underwent a 14 per cent decline in GDP after enacting these measures in 2009, but bounced back with 2 per cent growth the following year. Unemployment shot up to 17 per cent in 2010, but receded the next year to 12 per cent and is still declining. Greece has seen up to 7 per cent annual declines in GDP since 2009. Greek politicians have prolonged this negative growth trend by limping down the path to reform, bringing persistent and rising unemployment, which has increased between 30 and 40 per cent annually since Greek chaos began. Institutional lenders won’t support Greece’s poor economic fundamentals forever. The EU and IMF were supposed to release the current €31.5bn tranche back in June, but haven’t because of a lack of progress achieving the required preconditions.
Meanwhile, the Greek central bank has been financing the government through emergency lending operations, capped at €7bn by the ECB. The ECB permitted raising the limit from €3bn when Greece needed to fund repayment of a maturing ECB bond in August. But it seems doubtful that its head, Mario Draghi, will permit Greece to inflate away its entire debt pile due next month.
The more Greece falters and fumbles towards downsizing its government and boosting competitiveness, the more the Greek economy — and the Greek people — will suffer. Greek policymakers need a reminder of the consequences of repeatedly tapping the snooze button instead of answering the call to reform.
Matthew Melchiorre is the Warren T Brookes journalism fellow at the Competitive Enterprise Institute.