A Blueprint for Greece’s Recovery within a Consolidating Europe – Brussels Keynote 7th May 2015

15/05/2015 by

On 7th May 2015 I was invited to deliver a lunchtime keynote speech at the European Business Summit 2015 in Brussels. Belgium’s Deputy Prime Minister and Foreign Minister introduced the talk. Click here for the accompanying powerpoint slides.

The text of the talk follows below


A Blueprint for Greece’s Recovery within a Consolidating Europe

Brussels EBS2015 Keynote 7th May 2015

Today all eyes are turned on two processes: the British election and the negotiations that are unfolding here in Brussels between our team and the technocratic staff from European institutions, plus the International Monetary Fund.

Interestingly, both processes, the electoral one in Britain and the continuing Greek drama, contain the seeds of potential fragmentation at the level of the European Union. It is crucial that we find ways of preventing such fragmentation, at both ends of the continent. If we fail, history will pass a deservedly harsh judgment upon us all.

Let me focus on only one of the two processes – the one I am qualified to discuss: the negotiations happening close by at the level of the Brussels Group over the Greek loan agreement and its conditionalities.

Months of negotiations, even since we were elected in late January, have failed to produce an agreement. I trust that one will emerge very soon. However, it is useful to ask: Why is it taking so long to reach agreement? Fruitless recriminations aside, one tangible reason is that all sides have been focusing too much on the strings to be attached to the next liquidity injection and not enough on a vision of how Greece can recover and develop sustainably.

This is why I think it important to visualise a recovering Greece, within a changing Eurozone. Not only is there a pressing need to come up with such a blueprint for Greece’s recovery but, additionally, this commonly agreed blueprint may prove the catalyst that unlocks the present impasse.

Furthermore, as I already touched upon, such a blueprint for Greece may also help Europe address some of its design faults. After all, the Euro Crisis began in earnest in Greece. Why should we restrain ourselves from imagining that a lasting solution, a process of genuine continental consolidation, can also begin with a blueprint for Greece’s recovery?

So, back to the question: Why has white smoke not emerged from the Brussels Group yet? After all our government and the institutions already agree on a great deal:

  • Greece should never have to borrow again in order to pay for its salary and pension bill.
  • Public debt needs to be managed and reconfigured
  • Greece’s tax system needs to be revamped and the revenue authorities must be freed from political and corporate influence.
  • The pension system is ailing.
  • The economy’s credit circuits are broken.
  • The labour market has been devastated by the crisis and is deeply segmented, with productivity growth stalled.
  • Public administration is in urgent need of modernisation, and public resources must be used more efficiently.
  • Overwhelming obstacles block the formation of start-ups and impede entrepreneurship. Competition in product markets is far too circumscribed.
  • Inequality has reached outrageous levels, preventing society from uniting behind essential reforms.
  • Oligarchic interests rule supreme, act as a brake on growth and cause resentment that makes reform difficult.

So, we agree on all this.

This consensus aside, agreement on a new development model for Greece requires overcoming two hurdles. First, we must concur on how to approach Greece’s fiscal consolidation and our management of public debt. Second, we need a comprehensive, commonly agreed reform agenda that will underpin that consolidation path and inspire the confidence of Greek society on the one hand and our partners on the other.

Beginning with fiscal consolidation, the issue at hand concerns the method. The institutions have, over the years, relied on a process of backward induction: They set a date (say, the year 2019) and a target for the ratio of nominal debt to national income (say, 120%) that must be achieved before money markets are deemed ready to lend to Greece at reasonable rates.


Then, under arbitrary assumptions regarding growth rates, inflation, privatization receipts, and so forth, they compute what primary surpluses are necessary in every year, going backwards to the present.

The result of this method, in our government’s opinion, is an ‘austerity trap’.

When fiscal consolidation turns on a pre-determined debt ratio to be achieved at a predetermined point in the future, the primary surpluses needed to hit those targets are such that the effect on the private sector undermines the assumed growth rates and thus derails the planned fiscal path. Indeed, this is precisely why previous fiscal-consolidation plans for Greece missed their targets so spectacularly.


The Greek government’s position is that instead of backward induction we should map out a forward-looking plan based on reasonable assumptions about the primary surpluses consistent with the rates of output growth, net investment, and export expansion that can stabilize Greece’s economy and debt ratio. If this means that the debt-to-GDP ratio will be higher than 120% in 2020, we need to devise smart ways to rationalize, re-profile, or restructure the debt – keeping in mind the aim of maximising the effective present value that will be returned to Greece’s creditors.

Besides convincing our partners that our debt sustainability analysis should avoid the austerity trap, we must overcome the second hurdle: the ‘reform trap’. The previous reform program, which our partners are so adamant should not be ‘rolled back’ by Greece’s new government, was founded on internal devaluation, wage and pension cuts, loss of labour protection, and price-maximising privatisation of public assets.

Our partners and the institutions tell us that, given time, this agenda will work. That if wages fall further, employment will rise. That the way to cure an ailing pension system is to cut pensions. And that privatizations should aim at higher sale prices to pay off debt that many (privately) agree is unsustainable.

By contrast, our government believes that this program has failed, leaving the population weary of reform. Slides 2&3 vividly demonstrates this failure.


Besides the loss of national income, that has pushed the debt-to-GDP ratio toward 180%, the best evidence of this failure (see Table 3) is that, despite a huge drop in wages and costs, export growth has been flat, with the elimination of the current-account deficit being almost exclusively due to collapsing imports.

Additional wage cuts will not help export-oriented companies mired in a credit crunch. And further cuts in pensions will not address the true causes of the pension system’s troubles (low employment, a large proportion of undeclared labour and a ramshackle social welfare system that pressurises the state to pension off unemployable workers in their late 50s or early 60s). Such measures will merely cause further damage to Greece’s already-stressed social fabric, rendering it incapable of providing the support that our reform agenda desperately needs.

Greece’s recovery: What will it take?

First and foremost, it will take the restoration of INVESTMENT and CREDIT both which have been decimated by seven years of debt-deflation (2008-2015. But how can this be done? How can we restore investment and credit to levels consistent with escape velocity?


Imagine a Development Bank levering up collateral comprising the equity the state shall retain after privatisations as well as other assets (e.g. real estate) whose value can be easily enhanced (and collateralised) through reforming their property rights. Imagine that it links up the European Investment Bank, the Juncker Plan etc. with Greece’s private sector. Privatisation suddenly escapes any association with fire sales and becomes part of a grand developmental public-private partnership.


Imagine further a Bad Bank that helps the banks shed their legacy non-performing mortgages and unclog their financial plumbing. In concert with the Development Bank’s virtuous impact, credit and investment flows will flood the hitherto arid realms of Greece’s economy eventually helping the Bad Bank turn a profit, and turning… ‘good’ in the process.

The next piece in the jigsaw puzzle concerns, naturally, the real economy.


Product markets. The government is considering to:

  • deregulate the market for natural gas
  • consider the French bilateral contracts model in the regulation of the electricity power and distribution sector (without however privatising the existing power generating company)
  • deregulate product specifications (e.g. dairy products, non-prescription pharmaceuticals)
  • simplify business licensing (in close cooperation with the World Bank)
  • legislate the inclusion of all discounts into retailers invoices (to limit supermarkets’ oligopoly power over their local suppliers)
  • Strengthen the Competition Commission and empower it with its own budget and revenue raising capacity.

On our Labour markets. Recent estimates put up to one third of all paid labour in the informal (undeclared) labour category. If one adds to this figure the fact that less than 10% of unemployed workers ever receive any unemployment benefits, it is clear that the Greek labour market is more de-regulated than most other European labour markets. Further reductions in worker protection will not benefit high-quality employers, who are bound to be handicapped by having to compete against competitors that hire informal labour.

In short, the labour market needs regulation to formalize the informal labour force, with positive externalities for pension funds and government revenues. It is for this reason that most employers’ organisations in Greece are in favour of new collective bargaining legislation and higher minimum wages. To this effect the government has already began a fruitful dialogue with the International Labour Organization (ILO) to formulate suitable legislation.

Turning to our Pension System: When the 2012 haircut (PSI) was effected, pension funds lost €26 billion. They also lost one third of contributions due to the collapse in declared paid employment. Soon after, pensions were cut by up to 44.2% in the private sector and up to 48% in the public sector. As a result, the average pensioner in Greece is now one euro away from the official poverty line of 60% of median income.

It is obvious that only a return to job-rich growth can render it sustainable again and any attempt to cut pensions now to balance the books will lead to further pauperisation and another twirl of the debt-deflationary spiral.

Of course, this does not mean that we should not reform the system while waiting for growth to pick up:

  • Early retirements
  • Consolidation of smaller funds
  • Possible use of Leximin method of squeezing pensions from above, rather than horizontally



Can one imagine Greece recovering strongly as a result? Absolutely! In a world of ultra-low returns, Greece will be seen as a splendid investment opportunity, causing a steady stream of foreign direct investment to flow inwards.

As the overly negative expectations turn positive the problem will be to contain ‘irrational exuberance’. The danger will then be of a repetition of the capital inflows of the pre-2008 era that ended up in debt-fuelled Ponzi growth?

To ensure that this time it is different, Greece will need to reform its social economy and its political system. Creating new bubbles is not our government’s idea of development.

Democratic governance reforms


During Greece’s era of debt-fuelled-growth, capital flows were channelled by commercial banks into a frenzy of consumerism and by the state into an orgy of unlawful procurement and general profligacy. This time it will be different.

The new Development Bank will take the lead in targeting scarce home-grown resources into selected productive investments in start-ups, IT companies that make use of local human capital, organic-agro small and medium sized enterprises, export-oriented pharmaceutical companies, means of attracting the international film industry to Greek locations, educational programs that take advantage of Greek intellectual production and unbeatable historical sites etc.

In the meantime, the regulatory authorities will be keeping a watchful eye over commercial lending practices while a debt-brake will prevent our government from indulging into bad, old habits, ensuring that our state never again slips into primary deficits. Cartels, anti-competitive invoicing practices, senselessly closed professions, and a bureaucracy that has traditionally turned the state into Public Enemy No. 1, will soon discover that our government is their worst foe.

Greece’s development has in the past been arrested by the unholy alliance between oligarchic vested interests and: political parties, scandalous procurement, clientelism, the permanently insolvent media, the ‘accommodating’ banks, weak tax authorities and a snowed-under, fear-stricken, judiciary. Only the bright light of democratic transparency and efficient government can dissolve this dark alliance. Our government is determined to help it shine through.


Basis for a new covenant between Greece and Europe

Fiscal, VAT & pension reforms

  1. Dynamically/intertemporally consistent fiscal plan for the 2015-2020 period
  2. A revamped VAT system with two rates (e.g. one at 6.5% for basic goods, books, pharmaceuticals and another at 15% for everything else), with the addition of: (a) a 3% surcharge for tax transactions on goods/services at the higher rate), and (b) a provision for VAT returns in the case of permanent residents of islands currently benefitting from a 30% reduction in VAT (so as to render the change VAT-rate neutral for those remote idlands)
  3. Significant curtailment of early retirements and mergers of pension funds


New institutions

  1. Independent, self-governing IRS-like Tax Commission (under the aegis and supervision of Parliament)
  2. Development Bank: Utilisation of public property through a combination of privatisation and collateralisation of public assets, in the context of setting up the new Development Bank
  3. Bank Asset Management Company: Utilising the remaining part of the HFSF’s capital, BAMC would help manage the banking sector’s non-performing loans so as to de-clog the circuits of credit
  4. Out-of-court Workout Tribunals, that help bypass the arteriosclerotic judicial process of dealing with disputes on tax arrears and NPLs.

Growth and Recovery Initiatives

  1. Public debt management that improves debt sustainability and brings market access closer, involving:
    1. ESM purchases on behalf of ECB-help SMP-program GGBs (27 billion approximately). Thus Greece benefits from the long ESM maturities (that help send these short-term repayments to the future) and allows it to participate in the ECB’s QE
    2. Smoothening out of lumpy EFSF-loan repayments during 2022-2025, through suitable maturity extensions
    3. Linking repayments to GLF and EFSF loans to nominal GDP growth
  2. A new investment package by the EIB in collaboration with the new Development Bank, the EBRD, KfW etc.
  3. A comprehensive Anti-Poverty ten year program, in collaboration with the European Commission


Let us for a moment imagine the effect of the announcement of such an agreement on Greece’s financial, fiscal and social security ecosystem:

With the shares of the banks skyrocketing, our state’s losses from their recapitalisation will be extinguished as its equity in them appreciates and pension funds are refloated by the dividends from the DevBank and the contributions of newly formalised and employed workers.

Suddenly, a society mired in debt-deflation and rendered unreformable by a reform agenda that was rejected by the majority will be on the mend and ready to embrace as their own the reforms that we are all striving to agree upon.

So, my question is: What do you believe ladies and gentlemen is in Europe’s best interests? What would help Europe consolidate in the future?

A Greek and European failure to implement this blueprint, leading us all to a dystopian, uncharted territory? Or the successful implementation of our blueprint? I shall leave it to you to decide.

For my part, I shall conclude with what I consider to be triptych of dangerous myths that is putting the Eurozone, and of course, Greece in great peril:

  1. A Greek exit from the Eurozone may be good for the Eurozone, and even for Greece
  2. Greece has not done enough during the last five years and insists on having other nations, some of them poorer than itself, pay for its profligacy
  3. The new Greek government has not negotiated in good faith, has tabled no serious proposals to the institutions, and has no credible plan for helping the Greek economy stand on its own two feet within the Eurozone.

None of the above is correct.

  1. A Greek failure, even if it is at first contained by an activist European Central Bank, will render the Eurozone similar to the mid-war Gold Standard: a hard money fixed exchange rate regime that jettisons economies bearing the greatest burden of adjustment. Once this realisation enters hearts and minds, it is only a matter of time before the Eurozone will fragment with enormous costs for every European nation. As for Greece, a forced exit will cause the pauperisation of another million Greeks – as if the current poverty crisis is insufficient!
  1. The notion that Greece has not done enough to consolidate its public finances is non-sense. As we saw no economy has consolidated more in peacetime during the last three centuries. Moreover, Greece is running a primary surplus and the new Greek government is committed to a deficit brake that will ensure that it does not slip back into a primary deficit. Thus the claim that the Greek state requires loans in order to pay for its salaries and pensions is simply wrong.
  1. The Greek government has been arguing since at least the 20th February 2015 Eurogroup agreement for immediate implementation of a number of important reforms. I am happy to confirm that much progress has now been made here in Brussels in this regard.

Lastly, the blueprint you kindly gave me the opportunity to outline today lays out a plan for investment-led recovery based on wide-ranging socio-economic reforms that enhance liberty, justice, shared prosperity and the idea that democracy can turn a vicious into a virtuous cycle.

In 2010 our failures took a toll on Europe. If we succeed together in this project, a different process may unfold, with Greece being the harbinger of good things to come across Europe.

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