Who’s to Blame for Greece?: Life After Bankruptcy: Between Optimism and Substandard Growth 3030640809, 9783030640804

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Theodore Pelagidis Michael Mitsopoulos

Who’s to Blame for Greece? Life After Bankruptcy: Between Optimism and Substandard Growth THIRD EDITION

Who’s to Blame for Greece? “The new book by Michael Mitsopoulos and Theodore Pelagidis offers insightful analysis of the Greek drama. It makes fascinating reading and well demonstrates that the blame is widely shared.” —André Sapir, University Professor, Université libre de Bruxelles, Belgium, and former Economic Advisor to the President of the European Commission “Who is to blame for Greece? If I could pick just two experts on the Greek debacle to answer this question it would be Theodore Pelagidis and Michael Mitsopoulos. And thankfully they have done just that in this penetrating analysis of what has happened to Greece over the past five years. It’s a timely and incisive work and no one gets off easy a must read.” —Landon Thomas, Jr., Financial Reporter, New York Times, USA

Theodore Pelagidis • Michael Mitsopoulos

Who’s to Blame for Greece? Life After Bankruptcy: Between Optimism and Substandard Growth

3rd ed. 2021

Theodore Pelagidis Bank of Greece and University of Piraeus Athens, Greece

Michael Mitsopoulos Hellenic Federation of Enterprizes Athens, Greece

ISBN 978-3-030-64080-4    ISBN 978-3-030-64081-1 (eBook) https://doi.org/10.1007/978-3-030-64081-1 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Contents

1 Introduction  1 Part I The “Party Period” Before the Crisis   7 2 The Costs and Benefits for Joining a Common Currency with Emphasis on Weaker Member States: The Pre-crisis Debate  9 3 Greece Before the Crisis: The Critical Years in Domestic Politics 27 4 IMF and EU Reports on Greece 61 Part II Greece’s Free Fall 2010–2013  97 5 The Troika Period Reconsidered 99 6 Assessing the Intentions of the Government(s) Since the Ratification of the Maastricht Treaty123

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CONTENTS

Part III Looking Ahead 161 7 Greece: Why Did the Forceful Internal Devaluation Fail to Kick-Start an Export-Led Growth?163 8 Giving Greece a Chance to Succeed: Think About the Private Sector, for a Change203 9 Structural Differences Ensure Permanent Shock Trends That Play into the Above. A Closer and More Democratic Union to Heal Economic Asymmetries and Help Southern European Countries Such as Greece251 Part IV How Populism (2015–2017) Destroyed a Country with High Potential 261 10 The Rise of Populism in Greece and the Impact on the Economy263 11 Latest Developments as of December 2017279 12 Conclusions293 Part V Life After Bankruptcy: Between Optimism and Substandard Growth 301 13 How “More Europe” Can Heal the Current Institutional Divergence Hurting in Particular Weaker Member States Like Greece303 14 From Viking Kleptocratic Pressure Groups to State Capture Through Populism: Buying Votes Through Rent Seeking Clientelistic Partitocracy321 15 In Defense of Manufacturing343

 CONTENTS 

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16 Greece’s Comparative Advantage as China’s Backdoor to Europe369 17 Taxing Ourselves to Death: Greece’s Tax Regulations375 18 How to Finance a Tax Wedge Cut in a Way That Supports Work and Families393 19 The Greek Economy After Populism: Between Optimism and Substandard Growth407 20 Final Remarks415 Author Index417 Subject Index421

About the Authors

Theodore  Pelagidis is the Deputy Governor of the Bank of Greece (since September 2020) and Professor of Economics at the University of Piraeus, Department of Shipping. He has been an NR senior fellow at the Brookings Institution during 2012–2020; a NATO scholar at the Center for European Studies, Harvard University (1995); an NBG fellow at the LSE (2010); and an Onassis scholar and Fulbright fellow at Columbia University (2008). He has also served as an expert to the IMF in the Internal Evaluation Office (2015) and to EC (Horizon, 2018). Michael  Mitsopoulos is Director in Business Environment and Regulatory Affairs at the Hellenic Federation of Enterprises, Greece. He holds a PhD in Economics from Boston University and has taught at the University of Piraeus and the Economic University of Athens. He has published extensively in academic journals and is the co-author with Pelagidis in Understanding the Crisis in Greece: From Boom to Bust (Palgrave, 2011 & 2012, 2nd ed.) and of Greece. From Exit to Recovery? (2014).

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List of Figures

Fig. 2.1

Fig. 2.2 Fig. 2.3

Fig. 2.4

McKinsey presentation of lack of adjustment mechanism in euro area. (Source: McKinsey & Company (Germany) (2012), The Future of the Euro: An Economic Perspective on the Euro Area Crisis, McKinsey) Labor migration in key economic areas. (Source: US Census Bureau, Current Population Survey, Eurostat LFS. McKinsey & Company (Germany) (2012) analysis of this data) Intra-EU and intra-euro area shares of export on total export of the two groups respectively. (Source: Bruegel based on IMF data (Direction of Trade Statistics database). Note: The above figure shows intra-EU and intra-euro area shares of export on total export of the two groups respectively. Each of the two lines were constructed taking into account the changing composition of the European Union and the euro area over time, meaning that a given country is included in the series only by the time it joined the EU or the euro. However, further calculations show results do not change dramatically if considering a fixed group of countries in either series. | Read more at Bruegel http://www.bruegel.org/nc/blog/detail/ article/1420-­chart-­sharp-­decline-­in-­intra-­eu-­trade-­over-­the-­ past-­4-­years/?utm_source=Bruegel+Chart+of+the+Week& utm_campaign=8bca3a3d23-­Bruegel+Chart_ Week_35_2014&utm_medium=email&utm_term=0_c8cb23 9d3a-­8bca3a3d23-­277603541) Divergence of current accounts within the EMU. (Source: European Commission/AMECO, McKinsey & Company (Germany) (2012) analysis of these data. Note: Net exports of

14 15

21

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xii 

List of Figures

Fig. 5.1 Fig. 5.2 Fig. 5.3

Fig. 5.4 Fig. 6.1 Fig. 6.2 Fig. 6.3 Fig. 6.4

Fig. 6.5

goods and services plus net primary income from the rest of the world plus net current transfers from the rest of the world) Net revenue, primary expenditure, and interest expenditure of Greek central government budget. E estimate, B budget. Source: Annual government budgets, various years “Interest cover” of Greek general government. Source: Annual Government Budgets, various years OECD structural indicators in key network industries. Note: 0 worst, 6 best (inverse from original OECD index). Thus an increase in the level of the index over time indicates an improvement. Evolution of index through time and for all countries index is available. First in line always country with lowest current performance. These are the OECD indicators of regulation in non-manufacturing sectors (NMR). These indicators measure regulation at the sector level in 34 OECD countries and 22 non-OECD countries. The indicators presented here cover seven network sectors (telecoms, electricity, gas, post, rail, air passenger transport, and road freight). For further details see Koske, I., I. Wanner, R. Bitetti, and O. Barbiero (2015), “The 2013 update of the OECD product market regulation indicators: policy insights for OECD and non-OECD countries,” OECD Economics Department Working Papers. PMR: Product Market Regulation. Source: OECD structural indicator database, author’s presentation OECD PMR indicator: Greece and average of euro area countries that are also OECD members. Source: OECD Product Market Regulation (PMR) index. Lower is better Public and private sector employment to population ratio, 2013. (Source: Eurostat) Tax wedge in Greece, 2014. (Note: SSC: Social Security Contributions. Source: OECD) Self-employed to employees ratio, 2014. (Source: AMECO, European Commission) Compensation per employee, 2014: gross compensation, including all Social Security Contributions and value of benefits, thousands of euro per year. (Source: AMECO, European Commission) Annual gross compensation per employee, including all Social Security Contributions and benefits: thousands of euros per year, 2013. (Source: AMECO, European Commission, and EC progress report on Greece. Gross compensation includes

22 100 102

118 122 132 135 136

138

  List of Figures 

Fig. 6.6 Fig. 6.7 Fig. 6.8

Fig. 6.9 Fig. 6.10 Fig. 7.1 Fig. 7.2 Fig. 7.3

Fig. 7.4 Fig. 7.5 Fig. 7.6 Fig. 7.7 Fig. 7.8

Fig. 7.9

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all social security contributions, wages, benefits and value of pension benefits) 139 Personal income tax (PIT) and Social Security Contribution (SSC) revenue as % of GDP, 2012. (Source: European Commission Tax Database, tax trends) 140 Share of employment by company size class, 2013. (Source: European Commission Small Business Act (SBA) factsheet with 2009 data) 141 Gross monthly basic wage per employee (including only employee Social Security Contribution) per company size class, euros per month. (Source: Data provided by IKA (www.ika.gr), analysis by authors) 142 Full-time employees, employed per company size class. (Source: Data provided by IKA (www.ika.gr), analysis by authors)142 Public finances structure: key revenue and expenditure items 2013 General Government budget (billion euros). (Source: 2013 Greek Government Budget) 143 Employment and unemployment (thousand of persons). (Source: AMECO/European Commission) 165 Total employment to population ratio: euro area and Greece. (Source: Eurostat) 166 Employment in government and pensioners/former government employees : 1000 employees/pensioners. (Source: IMF reports on Greece, European Commission MoU progress report 4 of 2nd MoU, Greek government budget) 167 Compensation of employees for total economy (% of GDP). (Source: AMECO/European Commission) 168 Compensation of employees, corporations (% of GDP). (Source: AMECO/European Commission) 169 Compensation of employees, Greece (% of GDP). (Source: AMECO/European Commission) 170 Compensation of employees (% of GDP, total economy minus corporations). (Source: European Commission/AMECO) 171 Average gross wage per day, euros. (Source: Data provided by IKA (www.ika.gr), analysis by authors. Basic and regular earnings without overtime, bonuses, etc., that includes employee social security contributions only. Enterprises that exclude construction sites) 172 Average gross wage per day (% YoY change). (Source: Data provided by IKA (www.ika.gr), analysis by author’s. Basic and regular earnings without overtime, bonuses, etc., that include

xiv 

List of Figures

Fig. 7.10 Fig. 7.11

Fig. 7.12 Fig. 7.13

Fig. 7.14 Fig. 7.15

Fig. 7.16

Fig. 7.17 Fig. 7.18

Fig. 7.19

employee social security contributions only. Enterprises that exclude construction sites) 172 Number of employees. (Source: Data provided by IKA (www.ika.gr), analysis by authors. Enterprises except construction sites) 173 Employment and basic salary (% YoY change). (Source: Data provided by IKA (www.ika.gr), analysis by authors. Basic and regular earnings without overtime, bonuses, etc., that include employee social security contributions only. Enterprises that exclude construction sites) 173 Labor cost index: market activities. (Source: Eurostat) 174 Nominal compensation per employee (thousands of euros annually). (Source: AMECO/European Commission. Includes value of pension benefits and all social security contributions. IMF, European Commission reports where stated in legend E estimate)176 Administrative cost and gross wages and salaries of private sector (% of GDP, 2003). (Source: Eurostat 2003 data and 2005 Kox report for EC with 2003 data) 177 Regulation of product markets and corporate wage bill (% of GDP, 2013). (Note: PMR: Product Market Regulation ; and GVA: Gross Value Added. Source: OECD PMR indexes, AMECO/European Commission) 178 Profit before tax to sales: non-financial companies -financial corporations—limited companies and partnerships or equivalent legal form, 2008. (Source: BvD, author’s computation)179 Profit before tax to total assets: non-financial corporations— limited companies and partnerships or equivalent legal form, 2008. (Source: BvD, author’s computation) 180 Distribution of employees insured at IKA per bracket of gross monthly wage. Companies with up to 24 insured. Full-time employment only. (Source: Data provided by IKA (www.ika. gr), analysis by authors. IKA. Primary private sector social security fund. Gross wages include employee contributions and only basic wages without overtime, perks, etc.) 182 Distribution of employees insured at IKA per bracket of gross monthly wage. Companies with 25–249 insured. Full-time employment only. (Source: Data provided by IKA (www.ika. gr), analysis by authors. IKA. Primary private sector social security fund. Gross wages include employee contributions and only basic wages without overtime, perks, etc.) 183

  List of Figures 

Fig. 7.20

Fig. 7.21

Fig. 7.22

Fig. 7.23 Fig. 7.24

Fig. 7.25

Fig. 7.26 Fig. 7.27 Fig. 7.28

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Distribution of employees insured at IKA per bracket of gross monthly wage. Companies with over 250 insured employees. Full-time employment only. (Source: Data provided by IKA (www.ika.gr), analysis by authors. IKA. Primary private sector social security fund. Gross wages include employee contributions and only basic wages without overtime, perks, etc.) 184 Distribution of employees insured at IKA per bracket of gross monthly wage. Companies with up to 49 insured employees. Part-time employment only. (Source: Data provided by IKA (www.ika.gr), analysis by authors. IKA. Primary private sector social security fund. Gross wages include employee contributions and only basic wages without overtime, perks, etc. Part time till) 185 Deviation of pay in sector and provisions of sectorial wage agreements in Greece for the year 2009. Difference of sector minimum wage from basic national agreement. Euros. (Data Source: Eurostat, Labor cost per employee full-­time employment for the year 2009. Annual detailed enterprise statistics for industry (NACE Rev.2 B-E). OMED for sectorial agreements as valid in 2009, computation of average yearly cost for benchmark worker with three years work experience and who is unmarried. Author’s computations) 186 Real unit labor cost. Total economy, performance relative to the rest of former EU-15. (Source: AMECO/European Commission)188 Stock to sales and road haulage regulation, 2008. Nonfinancial sector private and public limited companies. (Source: OECD PMR index and BvD (Bureau van Dijk) data for corporate balance sheets, author’s analysis) 190 Journeys and regulation of road freight haulage. National transport, all own account and for hire trucks. (Source: OECD Product Market Regulation (PMR) PMR index and Eurostat data, author’s analysis) 190 Taxes on electricity for industrial use. Consumption “C” in the 20,000 MWh 250 Company size / number of employees Dec 2009

Dec 2013

Fig. 6.8  Gross monthly basic wage per employee (including only employee Social Security Contribution) per company size class, euros per month. (Source: Data provided by IKA (www.ika.gr), analysis by authors) 5,00,000 4,50,000 3,50,000 422,332

253,514

287,881

256,594

1,00,000

268,887

1,50,000

323,494

2,50,000 2,00,000

453,003

3,00,000

401,878

Employees, full time

4,00,000

50,000 0

< = 10

11–49 50–249 = >250 Company size/number of employees Dec 2009

Dec 2013

Fig. 6.9  Full-time employees, employed per company size class. (Source: Data provided by IKA (www.ika.gr), analysis by authors)

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self-employment thus addressing one contributor to the revenue deficit of the state, while at the same time alone it will contribute little toward the reduction of the disincentives to grow the incomes of well-paid salaried employees and the prosperity of companies that depend on them. The tax paradox of Greece—taxes are low because taxes are high—that is, taxes in the sense of state revenue are low because taxes at the individual level are high, is not easy to unravel, both for economic and for political reasons. First of all, the depression of the productive economy even while the state was meeting Troika employment targets through early retirement schemes means that by now 1.8 million private sector full- and part-time employees, plus about one million self-employed, have to pay the wages and salaries to over 600,000 public sector employees and 2.8 million pensioners. Figure  6.10 illustrates how important the Social Security Contributions (SSC) are to the revenue of the general government— exactly because they are not computed according to a progressive scale, but apply as a flat rate from the first euro with no exemptions. Reducing them by a few percentage points during 2014 did not lead to a large fall in

Fig. 6.10  Public finances structure: key revenue and expenditure items 2013 General Government budget (billion euros). (Source: 2013 Greek Government Budget)

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T. PELAGIDIS AND M. MITSOPOULOS

revenue because of the growth of employment at the time, which underlines the fact that in the current circumstances the problem can only be solved with a gradual reduction in the context of an environment that strives to improve confidence and restore growth. Thus promotion of the key flagship reforms that is visible enough to influence confidence needs to be paired with any plan to gradually reduce social security contributions at the same time. In addition, Fig. 6.10 demonstrates the importance of pensions for the expenditure side of the government profit and loss statement. As many of the islands of privilege described in Mitsopoulos and Pelagidis (2011) still remained in early 2015, and actually formed one of the key points upon which successive Greek governments balked even while the Troika insisted on reforms, targeted corrections in the pension system for cases where lifetime contributions fall blatantly short of benefits should be corrected in a socially fair manner in order to facilitate the fall in social security payments: thus, encouraging the growth of salaried employment and of the average Greek company. Therefore, in the end the reduction of the tax wedge on salaried labor in Greece emerges as a key success factor that has been off the table because (1) of the ideological belief of successive Greek governments that high social security contributions and a progressive tax system are essential to accommodate both the large electorate that declares low incomes and the large number of voting pensioners, and (2) the repeatedly demonstrated insistence of the official lenders that the only way for taxes in Greece is upward.

6.5   The Lack of a Strategy to Enhance Growth: In Greece and in Europe At this point it needs to be stressed, once again, that while clearly the Greek government, as having the mandate to govern the Greek people, and as the co-signer of the conditionality program, has the main responsibility for choosing and implementing the policy strategy, the supervision of the program’s execution by the official lenders implied that, gradually, an increasing share of the responsibility for the current situation burdens the supervising official lenders as well, especially since in so many cases the conditionality to release tranches had essentially been reduced to the implementation of new taxes, rather than really growth-enhancing reforms.

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General government budget includes 5.9 billion euros in pensions paid directly by the central government to former public sector employees. The general government budget includes social security fund revenue (contributions by employees and employers) and the benefits they pay out (medical and pension related, as well as unemployment benefits, etc.). And it is not only the reports of the IMF missions before 2010 and after the start of the conditionality program that reveal a lack of a sense of urgency that should accompany the measures to unlock the growth potential of the private sector along with the fiscal consolidation strategy, and a sense of the importance that the mix of the latter has. It is also at the European level that this lack of a sense of urgency is documented. The repeated initiatives to establish fiscal governance in the EU, and especially in the monetary union, that accompanied the gradual establishment and strengthening of the permanent rescue mechanism, were, till early 2012, predominantly focused on strengthening the supervision on the fiscal side and on making early warnings and sanctions more expedient and automatic. After years of extensive deliberations, in the wake of the banking crisis and the subsequent sovereign debt crisis, the new architecture to supervise public finances was finalized in December 2011, with the completion of the Reinforced Stability and Growth Pact, the so-called six plus two pack. In a nutshell, the new setup describes numerous avenues to raise red flags, ask for deposits, and implement fines in the case of a member state allowing its public finances to diverge from the prescribed, tight, margins. Yet, the elaborate process that has been established fails to answer the fundamental question as to the effectiveness of fines in the case of a country that is in extreme trouble, or whose internal political and social dynamics clearly do not allow it to deal effectively with its fiscal problems. And the depth and breadth of the measures to supervise public finances and to swiftly impose penalties in the nature of fines if deviations emerge on that side calls for a comparison with the respective lack of any provisions to ensure a more determined and automatic deepening of the internal market. The question is: which are the measures that ultimately can guarantee the growth potential and the new jobs Europe needs, if it wants to keep the vision of a united Europe a vision that can inspire the younger generations that now enter the job market? While clearly the latter touches on thorny issues of how competencies will migrate from the national legislatures to the European (representatives are democratically elected it should be noted) legislature, and

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bureaucracies, as far as implementation and supervision is concerned, the emphasis on fiscal control and the coincident neglect of growth-­enhancing reforms that are salient features of the implementation of the Greek conditionality program in the 2010–2012 period also appear to be very much present in the Europewide response to the crisis. This was true at least up until early 2012, when interventions like Presidents Barroso (2012) and Van Rompuy (2012) clearly spelled out the need to enhance growth prospects as a part of an integrated strategy that complements fiscal responsibility and the building of a “banking union” that should address the fragmentation of financial markets, which has emerged as capital keeps flowing out of the European crisis countries. One can, therefore, dare to assert that the lack of an emphasis on the part of the Greek government on the issues related with enhancing growth and tilting the balance in favor of the private sector in the economy did not appear to be out of line with the documented approach to deal with the Europewide problems. Yet, one should keep in mind that this happens for different reasons in Greece and in Europe. While in Greece the lack of focus on growth-­ enhancing measures follows from the entanglement of politics with interests that resist the necessary reforms, in Europe it seems to follow largely as a result of the fact that a more determined implementation of growth-­ enhancing policies would require a strategy to address the main compromise the common currency was born with—that is, the coexistence of a common monetary policy with fiscal and economic policies that are merely coordinated national policies. Only when fiscal and economic policies in Europe become more than simply coordinated national policies will Europe be able to match adequately austerity with growth-enhancing measures, as becomes also evident from the analysis of Draghi (2014). And this in turn implies that the democratic mandate that European lawmakers, and the guarantor of treaties, the Commission, now receive will need to be adapted in an appropriate way, in order to match the political reality of the “closer and deeper Union” called for by European leaders like Presidents Barroso and Van Rompuy, something that understandably is a very sensitive and challenging issue.

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6.6   The Private Sector Death-Trap: Undermining the Financial Sector, Jeopardizing Macroeconomic Stability, and Questioning the European Future of the Country It has to be stressed that the abovementioned strategic failures in the approach to deal with the problems of the country take place in the context of a country that is asked to undertake one of the most difficult adjustments made by any country and through a deal that appears to be ignoring important warning signs. Essentially, the deal amounts to agreeing with the political leadership and the administration of an economy that has been turned by the former into one that is quasi-soviet and at the fringes of free markets, that they will tear down the bureaucracy they have established over 30 years, while being offered the cash and support to keep operating largely in a “business as usual” environment. It is in such a context (post-2010) that a lack of a firm conviction that a shift in the balance in favor of the private sector was a necessary precondition for success had been observed. The lack of such a conviction, which clearly permeated the policy design and the actions of the Greek government during the 1990–1993 period, has been linked after 2010 with a number of other unfortunate policy choices, both on the side of the Greek government and by European policy makers and opinion leaders. These have further burdened the prospects of the private sector even as they kept the profligate state on life support. In particular, these are the gradual entrenchment of macroeconomic imbalances as a permanent situation, the PSI (especially the large PSI of October 2011), and the uncertainty that stems from tying the European prospects of the whole of Greece (as implied by statements like the ones juxtaposed in Table 4.3) with the insufficient willingness of the government, which often has acted as a guardian of the interests of the—clientelistic part of—public sector rather than as a guardian of the interests of all Greek citizens as mandated by the constitution, to implement the agreed program. 6.6.1  The Private Sector Involvement (PSI) The rationale motivating the imposing of the PSI, especially the one of October 2011, both from the side of the official lenders and from the side of the Greek government may merit at some time its own historical

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evaluation. Definitely the rhetoric that surrounded it included an effort to impose a credible “incentives structure” on the private sector lenders, which were to be punished for their profligate lending to countries that did not adequately meet the levels of fiscal responsibility that the Maastricht treaty requires. At the same time, on the part of the Greek policy makers, the PSI also appeared as an effort to actively discount, as a policy objective, the property rights of the shareholders of Greek banks, and favor a nationalization of the Greek banking system—a thesis supported by statements like that of Venizelos (2012b). It also aimed to maintain, on paper, the sustainability of the Greek public debt, and thus secure the formal precondition of the program approved by Council Decision (2010/320/ EU ) of May 10, 2010 while also securing, on paper, the sustainability of the economy that had to pay back the loans given by the IMF. That is, it secured that the financial assistance offered by the other member countries to Greece remained in line with the “no bail-out clause,” one of the cornerstones of the Maastricht treaty, as specified by Article 125 of the TFEU, and that the program remains a credit facility to an illiquid, but solvent, sovereign both for the European official sector and the IMF. Both arguments though, in the case of Greece, had significant flaws. Regarding the provision of the “right incentives” to the private sector lenders, the Greek financial institutions more than doubled their lending to the Greek state between early 2009 and early 2010, drawing largely on cash provided by the ECB through a program of government guarantees in which, effectively, they were forced to participate in—for example, the National Bank of Greece initially did not want to participate but under political pressure finally did which has been unfairly neglected. Also, as the non-Greek financial institutions that held Greek government debt (mainly German and French), and as the Greek debt dynamics worsened during the implementation of the conditionality program, were able to sell Greek government bonds to the ECB, or hedge them, the Greek financial institutions were not able to do so—the vehement press received by the then state-owned T-bank, a large holder of Greek Government Bonds for hedging part of its portfolio, and the subsequent divestiture of the hedging, is again telling, and usually taken out of the equation. The extent to which they are actually influenced by the official sector is demonstrated by the fact that, with the implicit acceptance of the supervising official lenders it should be stressed, they have used a once valuable part of the cash reserves they obtained through the advance toward the recapitalization process to lend the Greek government, with the purchase of short-term notes this

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time. Thus, once again, they were increasing their exposure to Greek government debt, even in the aftermath of the crippling PSI, under the close supervision of the official lenders and while the Greek government remains one of the worst possible credit risks for private sector lenders. Only since 2014 the ECB has started to enforce with ever more strict ways the rules that effectively forbid banks to finance government budget deficits, as a reaction of renewed pressure by the political system to follow such practices, as it exercises its new central supervision mandate. The abovementioned incidents are sufficient to cast reasonable doubt on the working hypothesis that the decisions of Greek financial institutions with regard to the holdings of Greek Government Bonds and short-­ term notes are decisions taken by the private sector under solely financial risk/benefit assessments. Thus, the argument for the imposing of “appropriate” incentives through the punishing haircuts and debt write-offs actually may create inappropriate, rather than appropriate, incentives structures. Especially at a time when it is still a declared target to ensure that current, and new, private sector shareholders will pay considerable amounts to keep control of these institutions and, possibly more important, private funds have to restore to health the 90% plus of the liability side of the balance sheet of these institutions, even after the EFSF has ensured, till the end of 2014, that they meet core capital adequacy ratios. Regarding the sustainability of the Greek debt, both July 2011 and October 2011 decisions were preceded by the leaking of non-papers, claimed by the Greek media to be IMF-leaked debt sustainability exercises, that looked surprisingly similar in the layout and content to the exercises ultimately published in IMF (2012), and that targeted a haircut of the magnitude finally adopted as necessary to maintain the sustainability of the Greek government debt. In both anonymously leaked documents either it is not assessed that a determined strategy to shift the balance in favor of the private sector would alter the growth potential of the country dramatically, and sufficiently to alter the results of the exercise, or the willingness of the government to impose such policies is discounted (October 2011). The noteworthy fact here is that this assertion was followed not only by a decision (October 2011) that once again made available to the Greek government large sums of money to cover the emerging financing gap, without forcing upon it an immediate and dramatic cost-cutting effort through a financing shutdown of the type the Greek private sector has been experiencing since 2010, but also by the results of surveys like the ones presented by European Commission (2012) and ECB (2012).

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A more intriguing aspect of these debt sustainability exercises is that, even while the official lenders to the Greek government have been putting so much emphasis on them, their handling of the questions surrounding the European prospects of Greece has created such an atmosphere of high risk for those doing business in, and with, Greece that it has removed the floor from under the private economy, gradually turning a severe recession into a depression, and thus further undermining a fiscal consolidation effort that is predominantly based on revenue increases. This clearly also has an impact on the results of the debt sustainability exercises, regardless of the debt write-offs envisioned, as any trend projections based on numbers that are affected by such an uncertainty are essentially irrelevant. The latter imply that concerns with respect to the financing of gaps that are related to the policy mistakes of the past, and the questioning of the European prospects of the country, have to be somehow put aside, both through political commitments and through the use of inspired financial tools. With such a precondition, it should be able to calibrate the economic reality of Greece after a sufficient period of time, like ten years, and to formulate a strategy that will imply that this economic reality reflects on the labor market and society in a way that will be much improved with respect to the past. At the same time one should be able to adapt the terms of the current obligations of the Greek government, and its anticipated fiscal reality, to this economic reality in a way that it will ensure both the recovery of the creditworthiness of the country and the ability to pay its official lenders. Given the reference to the use of inspired financing tools, it needs to be stressed here that the importance of securing the trust of markets in government debt as a precondition to growth in a rich, but liquidity challenged, country is convincingly made by Alexander Hamilton in his First Report in Public Credit (1790). It is impressive to note that these fundamental, and always pertinent, arguments were assessed neither by the Greek government nor by the official lenders, in the case of Greece, in spite of the fundamental similarities at hand. For example, Venizelos (2012a) extensively analyzed the benefits of restructuring Greek government debt, but did not once mention the issues Hamilton was so concerned about, like the reputational effect, the critical role of government paper as collateral and the risks associated with a breach of trust in contracts. Actually, the fact that both in the case of Greece, and in Hamilton’s America, the value of private land as a collateral or asset that can be liquidated, and the value of public land as an asset that can be used as collateral

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or to pay off debt, were such important factors with regard to the developments of the economy makes the difference in the finally adopted policy choices even more striking. As are the consequences of the policy choices made: the USA was soon able to borrow to complete the Louisiana Purchase, while in Greece demand for public land slated for sale is now at least muted and privately held property, now being overtaxed and generously “internally devalued,” is practically useless as collateral and cannot be sold to raise cash to help restore to health productive, but cash strapped, companies, and households. Neither of course can they be used as collateral or sold to pay the, now excessive, property tax bills. Hamilton’s approach restored confidence in government debt, which also was used as collateral in the economy, and resolved the economic impasse of an economy in which internal devaluation fueled a downward spiral in economic activity. From October 2011, and in Greece, exactly the opposite happened. It has to be stressed here that under the pressure of strong lobbying from the Institute of International Finance (IIF), the July 2011a summit decision adopted an approach that had impressive similarities with Hamilton’s approach, and that avoided the severe consequences of the October 2011 decisions. In July 2011 the cost of the official sector’s inaction with regard to the implementation of cost-cutting measures and growth-enhancing measures was to be passed on to the private sector lenders of the Greek government, and then in October 2011 the inaction on these matters between the summer of 2011 and the winter of 2011 was once again to be passed on in its entirety to the private sector. Yet while in July 2011 the long-term cost to the private investor in Greek Government Bonds was not crippling, a result of the lobbying of the IIF that ensured that the proposed debt swap was to be largely a re-profiling exercise, the October 2011 decisions ensured that the shareholders of the Greek banks, that in theory could survive the July 2011 PSI, ultimately would not be able to retain control of their banks. Strange as it may see, the latter seems to have been an explicit policy goal of the Greek government, something that seems to be clearly documented in the statements of prominent Greek politicians that were directly involved in the process, like Venizelos (2012b). These developments have to be contrasted with the fact that in the 1990–1993 period, and following the effort to reestablish confidence in the economy, key infrastructure projects were handed over to the private sector with the aim, among others, to send strong signals to markets that

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would restore such confidence. At the time the sale of government owned land was also part of the plan to reduce government debt, but the government fell before it could implement these plans. And in 2011, proposals like the EUREKA project, that were completely ignored by the Greek government and the official lenders as a credible alternative tool to the PSI, when put under closer scrutiny, have also impressive resemblance with the strategy championed for, and implemented, by Hamilton. That said, it is worthwhile to note that in the document of the October 2011b Summit Statement the collateralization is foreseen of some unspecified government assets and, explicitly, the revenue from the—technically and economically highly questionable—pet project of the Greek government at the time (heavily promoted by then finance minister Mr. Papaconstantinou, who subsequently received a mild probation sentence for deleting extended family members from the list of leaked Swiss bank accounts that were highly likely to contain undeclared past incomes) to create swaths of (inevitably heavily subsidized by European funds) solar farms in Greece and export the electricity to Germany. This was designed for the purpose of restoring the lending capacity of the EFSF and afterward to replenish the core supervisory capital of the Greek banks that the same summit decisions crippled. In other words, the concept of EUREKA, while eschewed as a tool to use government assets as collateral to improve the creditworthiness of the Greek government debt, and solve the crisis in a Hamiltonian way, was used as a tool that effectively took the Greek financial sector away from the current shareholders, while making provisions that the government’s debt would not increase again with the cost of the consequent recapitalization. It is also impressive to note that the summit decision went into such detail and to such great lengths to create political support for a highly questionable and risky project, while remaining mute on key issues upon which the assumed willingness of private capital to flow in the country crucially depended. Such flows definitely were known to involve the old shareholders of the Greek banks in the consequent recapitalization process, and potential new shareholders that, in spite of the developments of the past years, would be asked to come up with sums of money the old shareholders clearly did not have available. The encouragement of private funds to participate in the recapitalization process, during 2014, also increasingly required an urgent policy initiative to deal with the deterioration of the quality of the loan portfolios that reflects the collapsing economic and social situation. Measures of such a package should not only aim to increase the value of collateral, ranging

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from government bonds and real estate to intangibles that are depressed not only by the “internal devaluation,” but also by uncertainty and specific legislative failures. They also need to encourage the return of the wholesale financing of the liability side of the balance sheet of banks, ranging from deposits that need to feel secure to other forms of wholesale financing, like convertible bonds. It has to be stressed that as the recapitalization process of Greek banks was underway after 2012, the developments since late 2014, and the losses they have implied for those that invested since 2012 in Greek banks and Greek government bonds, create a legacy that will be difficult to overcome—something that is, nevertheless, necessary if new investors are to be attracted to the country. But beyond the fact that if the 1990–1993 period essentially secured macroeconomic stabilization and the creation of a financial system that could support a developed economy, and after 2009 the country lost these two attributes that are preconditions for a developed economy, the main, unnecessary, blow to the private sector economy has been the prolonged uncertainty regarding the European prospects of the country. 6.6.2  Euro Area Exit Essentially, the European partners, having responded to a short notice request by the Greek government, and having offered to the Greek government a support package that stretched to the limit the spirit of the Maastricht treaty with regard to the no bail-out clause—that is, the first pillar of the Maastricht Treaty—were rewarded with a reluctance from successive Greek governments to face the problems at hand with adequate determination. Thus, at some point, it was inevitable that some European officials would put, in various ways, on the table the question of terminating, directly or indirectly, the membership of a misbehaving member, in this case Greece. Thus questioning the second pillar of the Treaty; that is, the rule that once in, a country does not leave. Such a stance may have a rationale, as an effort to force Greek governments with a quite unfavorable track record to finally deal more decisively with the problems at hand. And they may also reflect reasonable doubts and disappointment from European politicians, who one has to recall, are elected and accountable toward the taxpayers of their country. Also, unlike the clear awareness in the 1990–1993 administration that with Europe also going through a crisis, as was the case then, Greece had to take care of its own problems in a determined way, such an awareness seemed to be

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completely absent from the Greek politicians after 2010. This definitely undermined the European efforts to help Greece within the limitations of the democratic mandates of the national and European governments. Yet, in spite of all these undeniable facts, there is a fundamental flaw in the adopted approach. First of all, it is not difficult to argue how, under these conditions, and with the ability of the Greek government to achieve set fiscal targets increasingly put as a precondition for maintaining euro area membership, and with a legal deficit regarding possible links between a euro exit and an exit from full EU membership, given that only the latter is explicitly provisioned for in Article 51 of Treaty of the European Union (TEU) and given that a euro area exit is bound to lead to the violation of key articles of the TEU, the country is set on a course governed by a self-­ fulfilling prophecy of euro area exit. One only has to go to the board of any international company, and propose a project that involves investing in Greece, and observe the reaction of the other board members. Or observe the flow of deposits outside Greek banks before the series of elections in early 2012 and after November 2014 to appreciate the contribution of this uncertainty toward deepening the depression of the Greek economy. The impact of uncertainty is now increasingly documented, as in Bachmann et al. (2013), The Economist (2012a, 2013), and European Commission (2013), to affect the real economy that creates jobs and pays taxes. As a result of this uncertainty, the private sector is already effectively operating outside the euro area. From early 2011, and increasingly from then, financing terms in Greece, a euro area member, are clearly out of proportion with the terms faced by companies in other euro area countries. Letters of credit and export insurance do not apply any more in Greece and Greek companies that do business with other euro area countries are asked by their trade partners to prove the availability of euro accounts in other euro area countries. Furthermore, the strategy to tie the European future of the country to the actions of its government was based on the assumption that the Greek government represents the will of the Greek people, and acts in their best interest honoring their democratic mandate. After entrenching for decades clientelistic policies, kleptocracy, and tilting the favors overwhelmingly in favor of the state and groups that thrive on state-sponsored privileges, and at the same time placing all the burdens and obstacles on the productive private sector, this assertion is definitely subject to credible questioning. Asking the Greek government to do what it has to do therefore was the right, but not effective, thing to do.

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To make matters worse, this strategy strongly undermined the efforts of those forces in the country that would like it to progress, and be able to pay its debts, while at the same time it supports those that draw their support to face off reforms from the increasingly desperate population. The uncertainty that followed from linking the European prospects of Greece to the performance of its government also directly influenced the public perceptions with regard to who “is expected to prevail” in the internal struggle of the country. Supporters of reform have to face the consequences of a highly uncertain future with regard to their effort—it is difficult to muster widespread support when the prevailing expectation is that ultimately you will be on the losing side, while the contrary applies to your opponents. It has to be noted here that those people that have championed effective and truthful reforms within the administration, even over the past years, have done so without any reward, with huge personal cost and in some cases with the certainty of terminating their political careers. Also, the way the conditionality program is being implemented suggests that the calamity of the 1980s, when Greek companies were exposed to international competition via the accession to the then European Commission, even while domestically they faced a hostile administrative and business environment may be repeated now once more, as Greek policy makers and the official lenders seem to place the deregulation of markets ahead of the improvement of the business environment and restoring private sector financing to viable terms. Thus Greek companies that were using deficiencies in the working of markets to pass on to the consumer the higher costs imposed by the state may have to face competition from imports that do not face similar administrative costs and state interventions in the optimization of their production process. Finally, the prolonged uncertainty has led to the migration of large numbers of professionals that have high skills and that are more likely to be pro-­ European, depleting the ranks of supporters of reforms in the country. The abovementioned indirect support of those forces in the county that oppose the full implementation of the needed reform agenda is, unfortunately, also complemented by the flawed distribution of resources. On the one hand, the opponents of reform within the administration had for two critical years the very important support of readily available cash, which was offered by the successive official support packages, and were able to shield large sections of the public sector and the interests close to the administration from obliterating reforms. On the other hand, the supporters of reform in the private sector were faced with the dire consequences

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of the deepening depression and the vagueness with respect to the European future of the country, which threatened their own financial survival and took away from them any strength, or credibility, to shore up support for their efforts to promote reforms. Given that the private sector already, in a way, operates outside the euro area, the risk from a euro area exit, and possibly exit from full EU membership—which will practically companion a possible euro area exit—on that occasion, may not stem that much from the economics of such an event, as from the fact that such an event would signal the disruption of the last forces that hold back a complete submission of all institutions to the corrupt forces that the clientelistic state has sponsored during the past decades. The risk of euro exit thus amounts to the possibility of Greece turning into one of the most failed countries on the planet, and promoting this as a European policy amounts thus to damning European citizens, as Greek citizens are according the relevant articles of the Maastricht Treaty, to the collective punishment of being delegated to a life within a failed state. Assessing the political and social dynamics involved in such a process reveals the inadequacy of the approaches that argue that Greece may better implement the reforms it needs to implement anyhow outside the euro area. It also highlights the lack of taking into account the “political economy of reform,” especially in such an environment, both at the European level and by the part of the IMF, an issue that, among the major international organizations, only the OECD has recently started to investigate closer, as summarized in OECD (2009). Having said all the above, the economic rationale of a euro area exit is once again advocated since the developments that followed after the elections of January 2015. Such arguments ignore basic facts, like the ones examined in Chap. 7, and that demonstrate that the main benefit of a devaluation, which is to reduce wage costs, will have little impact on key exporting sectors that are undermined by high taxes on energy or administrative costs and uncertainties —that is, costs that will not be reduced by a devaluation of the new drachma. In addition, given that the manufacturing sector, that is, more export-oriented and that engages larger numbers of skilled employees, usually depends on international value chains, something absolutely normal for a small country, a devaluation will increase the costs of key inputs for these companies canceling out any supposed advantage, especially if the risks associated with a weak and volatile currency are taken into account. Still, it is often stressed that devaluation will make tourism more competitive, for example. These arguments in turn ignore

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basic arithmetic, in spite of the fact that tourism as a labor-intensive sector appears indeed posed to benefit from such a development: a tourist that purchases a 550 euro vacation to Greece pays in effect over 200 euro to the tour operator—an international company—and the airline—an international charter. These costs will remain unaffected by a devaluation of the new drachma. In addition, wage costs in the sector of accommodation have seen some of the largest reductions since 2012, and remaining issues like the overtime surcharge for weekends during the summer will not be addressed by the devaluation of the new drachma. In addition, for many hotels—where labor costs can be up to 50% of the cost structure—the remaining costs are mostly allocated to inputs that are imported, and therefore there would be no benefit from the devaluation of the currency. Finally, as Hausmann (2012) argues following the thorough analysis of the team that has worked to establish the Atlas of Economic Complexity, tourism in itself is not sufficient to answer all the questions that need to be answered in Greece today—and it falls short by a substantial magnitude. Arguments that suggest Greece exit the euro area so that it can regain competitiveness thus fail to take into account basic economic calculations and in addition fail to take into account the analysis that involves institutions—a failure that is difficult to accept since the publication of Acemoglu and Robinson (2012), which is accessible not only to trained economists but also to a wider public. What remains thus is an understandable fatigue of citizens and policymakers in other European countries who are simply tired of a persistent inability of Greek politicians to implement a policy agenda that will remove the “Greek problem” from the daily agenda. While understandable, it remains that a significant proportion of the European citizens, that happen to be citizens in the Greek private sector, have suffered the forceful impact of the uncertainty of the “grexit talk,” undermining in the process also the soundness of the public finances that are so crucial to reducing the “Greek risk.” Simply discarding these otherwise hard working and taxpaying European citizens from the family of European citizens poses some basic moral issues that are not trivial for Europe and that will set a precedent that may come back to haunt the Union, if not in the near future then surely at some point in time. A strategy that will restore the certainty of the European prospects of Greece, while actually forcing consequences on those that share the main responsibility for the current situation, could examine options like, possibly, taking away control of legislative initiatives from the government if

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they are not sufficiently growth enhancing, in the spirit of the proposals made by Trichet (2012) or Sapir and Wolff (2015). Such a move would inevitably be part of such a credible threat toward a compromised government. It has to be noted here, however, that such a measure needs to be limited only to growth-enhancing measures, and it needs to abstain from measures that are linked with further tax increases and socially unjust measures, as such a case would very fast, and justifiably, turn the public opinion against the legislation introduced, in spite of the Greek government. In that sense, a more automatic implementation of EU legislation, that the Greek government has failed to properly implement, would be within the bounds of the democratic mandate of the European legislators and the guarantor of Treaties. While the important speech of ECB President Mario Draghi in Helsinki (Draghi 2014) does not go into the details mentioned by former President Trichet, and the issues raised in Chap. 9, it clearly outlines the need to initiate a debate about the details of the process that will move “economic policy making from coordination to common decision making.” Finally, the questioning of the “once in you stay in” principle, possible as a response to the careless questioning by the Greek government in the spring of 2010, of the “no bail-out clause,” also has wide-ranging implications beyond Greece and for the future of the common currency, as it undermines confidence in the common currency area. The assumption that tight supervision of public finances will ensure that the problems now faced by Greece will not be faced again in any other euro area country, for example, in the next 100 years is essentially based on the assumption that the (nonexistent) angels Madison describes in Federalist paper 51 will always govern the member states. But unless markets feel confident that any member country will stay in the union, the currency risk will be present even if the used currency is the euro. The Canadian dollar was used as a currency in Quebec even as the uncertainty of secession encouraged companies to migrate from Montreal to Toronto, and the euro is the currency of Greece even while a euro in Greek banks, or offered by a Greek company, is not treated the same way as a euro in a German bank, or offered by a German company. To dispel the fears of markets that any member state in the future can be a candidate for expulsion, direct or indirect, European leaders have to stand up for the idea of a united Europe in a more determined way, thus stretching their commitment beyond the current designs for a closer fiscal supervision and a banking union. The forging of a lasting union, as the example of the creation of another, and

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in many ways differently structured, union over 200 years ago demonstrated, does not finish with the work of the inspired, and determined, “founding fathers,” but also depends on the determination that is demonstrated when the everyday challenges that threaten the integrity of the union arise.

References Acemoglu, D., and J. Robinson. 2012. Why Nations Fail: Origins of Power, Poverty and Prosperity. New York: Crown Business. Bachmann, R., S.  Elstner, and Sims Eric. 2013. Uncertainty and Economic Activity: Evidence from Business Survey Data. American Economic Journal: Macroeconomics, American Economic Association 5 (2): 217–249. Barroso, J.M. 2012. President of the European Commission Speech: Mission Growth: Ensuring Europe’s Future Through Growth and Stability. In Mission Growth Conference Brussels, May 29. Burtless, H. 2001. The Greek Labor Market. In Greece’s Economic Performance and Prospects, ed. R. Bryant, N. Garganas, and G. Tavlas, 453–493. Athens and Washington, DC: Bank of Greece and the Brookings Institution. Cacciatore M., R. Duva, and G. Fiori. 2012. Short-Term Gain or Pain? A DSGE Model-based Analysis of the Short-Term Effects of Structural Reforms in Labour and Product Markets. OECD, Economics Department Working Paper 948. Draghi, M. 2014. Stability and Prosperity in Monetary Union. Speech by the President of the European Central Bank, at the University of Helsinki, Helsinki, November 27. The Economist. 2012a. The Cloud of Uncertainty Dithering in the Dark. Quantifying the Effect of Political Uncertainty on the Global Economy, June 16. ———. 2012b. The Decline and the Small, Free Exchange, March 3. ———. 2013. Uncertainty and Unemployment, January 23. European Central Bank. 2012. Quarterly Euro Area Bank Lending Survey, July. European Commission. 2012. Overview of Competitiveness in 27 Member States, Memo of October 10. ———. 2013. Assessing the Impact of Uncertainty on Consumption and Investment. Volume 12 (2013) Issue 2—Quarterly Report on the Euro Area. June 2013. Directorate General for Economic and Financial Affairs (ECFIN). Euro Summit Statement, Brussels. 2011a, July 21. ———, Brussels. 2011b, October 26. Gros, D. 2011. Can Austerity Be Self-defeating? VoxEU, November. Gros D., and C. Alcidi. 2011. Adjustment Difficulties and Debt Overhangs in the Euro Area Periphery. CEPS Working Document, 347, May. Hamilton, A. 1790. First Report on Public Credit, January.

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Hausmann, R. 2012. Ireland Can Show Greece a Way Out of the Crisis. Financial Times, February 8. IMF. 2012. IMF Country Report No. 12/57. Malliaropoulos, D. 2011. The Loss of Competitiveness After the Country’s EMU Accession. In The International Crisis in the Euro Area and the Greek Financial System (in Greek), ed. G.  Hardouvelis and Ch. Gkortsos, 359–376. Athens: Hellenic Bank Association. Mitsopoulos, M., and T.  Pelagidis. 2011. Understanding the Crisis in Greece. London: Palgrave Macmillan. OECD. 2009. Chapter 1 Structural Reform at a Time of Financial Crisis. In Economic Policy Reforms 2009 in Going for Growth. OECD Publishing. ———. 2012. Entrepreneurship at a Glance 2012. OECD Publishing. Pelagidis, T., and M.  Mitsopoulos. 2014. Greece: From Exit to Recovery? 125. Washington, DC: Brookings Institution Press. Reinforced Stability and Growth Pact (SGP) (“Six pack”). December 2011. http://tiny.cc/1ailew Sapir, A., and G. Wolff. 2015. Euro Area Governance: What to Reform and How to Do It. Breugel Policy Brief 2015/01, February. Trichet, J.-C. 2012. Lessons from the Crisis: Challenges for the Advanced Economies and for the European Monetary Union. In Eleventh Annual Niarchos Lecture, Peterson Institute for International Economics, Washington, DC, May 17. Van Rompuy, H. 2012. Towards a Genuine Economic and Monetary Union. Report by President of the European Council, June 26. Venizelos, E. 2012a. Statement that the Nation is Relieved form 105 Billion Euros of Debt. Minutes of the Hellenic Parliament Sessions, Period IГ’, Meeting Г’, Session PA’. ———. 2012b. Statement that “We have now, as a Government, the Strategic Control of the Banking System”. Meeting with Young Entrepreneurs, April 26. http://tiny.cc/jbikew

PART III

Looking Ahead

CHAPTER 7

Greece: Why Did the Forceful Internal Devaluation Fail to Kick-Start an Export-Led Growth?

7.1   Introduction Much has been said about the results of the austerity program implemented in Greece by the “Troika.” The official creditors initially sanctioned an implementation of the agreed conditionality program (included in the MoU that also provisioned the official loans to the Greek government) that principally focused on increasing taxes and labor market reforms that facilitated the fall of private sector wages. As already described, only during the third year of the implementation of the program did they try to complement this tax spree with horizontal cuts in pensions, medical benefits, and public sector wages,1 that failed to touch the key distortions

1  Indicatively, a cut in the supplementary payments received by public sector employees in the spring of 2010 was soon afterward amended, and this was accepted by the Troika European Commission (EC); European Central Bank (ECB); International Monetary Fund (IMF), in a way that made the setup of a unified payment authority that centrally clears all payments to public sector employees a prerequisite. This authority did not become operational but two years later, thus effectively postponing pay cuts in the public sector till after the summer of 2012.

Part of this chapter draws on Mitsopoulos and Pelagidis (2014). © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 T. Pelagidis, M. Mitsopoulos, Who’s to Blame for Greece?, https://doi.org/10.1007/978-3-030-64081-1_7

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of both the pension system2 and the public sector wage structure. Growthenhancing structural reforms, as defined by deregulation of network industries, professional services, reduction in red tape and corruption, and the privatization of assets that are important for the functioning of the economy, like infrastructure, were not deemed a priority, at least as far as the release of payment tranches to the Greek government was concerned. They were effectively off the agenda, with the exception of a few halfhearted and therefore incomplete attempts. To make matters worse, a number of ill-advised policies and strategic political decision directly undermined the ability of the productive part of the economy to contribute toward the stated goal of an export-led recovery of the Greek economy. In this chapter we present facts that document the impact of the adopted strategy on employment and wages, updating our related previous analysis in Mitsopoulos and Pelagidis (2014) and extend the arguments to further elaborate on the impact of the adopted policies on the export performance of the Greek economy.

7.2   Employment Overall developments in the economy document that, starting out from a relatively low employment to population ratio that reflected a number of salient distortions described in Mitsopoulos and Pelagidis (2011), the Greek economy demonstrated a significant loss of employment since the onset of the “Greek crisis.” The available data (Fig.  7.1) document the increase in unemployment and the fall in employment throughout the 2010–2013 period, with the net loss of over one million jobs, out of 4.5 million, since the onset of the crisis and the increase in the numbers of unemployed by about a million, which also reflects the entering into the workforce of the young who cannot find jobs, while, for example, employees from the public sector exit the job market and move into early retirement. 2  Related three articles by Manos Matsagganis available at the site of the Greek weekly free newspaper Athens Voice (www.athensvoice.gr) with the titles like “Part a: who benefits from early retirement?,” “Part b: who benefits from the cancellation of the pension cuts that violate the Constitution according to a tertiary court decision?” and by Platon Tinios in the newspaper Kathimeriini, www.kathimerini.gr, 26/7/22015, with the title “Mothers of 30 year old minors as a mirror of Greece.”

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Fig. 7.1  Employment and unemployment (thousand of persons). (Source: AMECO/European Commission)

The loss of employment also affects those who are employed but are not employees (i.e., the self-employed), mainly because of tax measures and increases in contributions that led many of those with low incomes to discontinue their registration with the tax authorities. In spite of this, for Greece the ratio of self-employed to total population remains significant above the euro area average. On the other hand, a fall in the ratio of the number of employees to total population, which was already significantly below the euro area average before the crisis, has steeply declined even further, leading to a dramatic decrease in this, already low ratio. In the process, all increases in the number of employees to population ratio that had been achieved since 1999 (who never managed to get salaried employment up to the European average), thus bringing Greece close to the euro area average, have essentially been lost (Fig. 7.2).

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Fig. 7.2  Total employment to population ratio: euro area and Greece. (Source: Eurostat)

It has to be stressed here that with respect to general government employment a large fall in employment from 2009 till 2011 was essentially due to the non-renewal of traineeships that were funded by the European structural funds, and thus was not an action that led to a fall in public expenditure. In addition, from 2010 onward there has been, under the acceptance of the Troika, a policy to reduce general government employment through encouragement of early retirement (Fig. 7.3). This policy helped to meet the targets to reduce the number of public sector employees in Greece while avoiding outright layoffs, but burdens the budget with increased pension payments at the same time as its wage bill has declined (in addition, a large number of former public sector employees has already applied for retirement, but the applications have not been processed and thus they are not yet registered as pensioners). In addition, this policy removed from the workforce a large number of individuals that were still at a productive age and often were highly competent and skilled.

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Fig. 7.3  Employment in government and pensioners/former government employees : 1000 employees/pensioners. (Source: IMF reports on Greece, European Commission MoU progress report 4 of 2nd MoU, Greek government budget)

7.3   Wages and Earnings The documented low level of salaried employment is only one of the two main reasons why the total compensation of employees in the total economy is so low in Greece (Fig. 7.4). The other relates to the absolute level of wages that were such a central focus of the Greek adjustment program. While the rapid and forceful decline of wages was a stated objective of the internal devaluation policy, the breakdown of the ratios of the compensation of employees to GDP for the total economy and of the compensation of employees from corporations, and the difference between the latter and total compensation of employees (essentially, an indirect way to estimate the general government wage bill), reveals the large decline in the

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Fig. 7.4  Compensation of employees for total economy (% of GDP). (Source: AMECO/European Commission)

compensation of employees to total GDP from corporations (Fig.  7.5). This is from their already low level (and a rebound in 2014 also as a result of increased employment and stabilizing wages); there is also a persistence in the relatively higher value of this ratio for compensation of employees except from corporations (Fig. 7.6), which is our proxy for the public sector wage bill. As income in the country fell, salaried income in the productive sector fell more rapidly and the relatively (to the euro area average) high salaried income in the general government persisted (Fig. 7.7). This finding is in line with the widely held belief that public sector employees—especially those sub-sectors that are closely connected with the clientelistic/political party system—were, relatively speaking, both numerous and relatively highly paid in Greece before the crisis, and that they were relatively protected by successive governments and, indirectly the Troika, from the impact of the crisis and the priorities of the Greek adjustment program.

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Fig. 7.5  Compensation of employees, corporations (% of GDP). (Source: AMECO/European Commission)

Beyond the clear issues of moral fairness that arise, with the private sector bearing the brunt of the internal devaluation of gross (before taxes) income, while the gross income of the public sector employees demonstrated relative resilience (which were employed by the entity that mainly initiated the problems of Greece), this finding also raises a practical issue. It is that the relative position of net contributors to the public sector revenue (private sector employees generate value added, and pay taxes that are a net income for the state) has weakened relatively while that of net recipients of salaries or pensions from the state (public sector employees receive their salary from the government’s revenue and their income taxes simply reduce the net amount they are paid, and the same is true for pensioners and their income from the social security system ) has increased, thus actually worsening the balance between the net contributors and the net drainers on the balance of the public finances. In that sense, the way the “internal devaluation” has played out in Greece during the first years of the adjustment program not only seems to have “internally devalued” the tax base as an aggregate, but also has undermined the sustainability of the public finances by shrinking the tax base of the economy at a relatively faster pace. This insistence on the achievement of a rapid decline in the

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Fig. 7.6  Compensation of employees, Greece (% of GDP). (Source: AMECO/ European Commission)

average wage bill, with no regard to the composition of the average and with no apparent effort by the Troika to identify the part of the wage bill that indeed needed a more aggressive reduction, seems therefore to have directly undermined the stated policy objective of placing the public finances of the country on a more sustainable path. At the time such an approach could also be found amongst the influential European economists, like Gros (2010). As argued in Pelagidis and Mitsopoulos (2014), it also played directly in the hand of the clientelistic domestic politics that took full advantage of the leeway the Troika allowed them and fully exploited the opportunity to push all the costs and risks of the adjustment program on the productive sector of the economy while shielding their

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Fig. 7.7  Compensation of employees (% of GDP, total economy minus corporations). (Source: European Commission/AMECO)

clients in the administration and the overregulated parts of the economy that enjoyed state-sponsored rents. The fall in compensation for salaried employment in the private sector needs some careful data analysis. The data from the social security fund that insures most private sector employees (except for special cases like lawyers or engineers, for example, who still have their own fund, even when they are employed as salaried employees) reveal how the adjustment of wages3 started to gain pace only during 2012 (Figs. 7.8 and 7.9), and how the bulk of the adjustment up until 2012 was essentially documented in the decline of employment4 (Figs. 7.10 and 7.11).

3  That is, gross wages with the social security contributions of the employee, but not those of the employer, of regular earnings, that is, except bonuses, overtime, and other payments including payments in kind. 4  It should be noted that the employment documented here excludes employment at construction sites, which have a separate legal status as employees are hired by each project for its duration. A significant part of the decline in employment comes from the essential freezing of construction activity, as the decline of employment on construction sites from 120,000 employees in January 2009 to less than 40,000 employees in January 2012 and below 30,000 by mid-2013 reflects.

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Fig. 7.8  Average gross wage per day, euros. (Source: Data provided by IKA (www.ika.gr), analysis by authors. Basic and regular earnings without overtime, bonuses, etc., that includes employee social security contributions only. Enterprises that exclude construction sites)

Fig. 7.9  Average gross wage per day (% YoY change). (Source: Data provided by IKA (www.ika.gr), analysis by author’s. Basic and regular earnings without overtime, bonuses, etc., that include employee social security contributions only. Enterprises that exclude construction sites)

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Fig. 7.10  Number of employees. (Source: Data provided by IKA (www.ika.gr), analysis by authors. Enterprises except construction sites)

Fig. 7.11  Employment and basic salary (% YoY change). (Source: Data provided by IKA (www.ika.gr), analysis by authors. Basic and regular earnings without overtime, bonuses, etc., that include employee social security contributions only. Enterprises that exclude construction sites)

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The fact that up until early 2012 the bulk of the adjustment seems to have taken place through the reduction of employment, even while regular earnings remained broadly stable, and that since early 2012 the regular earnings have started to fall rapidly, can be attributed to the changes in the labor laws and the introduction of a reduced minimum wage, increased flexibility to determine wages above the minimum wage without the constraints introduced by sectorial and professional wage agreements.5 The persistence of basic wages in the private sector up until 2012, even while employment numbers were falling as companies tried to reduce labor costs given the downward inflexibility of nominal wages, should not be interpreted to mean that the aggregate compensation per employee did not fall prior to 2012. Eurostat data (Fig. 7.12) reveal how the non-wage part of labor costs fell rapidly during that time, along with employment, as companies sought to trim labor costs given the constraints of the agreements and the labor legislation that did not make it possible to lower regular wages. Reduction in overtime, shutting down production lines during

Fig. 7.12  Labor cost index: market activities. (Source: Eurostat) 5  It should be noted that the constraints introduced by sectorial and professional wage agreements and that were abolished essentially through the change in the arbitration mechanism have since been re-introduced in principle through a final decision by the tertiary court. It remains to be seen if this re-introduction in principle will lead anew over time to the distortions that had built up during the past decades. A re-interpretation according to ILO guidelines should in principle avert such a development and seems the way adopted to move forward by the summer of 2015.

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weekends, and abolishing nightshifts, where surcharges have to be paid on the salary; stopping paying bonuses and handing out a share of profits to employees (which anyhow is discouraged in effect by the tax legislation); stopping practices like the distribution of food coupons (again the tax legislation anyhow sets stringent limits to this practice), offering cellular phones and company cars (that are now taxed as income, but only for the private sector as government officials still have their cars and official cell phones without them being added to their taxable income) or corporate credit cards (also taxed as income) were all practices that trimmed corporate non-wage labor costs drastically from the onset of the crisis till early 2012. These facts demonstrate the complicated nexus of developments in private sector wages, non-wage labor costs, as well as the development in public sector wages and labor costs along with the different evolution of employment in the private and public sectors. Overall, these facts demonstrate that the arguments formulated by Draghi (2014), particularly considering the parallels to Spain and Ireland, apply directly to Greece—as a matter of fact the process of adjustment happened in a way that led to a stabilization of employment once downward wage flexibility was introduced is even more striking in the case of Greece. Having said all this, it needs to be stressed that while the minimum wage clearly was a binding constraint for employment at the onset of the crisis, as argued in Pelagidis and Mitsopoulos (2014), the flexibility introduced in 2012 predominantly accommodated the fall in incomes and prosperity that had occurred during the 2010–2012 period, and therefore the argument remains intact that in 2010 structural reforms in product markets and the business environment ought to have been promoted more aggressively, and at least as aggressively as labor market reforms. In addition, the rapid fall in GDP that took place since 2008 implies that the measures of labor cost and competitiveness usually cited by researchers that examine Greece need always to be scrutinized carefully. Changes in labor cost indexes rarely reveal the main fact, which is that in spite of the relative increase of unit labor costs since the euro area accession of the country, wages and the total compensation of employees—as an absolute level—remained well below European averages even before the crisis. Furthermore, after the reductions of the past three to four years they are now actually significantly lower. In particular, Eurostat data (Fig. 7.13) reveal that the (taxable) gross income of the employees (still employed, as the unemployed cease to add to this statistic ) in all sectors

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Fig. 7.13  Nominal compensation per employee (thousands of euros annually). (Source: AMECO/European Commission. Includes value of pension benefits and all social security contributions. IMF, European Commission reports where stated in legend E estimate)

had fallen by over 15% from 2009 to 2013. The result is that the Greek nominal compensation per employee was in 2013 on average 43% below the euro area average. In addition, data from Eurostat analyzed in Pelagidis and Mitsopoulos (2014) show that wages in competitive, tradable sectors of the economy such as food and manufacturing in general are much lower

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than say electricity production or water utilities (non-tradable sectors with state-controlled incumbents). Finally, data released by the progress reports of the Greek program of the European Commission and IMF are useful with respect to the average compensation in the private and public sectors, reaffirming at least for the most recent years the fact that the fall in compensation started earlier and proceeded faster in the private sector and that the large difference in compensation, among the largest in the EU, between private and public sector per capita compensation persists (Fig. 7.13). While the reaction of the domestic clientelistic politics can be rationally explained, it remains an unanswered question as to why the Troika failed to assess these facts and failed to insist on a more constructive qualitative composition of the “internal devaluation” strategy. The latter becomes even more striking when one considers the lack of progress on the front of growth-enhancing structural reforms and once one takes into account that Greece really stood out, before the crisis, as the euro area member country with the lowest ratio of private sector wages to GDP and the highest estimated cost of administrative cost to GDP (Fig.  7.14)—even by 2013 another version of this figure (Fig. 7.15) that compares product market regulation and the corporate wage bill illustrates the same reality. That is, it stood out as the country with the smallest potential to improve cost competitiveness through the reduction of the productive sector wage bill, and the country with the largest potential to improve cost

Fig. 7.14  Administrative cost and gross wages and salaries of private sector (% of GDP, 2003). (Source: Eurostat 2003 data and 2005 Kox report for EC with 2003 data)

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Fig. 7.15  Regulation of product markets and corporate wage bill (% of GDP, 2013). (Note: PMR: Product Market Regulation ; and GVA: Gross Value Added. Source: OECD PMR indexes, AMECO/European Commission)

competitiveness through the reduction of red tape and waste, as respectively depicted in Figs. 7.14 and 7.15. It goes without saying that the same argument can be made with respect to regulations that create rents and restrict the competitive working of professional services. And while progress has been made on these fronts, in some cases quite substantial, for the product market regulations Fig. 5.4 reflects the simple fact of the Greek reform paradox. Given the fact that the country started out in 2010 as probably the worst regulated country in the euro area, significant progress has been made, but, in spite of this, a lot remains to be done. Thus, both sentences are true: Greece has done a lot, ironically as Fig. 5.4 shows at a time that most other countries slowed down their reform progress, but Greece needs to do a lot more in order to reduce its regulation-related non-wage costs in a way that will allow the country to be competitive, a point supported by numerous authors, like Böwer et al. (2014). The high non-wage costs and the tax structure described in Part II along with these high costs meant, as argued also in Mitsopoulos and Pelagidis (2011), that the profitability of Greek companies was low even before the crisis. An analysis of published accounts for the equivalent company types to limited companies and limited partnerships that are included

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Fig. 7.16  Profit before tax to sales: non-financial companies -financial corporations—limited companies and partnerships or equivalent legal form, 2008. (Source: BvD, author’s computation)

in the Bureau Van Dijk Bureau van Dijk database illustrates how in 2008 the profit before tax to sales ratio for Greek companies was well below that observed in other European countries, with the exception of Ireland, which was already experiencing a severe downturn at the time (Figs. 7.16 and 7.17). At this point the distortions in the tax system along with the impact of the extensive and intrusive in economic decisions regulation has to be linked with one more aspect of the Greek economy. Numerous regulations burdened, in particular, investment that has a long depreciation horizon, as during long periods unfavorable regulatory developments have a greater chance of derailing the initial business plan. Manufacturing in particular was negatively affected—as investments in this area have long horizons and once made there is usually little room to move, unlike, for example, in shipping. In some cases regulations targeted manufacturing in ways that surpassed anything Kafka would have dared to imagine. During the early 1980s the then socialist government of Andreas Papandreou came up with a plan to drive manufacturing out of the Attica region. The rationale was that Attica—that includes the capital Athens—would focus on services and residential land uses, with government services inevitably

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Fig. 7.17  Profit before tax to total assets: non-financial corporations—limited companies and partnerships or equivalent legal form, 2008. (Source: BvD, author’s computation)

being a large part of the aggregate services. Alternative destinations for the relocating of manufacturing units were to be designated; only they were never specified with legal clarity. In addition, the overall adoption of policies that increased macroeconomic instability and increased administrative costs, burdens, and uncertainty created an environment in which few companies could afford the cost of relocation. Finally, manufacturing thrives usually when it is clustered close to other activities, when it is located around larger markets and skilled labor, and when it has access to key infrastructure—attributes that in Greece are hard to find together outside the Athens area. In other words, manufacturing was expected to move away from the only area in Greece that ticked almost all the boxes needed to make manufacturing successful. Inevitably, like so many other policies of the Andreas Papandreou governments, the result was a disaster. Scrutinizing the evolution of manufacturing in Attica and the areas that were expected to receive manufacturing activities, only the jobs destroyed in Attica exceeded by multiples the jobs that migrated. In addition, many companies stayed and opted to do something that was necessary for them to survive, but which the law did not allow: they renovated and updated their machinery. Under the law at that time, simply changing an old

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energy-inefficient generator with a new one was illegal. Thus they were condemned to the bribing of auditors in order to keep operating—something that inevitably implied that they could not modernize their corporate structure and thus they usually remained family owned and run businesses. But the companies that migrated also faced the fact that the spatial planning and related framework of the designated areas would not be completed for years, also condemning them de facto to operation in a legal limbo, with similar consequences. While this law has since been significantly amended (in 2014) in the right direction—though not abolished outright—opening up the theoretical possibility of a revival of manufacturing in the Attica area, the current levels of uncertainty, cost of financing, and energy imply that for now this possibility remains only theoretical. Still, at some point the changes in this law along with progress in the areas of spatial planning and the licensing law may lead to a revival of Greek manufacturing, which nobody includes at this point in the list of potential growth drivers. The potential for a spectacular manufacturing revival can be there especially if non-wage labor costs can be rationalized along with energy costs. Many hurdles and the legacy of deindustrialization remain however—and are elaborated on in Mitsopoulos (2014). The developments in the labor market since 2010 also raise important issues that are becoming relevant as the government elected in early 2015 wanted to reverse the labor market reforms implemented and activated by mid-2012. The detailed data provided by IKA for full-time salaried employment demonstrate, during the period of downward wage inflexibility but accelerating recession (2010–2012) companies proceeded aggressively with layoffs. A breakdown by size of companies, according to the number of employees insured at IKA, shows that this aggressiveness was particularly evident among smaller companies (Fig. 7.18). It is no coincidence that according to the accounts published during the 2010–2013 period, and that are available, the number of smaller companies declined steeply, while larger companies survived, albeit with weakened balance sheets and profitability ratios. Therefore, smaller companies that by definition are more vulnerable were forced during the crisis to proceed with aggressive layoffs to secure survival. It remains as a fact though that larger companies proceeded with milder layoffs, and in the case of large companies effectively with no layoffs (Fig. 7.19). Since 2012 the data have provided us with further insights. As the new laws allowed for lower wages, smaller companies shifted the distribution of the wages paid to their employees aggressively toward the new minimum wage, without increasing

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Fig. 7.18  Distribution of employees insured at IKA per bracket of gross monthly wage. Companies with up to 24 insured. Full-time employment only. (Source: Data provided by IKA (www.ika.gr), analysis by authors. IKA. Primary private sector social security fund. Gross wages include employee contributions and only basic wages without overtime, perks, etc.)

substantially the overall number of full-time employees. Medium-sized companies during the same period of time proceeded with new hiring, albeit at low wages, while keeping the wages of their existing employees stable—something demonstrated by the fact that the distribution of their employees expands toward the left even while it remains unaltered otherwise (Fig.  7.20). And again larger companies seem to have simply increased employment. Looking now at the data for part-time employment, we can see the dramatic increase of such among smaller companies since 2012 (Fig. 7.21). It seems that as smaller companies took advantage of the reduced minimum wage to actually reduce wages for existing employees, they proceeded with new hirings—possibly of employees laid off during the 2010–2012 period—with part-time contracts. What is also noteworthy is that between 2012 and 2014 the number of full-time employees that earn a gross monthly salary of between 550 and 750 euros—that is, the full-time employees that are likely to be affected by an increase in the

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Fig. 7.19  Distribution of employees insured at IKA per bracket of gross monthly wage. Companies with 25–249 insured. Full-time employment only. (Source: Data provided by IKA (www.ika.gr), analysis by authors. IKA. Primary private sector social security fund. Gross wages include employee contributions and only basic wages without overtime, perks, etc.)

minimum wage—has increased substantially, by about 146,000 employees to a total of 241,000 or 15% of all full-time employees according to the data of IKA. And the increase of these employees is allocated to some extent to new hirings by medium companies (that were less aggressive with layoffs during the 2010–2012 period) and predominantly to employees whose wages were reduced in smaller companies (that proceeded very aggressively with layoffs during the 2010–2012 period). As a result of this analysis it appears that a very large number of employees that will be affected by a possible increase in the minimum wage are employed by companies that are smaller, and therefore will have a smaller ability to pay the increased wage without putting their survival at risk. These companies are more likely to proceed with layoffs or with the practice of turning full-­time employment into part-time employment. While it is not clear with the current level of analysis if the increase in employment since early 2014 supported the gradual recovery of the

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Fig. 7.20  Distribution of employees insured at IKA per bracket of gross monthly wage. Companies with over 250 insured employees. Full-time employment only. (Source: Data provided by IKA (www.ika.gr), analysis by authors. IKA. Primary private sector social security fund. Gross wages include employee contributions and only basic wages without overtime, perks, etc.)

economy, or if causality went the other way (most likely causality went both ways), it is fairly certain that a reversal of the gradual improvement of the job market that was observed gradually during 2014 especially among the weakest employers and their employees will burden growth prospects and, as a result, fiscal prospects. But the government elected in 2015 planned to make changes that go beyond the minimum wage and that affect the broader nexus of wage setting, re-introducing some of the practices that were introduced in 1991 (and that were at the time commented by the IMF staff). These practices were at the time in line with the objective of the 1990–1993 government to remove wage setting from the government and to place it in the hands of social partners, but certain details of the design evolved and proved over the year as a source of excessive wage increases for certain employees and as a process that disconnected pay from performance for a certain number of employees, as also demonstrated in Fig.  7.22. We can document the

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Fig. 7.21  Distribution of employees insured at IKA per bracket of gross monthly wage. Companies with up to 49 insured employees. Part-time employment only. (Source: Data provided by IKA (www.ika.gr), analysis by authors. IKA. Primary private sector social security fund. Gross wages include employee contributions and only basic wages without overtime, perks, etc. Part time till)

impact of these practices in the following way, as also analyzed in Pelagidis and Mitsopoulos (2014): • By examining the AMECO projections, and the Eurostat, data for 2012, in 2012 the pay cuts in the public sector (that occurred at the beginning of 2012) are reflected in the labor cost developments for the whole economy. • In 2011 the fall in labor costs for the whole economy (including the public sector) seems to lag behind the fall in the market economy (even though the indexes are not directly compatible). • Regarding the market economy, and till Q2 2011, salaries fell faster in many sectors in which the initial salaries were lower, and persisted especially in privileged sectors that had benefited from the large pay rises before the crisis and that are most closely associated with the public sector.

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Fig. 7.22  Deviation of pay in sector and provisions of sectorial wage agreements in Greece for the year 2009. Difference of sector minimum wage from basic national agreement. Euros. (Data Source: Eurostat, Labor cost per employee full-­ time employment for the year 2009. Annual detailed enterprise statistics for industry (NACE Rev.2 B-E). OMED for sectorial agreements as valid in 2009, computation of average yearly cost for benchmark worker with three years work experience and who is unmarried. Author’s computations)

• According to the data of IKA, and comparing it to the data of Eurostat with regard to the total cost of labor, including base salaries and other payments, the private economy appears to have reduced expenditure like bonuses and expenditures associated with second and night shifts, reduced employment but not base salaries, at least till the end of 2011. The explanation for this may be found in the analysis of the sectorial agreements posted on the website of OMED (www.omed.gr), which gives per sector or profession the separate agreement that exceeds the agreement on the setting of the basic salary (Fig. 7.22). We can use this input to form data on the difference between the absolute daily minimum wage and the daily minimum wage for an unmarried employee, with three years of prior work experience, with the same employer, in the given sectors that have a special sectorial agreement. Comparing these with the average cost of an employee in the sector, as given by Eurostat, we can then identify the

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sectors for which both agreements that ensure higher minimum wages exist, and Eurostat documents an above-average cost per employee. This, rudimental, analysis suggests a positive correlation, something that seems at least to provide sufficient evidence for a further investigation into the assertion that the sectorial agreements indeed increased in Greece labor costs, and in particular in specific industries. The above analysis provides further evidence to suggest that the sectorial agreements, that were still valid during 2010 and 2011, did not allow employers to reduce base salaries, and thus encouraged them to trim labor costs by reducing, especially, other expense items besides the base salaries (as overtime, night shift pay, and bonuses, which are included in the Eurostat index but not in IKA data), and of course by trimming employment (as is evident from the IKA data). It appears thus that enforcing an “average” internal devaluation on the economy, while largely shielding the public sector and employees in the parts of the business economy that enjoy state-sponsored privileges that still were protected by sector agreements during 2010 and 2011, essentially allowed these “islands of privilege” to remain relatively protected during this period, even while the more competitive sectors of the economy trimmed labor costs much more aggressively. Alternatively, one could have put an emphasis from early 2010 on reducing the impact of these sectorial agreements and the arbitration process that was central to the working of these sectorial agreements, something that was done finally in December 2011, thus forcing the adjustment of pay on the more privileged parts of the private labor market. Thus the reduction of wages in the privileged parts of the private labor market would have already begun at the outset of the program, and not only after the “productive” part of the economy had already significantly shrunk. But this would have required a more elegant approach that shunned the achievement of “average targets of internal devaluation” for the whole economy, and rather was aimed at the core of the problems at hand—thus underscoring once again the lack of an elegant fine-tuning of the implementation of the conditionality program during the 2010–2012 period.

7.4   Labor Cost Indexes and Exports While all labor cost and competitiveness indexes somehow reflect the fall of employee compensation in Greece (as an indicative example, the ratio of compensation per employee to nominal GDP per person employed

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Fig. 7.23  Real unit labor cost. Total economy, performance relative to the rest of former EU-15. (Source: AMECO/European Commission)

relatively to former EU15 has fallen over 10% from 2009 till 2013, Fig.  7.23), these complex indexes, that most times are ratios of ratios, often fail to convey the simple message that the compensation per employee in Greece is now over 40% below the euro area average as was shown in Fig. 7.13. Once one takes this fact into account, the failure of the internal devaluation policy to lead to the revival of export-led growth anticipated by the Troika becomes even more striking. But this supposed puzzle is easily explained away through Figs. 7.14 and 7.15, even without undertaking the more tedious exercise of examining wages in each sector of the economy to document that the competitive parts of the economy never suffered from excessive wages. Reducing private sector wages did little to increase the competitiveness of the Greek economy simply because for the competitive private sector they were never the most important problem, as argued in Pelagidis and Mitsopoulos (2014). On the other hand, the main issues that held back the competitiveness of the private economy were not addressed. These

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issues included the regulation that stifles competition and creates rents, which increases the cost of introducing innovations into production and of streamlining and increasing the efficiency of supply lines, which, as argued in Mitsopoulos (2014), would allow productive ecosystems to evolve and research-based innovation to increase, as argued in Chap. 3 of Pelagidis and Mitsopoulos (2014). For example, the stringent regulation of road freight transport Road haulage (Mitsopoulos and Pelagidis 2011, Appendix 1) that introduces major inefficiencies into the supply chain of the Greek economy, by increasing, for example, the ratio of stocks to sales of the corporate sector (Fig.  7.24) and the number of empty journeys of road haulage trucks (Fig.  7.25) has been subject to a lengthy and half-hearted deregulation that so far has not been able to yield the desired results. This example is indicative, as the deregulation of road freight haulage was the first major structural reform the Troika tried to impose on the Greek administration in 2010, and as it settled for a non-truthful deregulation it essentially set the precedent for all subsequent attempts at growth-enhancing reforms. But the failure of the internal devaluation to improve the export performance of the Greek economy did not follow from the combination of a failure to reduce existing costs and inefficiencies at the same time as wages fell. It was as a result of increasing costs and introducing new risks and burdens on the productive economy that more than compensated any competitiveness gain from the fall in wage costs. For example, as part of the adjustment program Greece had proceeded to significantly increase excise taxes6 on energy that was used in productive activities (Fig. 7.26). After increases in energy prices for industrial use of over 60% since 2009, according to Eurostat data,7 Greece is now a country that has a unique combination of high prices in both electricity and natural 6  The reading of Eurostat data on energy prices, which include data on excise taxes, has also led to inaccurate conclusions in many cases. The reason is that large industrial energy consumers in most European countries reach individual agreements with energy suppliers, and these agreements include, among others, highly reduced tariffs and special agreements on how to manage operations during times with high energy demand in the system. The prices of these agreements, as is the case with the rest, are considered industrial secrets, and are thus not revealed and therefore they do not affect the data published by Eurostat, even though in many countries such agreements cover over 50% of industrial energy consumption. In Greece on the other hand all consumption of energy is at the officially set prices published by Eurostat. 7  http://ec.europa.eu/taxation_customs/index_en.htm#.

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Fig. 7.24  Stock to sales and road haulage regulation, 2008. Non-financial sector private and public limited companies. (Source: OECD PMR index and BvD (Bureau van Dijk) data for corporate balance sheets, author’s analysis)

Fig. 7.25  Journeys and regulation of road freight haulage. National transport, all own account and for hire trucks. (Source: OECD Product Market Regulation (PMR) PMR index and Eurostat data, author’s analysis)

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Fig. 7.26  Taxes on electricity for industrial use. Consumption “C” in the 20,000 MWh