Prime Minister Kyriakos Mitsotakis (left) answers a question during a conversation at the Athens Democracy Forum on September 30. The Prime Minister appears confident that Greece will maintain robust growth rates over the next decade. [Dimitris Papamitsos/Prime Minister’s Office/InTime News]
There are at least two reasons for the current optimism about the Greek economy: a stronger-than-expected recovery, above the European average, and funds from the European Recovery Fund, as well as other important European funds that may support growth. The positive situation is reflected in a series of individual indicators, from interest rates and real estate to industrial production and exports.
Of course, the strong recovery also reflects the previous deep recession and was accompanied by a large budget deficit. The substantial financial support given by Europe was planned precisely because the Greek economy combines a high level of public debt with an equally worrying investment deficit. Assuming the damage from the pandemic heals, in terms of GDP, over the next few months, it is possible to program a high growth rate, around 3% per year over the next decade, which can cover the losses. of the decade-long crisis. and transform the image of the country. However, this can only happen under certain conditions, and it will not happen automatically.
The Greek economy still has a long way to go to reach the European average. To put it on a stable positive trajectory, its production base must be strengthened, with an increase in labor, investment and productivity. A series of related policy measures are positive. Some are dealing with leftovers from the previous crisis, such as nonperforming loans. Some are part of the process necessary to modernize and fill obvious gaps, such as the digitization of public services. Others are indicators of new funding priorities, such as vocational training programs for the unemployed. For this significant growth scenario to become a reality, it must be supported in a coherent and comprehensive manner by the policy framework.
In an economy, households, businesses and investors are guided by incentives. They can be pushed towards innovative entrepreneurship or a parasitic relationship with the government, towards productive investments or occasional expenditure, towards strengthening human capital or the informal economy. Incentives are shaped by existing measures and policies, their long-term credibility and the way they are applied and perceived by society. For the gradual and necessary change of incentives for the Greek economy, it is crucial to ensure the continuity and consistency of policy measures.
As an indication, the legislation on supplementary pensions for young workers in a funded system was, to say the least, an obvious intervention. It strengthens incentives for formal work, as any future pension will depend on accumulated contributions. However, if one does not succeed in building long-term trust and making credible the intentions to shake up the existing system, any positive impact will be in vain. As a result, as the very small size of many firms hinders productivity and wages, tax incentives have been provided for mergers. This positive step will nevertheless require measures to reduce the administrative burden on businesses, as this is the main reason why they remain small and engaged in informal activities. Even in higher education, the introduction of a minimum entry mark is a positive development, especially to prevent young people from becoming trapped. It is, however, necessary to accompany this reform with a material upgrading of vocational training, as a reliable alternative, and of equal opportunities.
In critical issues such as those mentioned above, individual actions can have a positive impact. However, if we accept the need for a change in the incentives and structure of the economy, coherence of interventions is necessary, as well as clear indicators and a markup of the envisaged trajectory. Other stronger economies can venture out with only limited adjustments, but Greece’s not. If, in the end, the new European funds only serve to strengthen the existing structure, the expected growth will simply never materialize. Optimism about the economy should be there, but directly linked to the desire and the ability to support change.
Nikos Vettas is the Managing Director of the Foundation for Economic and Industrial Research (IOBE) and a professor at the Athens University of Economics and Business.