Monday, September 22, 2014

Growth and Social Cohesion: Challenges for Greece and Beyond

Here is the video of a 1:28 h panel discussion on the above subject which took place at the LSE. Below is a summary of the key points made by Horst Reichenbach, head of the EU Task Force for Greece.

Access to credit: this is currently the major impediment for growth in the private sector.
Foreign investment: more focus is required on making Greece more attractive for foreign investors (structural reforms). 
Competitiveness: has improved significantly in terms of unit production costs (wages/salaries). What is missing is an increase in productivity (particularly in sectors where Greece has competitive advantages).
Social cohesion: critical! Unemployment will not come down quickly, thus, an overhaul of social cohesion systems is required.
Politics: sustained political stability is essential for Greece's turn-around; the condition 'sine qua non'.
Troika: Greece needs to assume ownership (rather: take it back from the Troika) of reform effort ("Greeks need to take their own fate into their own hands").
Financing: before year-end, clarity needs to be established whether Greece needs new financing from the EU. If yes, there will be the issue of a further adjustment program ("which clearly is not popular among Greeks").
Debt relief: the EU has promised debt relief and has reaffirmed its promise earlier in the year. A decision is likely to be reached befor the end of the year.
Technical support from the EU: will continue to be necessary.

"I think Europe has shown quite a lot of understanding that the situation from now on has to change and that if there isn't growth, not only the future of Greece will suffer but also the repayment of the debt will become impossible or at least very much more difficult. Therefore, very practical hands-on support of a different type is required. First of all, the need for more social cohesion in Greece is enormous. There is no social welfare system in Greece. It's the only European country where there is no social welfare system. Unemployed who are long-term unemployed for more than one year don't get any support from social insurance or the state directly and more than 2 million, perhaps moving towards 3 million, do not have any access to health service other than emergencies in the hospitals. So this is really a dramatic situation in which the activities of extreme parties can prosper by offering part of the solutions to these problems and if Greece is not, as a state, and in solidarity with Europe, is not able to address these problems head-on, there will be a very difficult situation".


  1. In the meantime, Samaras, as per troika demands, has to increase further the primary surplus next year, reaching 4.5% of GDP, of which, nothing can go to investments or to social cohesion and he must sell DEI, again as per troika demands, after raising the bills for consumers 50% and 30% for industry, nullifying the "competitiveness" gain that could get.
    The greek banks, despite other claims, everyone knows that can't finance the economy, as a matter of fact, financing decreased.
    Foreign investment, will never come, in a country with 175% debt and where every year the tax changes, to accomodate the yearly increasing troika demands for higher primary surplus.
    This, leads to political instability, which will bring SYRIZA into power. SYRIZA will have 2 choices. Either a) eat up everything that has said all these years and continue the same policy as New Democracy, which will most likely cause its early political demise (PASOK-style) or b) attempt to re-negotiate everything with the lenders. If the lenders deny (most probable), SYRIZA will then can do a "heroic exit". Do what Papandreou didn't. Put a referendum "do you want to keep with the memorandum or do grexit and uniltaterally default"?
    Time works against Samaras. Samaras has to find 2 more billion euros for the next year, to achieve 4.5% of GDP primary surplus. The new, lower pensions, with 330 or 360 euros base pension, will come into effect in Jan 2015. Today, it was announced, that hiring in public sector will now have 2 year trial period with 586 euros wage.
    Not a pretty sight ahead for a goverment that is behind in polls and faces snap elections in spring... Yesterday, prof. Yannis Varoufakis, in long article, adviced SYRIZA to prepare to clash with the lenders as the only hope. Be prepared to say "no" and take the airplane back home. I believe this has big chances happening, unless Tsipras makes 180 degree turn. Fact is, Tsipras, will either take a conservative approach and have quick success, giving hope and income to people or he will soon face a rebellion by the "left wing" of SYRIZA, which will accuse him of betraying their program and ideology. Political stability? The troikans should have thought about that a bit earlier. You can't have someone hoping for 5 years for something better, when the only he sees is going towards worse. And i am no SYRIZA voter, nor will i become one. But this is reality, behind nice sugar-coated words. Greece should have defaulted in 2010. A default solves immediately 2 problems at once: competitiviness and debt. Greece has been put in a "salvation plan" for a number of years, where none of the 2 was solved.

  2. These are 3 quick examples, from a long list, which i am surprised the EU Task Force never heard of. They all closed due to high electricity cost:

    1) A steel factory in Attica. Greek steel factories were 39th world ranking in output in 2007. Now they are below 50th.
    2) Cement factory closed in Chalkida.
    3) Wood factory shut down in Thrace.

    Electricity cost for industry in EU (after the troika imposed increases in Greece):
    Italy: 30-35 euro/Mhw
    Germany: 35-40
    France: 40-46
    Bulgaria: 46 (3000 greek enterprises moved to Bulgaria, coincidence).
    Greece (high voltagr): 77
    Greece (medium voltage) 104

    How much of the total production cost is the electricity cost? It's the "red" part of the graph here, almost the same amount as the "black" part (raw material). The "yellow" part is salaries:

    So, when you drop salaries 33% and raise electricity cost 50%, how much lower are you going to sell your product? Mr. Reichenbach should maybe have mentioned it, since the article's title was "1 out of 2 greek energy-thirst companies is threatened with failure".

    Other than that, wonderful evening they had in LSE. I hope they had a nice cup of tea.

  3. Speaking of political stability, after Samaras, today also the goverment's spokesman, Georgiades, said on TV "if this goverment falls, i will take all my money from bank, i won't let them there to be eaten by SYRIZA".

    Seems the "drachma" card, has been chosen as the last defence by Samaras, in an attempt to halt SYRIZA's lead in polls. But this is a quite destructive way to handle SYRIZA and it's doubtful whether this threat will work once more, since it has been used since 2010 several times and after you repeat the same threat many times, the threat itself loses it's "awe effect", gets trivialized somehow. Even worse, those who have very little to lose, are increased in number since 2010.

    But just shows how New Democracy can't find some "better news" to tell to the audience as counterbalance to SYRIZA's "hope", so resorts to "doom" scenarios... Athens stockmarket has been doing bad lately. At the same time, Dora Bakoyanni (New Democracy's almost leader, that lost to Samaras), said that the goverment won't manage to get the budgeted amount of money from the property tax, which should be reduced by 30% at least. A shot on Samaras from the "inside" of the party.

    1. I don't think that either a default or a bank run automatically translate into a Grexit. Refer to Cyprus. Deposit freezes and capital controls (temporary, of course...) are always available instruments in cases of emergency. What would matter in such a scenario is the 'story' which goes along with it. If SYRIZA could convince the public that these are just very temporary 'labor pains' which will soon lead to the birth of a Golden Age, things would remain quiet. But sooner or later there would have to be a Golden Age...

    2. The good fortune for SYRIZA, is only one. That nobody really expects them to bring Golden Age. Just "better than today". This is the recurring theme in discussions. A SYRIZA voter, would simply say "why, because with Samaras we saw the Golden Age?". Samaras is the one that needs some good news badly and quickly. In the last days, Samaras' answer to SYRIZA's program was that "it requires too much money, so it's not viable" and that "we are going back to growth" and "we will get debt sustainability certificate soon". Problem is, few believe him anymore. Last year, he was saying the economy "Is taking off". The debt sustainability certificate sounds more like a prank , since the same people that issue such certificate, are the same that were pretending for years, that the debt was sustainable and they are the ones towards which the debt is owed to. So, you understand why Samaras is meeting Merkel. He hopes he can come back with some tangible good news.

  4. Honest words from Reichenbach but I don't see why so many years had to pass before addressing the obvious issue of lack of growth.

    Everything seems to be standing still, both on a national and a European level.