For months the debate on Greece’s prospects, on the spending cuts and revenue measures to further reduce the budget deficit, and on the various approaches to the rollover of bonded debt has continued. The French banks have put forward a complex proposal, involving a partial rollover with guarantee of principal and a link of the interest rate to future Greek gross domestic product growth. The European Union and the European Central Banks have constrained such proposals to forms that avoid declarations of “default” by the three major rating agencies, so that the financial engineering under discussion cannot do much to reduce the burden of debt. The kind of swap under consideration could gain time to allow more fundamental solutions to be worked out.
Hundreds of articles have been written on the financial engineering involved. But the recovery depends also, and even more so, on rekindling growth and generating jobs. Without growth, the debt to GDP ratio, widely used as an indicator of “trouble”, could rise further, even if the debt figure, in the numerator, declines. The denominator in this ratio, Greece’s GDP, should be as important as the numerator in debt sustainability analysis. Moreover, without new jobs, the whole Greek programme will not be socially sustainable, no matter what happens to the debt to GDP ratio. While the financial engineering work has to go on, it is high time that an equal effort is spent on how to support growth of output and employment, even within the constraints of the macro-financial situation.
Every tax and every expenditure measure should be analysed for its impact on growth. This is not to deny the need for an overall substantial increase in net budget revenues. Nor is it time to call for across the board tax decreases as the opposition has done. Greece must aim at a significant primary budget surplus. That will also put it in a stronger negotiating position with foreign creditors. But the “quality” of the adjustment is as important as its “quantity”. Support to skills and training, improvements in the functioning of existing infrastructure, reforms that reduce the cost of employing people, tax increases on luxury consumption coupled with tax advantages for hiring and smart targeting of social support are all possible measures to make the “policy package” as growth friendly as possible. The government is looking into many of these possibilities and some important steps relating to better targeting expenditures have already been taken. But the almost exclusive focus of Greece’s external partners has been on just adding up tax and expenditure measures, without trying to assess their growth impact at the same time. It is, of course, easier to do a simple accounting of tax increases and expenditure reductions. Such accounting can be misleading, however. There are second round and incentive effects involved, and the real difficulty of measuring these should not prevent an effort to do so.
After the Greek government succeeded in getting parliamentary support for additional budget measures, the Belgian prime minister Yves Leterme proposed that the EU also should make an additional effort to support Greece’s recovery. This support could come in the form of some new EU funding as well as through a reallocation and front-loading of EU financing available to Greece. A new medium-scale employment intensive infrastructure improvement and expansion programme should be financed by such additional support and could be designed in close partnership with small-scale private Greek entrepreneurs and civil society. It may be useful to launch such a programme outside existing bureaucratic structures that have not yet been sufficiently reformed. A job-creating programme – implemented by a partnership that includes the private sector and non-government organisations, financed in a visible way by Europe – could go a long way in encouraging much needed support for the whole national recovery effort.
Such short-term measures must be complemented by longer-term strategic thinking. George Papandreou, the prime minister, has argued for a long-term growth model that builds on Greece’s location and national assets. It must now be detailed. As a member of the EU and as a high-income country, despite current difficulties, Greece’s growth cannot be based on being a manufacturing hub for simple products produced with low wages. A high-quality tourism sector will remain central in Greece’s future, strengthened and complemented by more cultural activities, retirement communities from northern Europe and high-quality medical services at advantageous costs. High value- added agriculture will also be important. Greece should work on channelling a greater portion of the revenues generated by shipping to its national economy. It should find niches in the high-technology sector and participate in its worldwide structure. Finally, with considerable potential for wind and solar energy, green technologies can, in the longer run, become a major source of growth.
Greece and its friends should spend as much time and brain power on designing the short and long-run elements of a growth strategy as they are on fine-tuning the analysis of the country’s debt. One effort should not crowd out the other. Both the reality of immediate jobs and expectations about growth are a potent force that can help lower the burden of debt and give hope to the citizens of Greece.