Managing Director & Senior Partner
The death knells tolled even before the deal was struck, before the Greek Parliament gave its necessary approvals, before the extent of the new austerity measures had a chance to sink in. Naysayers from the left and the right, from Greece, the EU, and elsewhere began beating the drums of demise for the latest rescue package that tries to secure Greece’s future in the Eurozone.
The prophets of doom may prove to be right: this is surely a very tough deal. Its unpopularity has led some experts to continue arguing that leaving the Eurozone is the preferable course. With the exception of the leftmost- and rightmost-leaning members of the Greek political system, few of these proponents live in Greece. They ignore the fact that the vast majority of Greeks see their future as part of Europe. Polls regularly show that 65 to 70 percent of the population supports remaining in the Eurozone. A “Grexit” would permanently undermine Greece’s position in Europe, seriously limit its influence in international affairs, especially in its immediate neighborhood, and substantially negate the significant achievements that the country has registered over the last four decades with regard to economic and sociopolitical change.
The proponents of Grexit talk of the consequences as if they were the lesser of two evils, but there is no way to understate the severe and lasting impact of the devaluation of at least 50 percent that a new currency would entail. It would mean a minimum drop of 50 percent in per capita GDP. Greece would need 7 percent average annual growth over the next ten years—an improbable scenario at best—just to get back to today’s level of economic output. However harsh the latest austerity measures are, they are not the equivalent of an economic atom bomb.
Demonstrating quick progress—to itself and to the world—is the one way Greece has left to move forward. The good news (a relative term in this context, to be sure) is that as painful as the deal may be, it does contain several solid cornerstones to build on.
In a consumption-driven economy such as Greece’s, higher taxes bite hard. Economists, politicians, and taxpayers themselves can argue the merits of raising taxes in an already suffering economy, but increases in VAT and the corporate income tax are part of the deal, and these increases are now law. The focus should therefore be on the future.
The only thing that businesses like less than higher costs (including taxes) is uncertainty. The only people who like uncertainty less than businesspeople are investors. The government has an opportunity now to signal—strongly and repeatedly—that the corporate tax code will not change until Greece gets back on its economic feet and can tackle a full tax overhaul. The country desperately needs investment. And it can create plenty of opportunities. But the prospect of new or altered taxation will constitute a big deterrent to capital investment unless the government acts with a clear and credible commitment to remove it.
The deal with Europe includes the requirement that Greece privatize a host of state-owned assets. Critics of privatization—and there are plenty—should look to other countries as diverse as France, Portugal, and the UK, where privatization has often proved highly successful. Even in the former Soviet bloc, where assets were privatized in an often clumsy, unfair, and traumatic fashion—owing in large part to the lack of functioning capital markets—no one is seriously suggesting a return to state ownership. Greece has functioning markets—and privatization doesn’t necessarily mean sale. There are many vehicles, including long-term leases, that enable the government to secure a predictable income flow, attract investment, and participate in the upside of privatized ventures.
The naysayers question whether the €50 billion privatization target is achievable. They miss the point. The list of assets on the government’s books is long, valuable, and attractive—and many have the potential for wider economic benefit. The easy targets could include state-owned stakes in airports, Piraeus and other ports, and many large companies.
These are only the tip of the iceberg. Greece is a vacationer’s paradise (all the more so in the current circumstances, because prices are low), and tourism generates about one-fifth of GDP. But the country has few world-class resorts with the recreational infrastructure, such as golf courses, that wealthy tourists seek out, because the government owns much of the most desirable—and developable—coastal land.
Multiple Greek islands, vacation meccas all, have government-owned airports that currently host one flight a day—or less! Meanwhile, the busiest airports, such as the one on popular Mykonos, need to expand their capacity to handle the traffic, which requires investment. This won’t happen under public ownership.
Yachters flock to the Greek islands. There is not enough marina capacity to serve them. Guess who owns most of the marinas? The list of possibilities goes on.
In the years following the 1997 Asian economic crisis, countries such as Malaysia and South Korea showed how policy reforms that facilitate foreign investment can help a badly roughed-up economy return to growth. Indeed, within only a few years of the crisis, South Korea again topped the Asian economic-growth charts. Current regulations in Greece are a barrier to investment—especially foreign investment. It can take more than ten approvals from different government departments to start a midsize manufacturing operation, and a delay on any one holds up the entire project. The government can take steps immediately to eradicate red tape and make it easier for a foreign—or any—company to start new operations.
Prime Minister Tsipras can signal a strong commitment to reforms—and help to ensure follow-through—by appointing a centralized economic-reform delivery team that reports directly to him. Governments in other countries, notably the UK government under Tony Blair, have used such mechanisms to blow through the inevitable bureaucratic bottlenecks and move reforms forward. Greece is good at stagnation, especially when political or bureaucratic turf is under attack. The prime minister needs to show progress quickly and demonstrate to all concerned—inside the government and out—that this deal is different. He needs a team of tough-minded technocrats and reformers who aren’t afraid to twist arms or step on toes. And he needs to personally oversee their progress so that everyone knows that the members of the delivery team speak for him.
These are all only first steps. Greece cannot turn itself around fully without addressing many entrenched economic problems. Unemployment, especially among young people; the unsustainable social-security system; and the ineffective tax code and collection system are all high priorities. (See The Role of Structural Reforms and the Prospects for the Greek Economy, a report by BCG and the Foundation for Economic and Industrial Research [IOBE], May 2014.) These are systemic problems that will take years to fix. The prime minister and his government must show progress soon. It’s the key to getting additional time from European creditors, attracting the investors whose capital Greece needs, and convincing Greek voters and consumers that there is indeed hope on the horizon, however distant.
To his credit, since striking the deal, Tsipras has so far been doing his part to make it work. He has pushed two difficult approvals through Parliament with an unexpected but broad coalition of the center right and the center left—and without the help of a significant bloc of his own party. The politics of the next several months will be tricky. Given the open revolt on the far left of Syriza, Tsipras will have to choose from a series of difficult options as he cobbles together the votes he needs to govern. Another election in the fall, in which the prime minister tries to corral a new coalition, is a distinct possibility.
But politics—Greek and global—cannot again become a reason for failure. There’s a ticking clock (or time bomb) in the form of a debt repayment schedule, but even more important for Greeks, there’s the need to get beyond the pain of more austerity and start building for the future. Economists and politicians can continue to argue about how we got here and who is at fault. Greece has to move forward. The only other option is debating a worse fate, from a weaker position, when the next debt payment comes due.