How can Greece recover from its cycle of debt and recession? For euro pessimists, of course, the answer is “go back to the drachma, repudiate all the debt, and hope to follow Argentina’s example.” But for those hoping to keep Greece in the euro zone (which, at least for now, includes all of the governments involved), the answer generally offered is structural reform. The IMF has called for an emphasis on growth through structural reform, to replace one sided austerity. With the new deal have come assurances that structural reforms will finally get the emphasis they need. But just what structural reforms are being proposed for Greece?
I’ve had some trouble finding the structural reforms among the cuts, but I’m going to try to pull together what I can.
One of the structural reform proposals isn’t specific to Greece. Leaders of a dozen countries, including David Cameron and Mario Monti (but notably not including Merkel or Sarkozy), sent a letter to EU President Herman van Rompuy calling for an emphasis on growth (this for the EU as a whole, not for Greece in particular).
The document calls on EU nations to deregulate their service, research and energy sectors as well as working on stronger trade links with China, Russia and the United States.
Turning to Greece specifically, Belgian politician Guy Verhofstadt describes the kinds of structural reforms he thinks Greece needs.
“It is not by discussing with Mr Venizelos on how to raise €300 million that Greece’s debt problems will be solved. The Eurogroup, as one arm of the Troika, must insist on significant structural reforms to the Greek State, the bloated public sector and its role in holding back entrepreneurship and growth which are currently lacking from current negotiations.”
“The present focus on wage cuts and new taxes should be shifted to scrapping unproductive state corporations and agencies, privatising the banks, market liberalisation in the many highly regulated sectors of the economy and an overhaul of the tax system. Only then will we effectively address the root cause of Greece’s indebtedness rather than just the symptoms.”
“At present the Greek people are being punished for the incompetence and short-term electoral interests of their political leaders who have tacitly supported, for decades, a clientilist system of patronage and favours….
An IMF Survey from December 2011 complained that
Structural reforms have not yet delivered expected results, in part because agreed reforms are not being implemented. For instance, two flagship reforms—on collective bargaining and liberalizing restricted professions—have yet to deliver substantial results.
The law opening up closed professions has been the most publicized of the structural reforms planned for Greece. The Economist described the plan thus in August 2010.
An umbrella law liberalising all “closed-shop” professions is now due to pass parliament by December—months earlier than had been agreed under the conditions of Greece’s €110 billion ($145 billion) bail-out by the European Union (EU) and the IMF.
More than 150,000 Greeks, from lawyers to undertakers, work in about 70 such professions. These vested interest groups keep the cost of services high; liberalising the closed shops could boost Greek GDP by 13.2% over three to four years, according to IOBE, a Greek economic think-tank.
At the time the Economist published this article, former Prime Minister George Papandreou had just won praise for standing by his plan to open up closed professions, despite a strike by 33,000 truck drivers “against plans to double the number of truck licences and allow Greeks to set up road-haulage companies.” But further plans to open up closed professions have moved slowly
An outdated, cumbersome and expensive licensing system for truck drivers was scrapped in a 2010 law hailed as a victory over vested interests. It has yet to be implemented.
Athens has begun opening up closed professions such as taxi drivers, where operators cannot work without hard-to-obtain licenses. But EU/IMF inspectors say implementation is too slow.
Professions such as taxi drivers remain shuttered by legal restrictions. Just last month, lawmakers voted down an article meant to free up and extend pharmacy opening hours.
The opening of closed professions isn’t the only structural reform in the works, though. An optimistic report on the Prime Minister’s web site, a little over a year ago, before Papandreou gave way to technocracy, gave this glowing account of how Greece was boosting its private sector.
Boosting the Private Sector
- A ‘Fast Track’ legal framework was created to attract and expedite large-scale investments. It includes tax incentives, cutting red tape in licensing procedures, a stable tax environment with an 8-10 year horizon, and an investment programme worth €4 billion.
- Corporate tax rate on non-distributed profits was reduced from 24% to 20%.
“Greece is on track to deliver on its reform agenda. Significant progress has been made, particularly in reducing the fiscal deficit, on the reliability of statistics, and key reforms on pensions and labour markets”
Jose Manuel Barroso, President of the European Commission, December 2010Increasing Competitiveness
- The new Real Estate and Asset Privatization Programme will generate €7 billion through sales and privatizations from 2011-2013.
- Relaxing product market regulations, lifting barriers to entry in services, and opening up closed professions will boost Greece’s output by an estimated 5 to 6% of GDP.
- Liberalization of the energy sector to boost competition and encourage investments in renewable energy.
- Opening of closed professions – road freight transports, pharmacies, lawyers, notaries, architects, engineers, accountants etc – to enhance competitivenessand promote growth.
Pension and labour market reforms
- Passed a radical reform of the Greek pension system ahead of schedule. It includes a rise in the retirement age to 65 by 2013. The pension reform will considerably reduce future spending pressures, with expenditure to increase by no more than 2.5% of GDP up to 2060.
- Labour market reform revises the mediation and arbitration system, introduces the prevalence of firm-level agreements over sectoral and occupational agreements, introduces sub-minima to minimum wage, raises the minimum for collective dismissals, reduces the level of severance pay and allows more flexible forms of employment.
Free market advocates argue the Greece is sorely in need of such reforms.
Opening a new business in Greece is well nigh impossible; closing one is somewhat easier.
Greek companies are constrained by a raft of what locals call “counter-incentives”—laws and bureaucratic hurdles that make it hard to do business. IOBE has counted 250 of them.
Indeed, from a US point of view, even that of a left leaning American such as Ezra Klein, Southern European labor markets look constrained by regulation to the point of being “weird.”
In a recent research paper (pdf), the International Monetary Fund made the same point. “Common across the euro area are a higher unemployment rate, a lower participation rate, and fewer hours worked” than in the US, they wrote. “While the amount of hours worked can arguably reflect preferences, other differences are more likely due to policies and institutions. In many euro area countries, employment participation is particularly low for females, older workers, and the young.”
The IMF identifies a number of labor-market practices they would like to see reformed. Unemployment benefits, for instance, top 75 percent of the previous year’s earnings in Luxembourg, the Netherlands and Portugal. The “implicit tax” on sending a second earner into the workforce “tops 70 percent when including social security contribution, benefits loss, and the cost of child care in Austria, France, Ireland, and the Slovak Republic.” Job creation in the service sector is held back by licensing and regulatory restrictions in Luxembourg, Italy, Germany, and Greece. There’s a huge problem across the Eurozone with “insiderism”: the tendency to need to know someone to get a job.
Under pressure from the troika, Greece has agreed to an ambitious privatization plan, since postponed, and the latest deal included a promise by Greece to cut the minimum wage by 20%, a change that is supposed to boost employment, especially among young people.
The OECD has put out a paper with a variety of recommendations to improve Greek competitiveness, including the following:
Raise labour market flexibility and tackle poverty. Improve activation policies. Target existing employment subsidies on the most disadvantaged youth. Reduce employment protection legislation and tackle the widespread dualism in the labour market, through the introduction of a single contract with moderate protection against dismissal. Ensure that the minimum wage does not act as a disincentive forhiring young people. Encourage more decentralized wage bargaining by avoiding administrative extension of collective agreements to parties not directly represented in the agreements. Reform the tax and benefits system to limit widespread poverty among the working population.
Enhance the effectiveness of competition policy. Reduce the administrative burden to start-ups and the barriers to entrepreneurship. Liberalise professional services. Proceed with privatization and foster competition in network industries. Introduce centrally-led review of stock of laws and regulations for competitive effects with follow-up revisions of laws and regulations that unnecessarily restrain competition.
As of this week, creditor nations are demanding 38 specific changes to Greek law.
They range from the sweeping – overhauling judicial procedures, centralising health insurance, completing an accurate land registry – to the mundane – buying a new computer system for tax collectors, changing the way drugs are prescribed and setting minimum crude oil stocks.
“The programme is much, much more ambitious than economic reform,” said Mujtaba Rahman, Europe analyst at the Eurasia Group risk consultancy. “This is state building, as typically understood in traditional low-income contexts.”
I’ve found a couple of blogs dedicated to discussing structural reforms to the Greek economy. Reform Watch Greece monitors and evaluate structural reforms, and political/social change in Greece, with posts such as this one about how structural reforms instituted in Australia over the past 25 years can provide lessons for Greece. And Greek Economists for Reform features posts like this one by Costas Meghir on reforming the judiciary and the labor market.
… The reform of the judiciary should focus on the time it takes to resolve commercial disputes as well as on the quality of judges and their ability to deal with complex issues. Hiring immediately from amongst the best lawyers offers an immediate way of dealing with the huge backlog of cases. In the longer term incentives structures backed with better pay should be put into place both to improve effort levels and to attract higher quality individuals in the profession. The labor market regulations should be simplified and all workers should face the same regulations, irrespective of occupation. All mandated severance pay and restrictions on mass layoffs should be abolished. Liberalizing the labor market also requires reforming the way unions work and making them much more accountable to the workers they represent in the workplace….
So, what are some of the obstacles to trying to boost Greece’s productivity through structural reform?
- Structural reforms to liberalize Greece’s labor market may, in the long run, lead to fuller employment. But in the short run, they mean that some people will lose their jobs, in a country with over 20% unemployment. As Keynes has said, in the long run, we are all dead. In the short run, people get very resistant to efficiency enhancing reform in the face of double digit unemployment.
- The US has historically had a lower unemployment rate than most (though not all) of Europe, and it does seem plausible that at least some of that is due to our less restrictive laws concerning business and labor. But there’s another side to why we’ve usually been closer to full employment: the Fed. Our Federal Reserve bank, unlike the ECB and the Central Bank of the United Kingdom, has a dual mission; it’s charged not just with adjusting interest rates to manage inflation, but also with maintaining full employment. As a result, in the current financial crisis, Bernanke has been much more aggressive in his response than have central banks in Europe. It’s easier to maintain political support for our less regulated labor market given our Fed’s more aggressive response to unemployment. Milton Friedmanesque freedom to choose is easier to maintain politically when combined with a measure of Milton Friedmanesque monetarism. Greece, obviously, doesn’t have this advantage; it has no way of bringing central banking policy to bear to ease its current unemployment while labor reforms have a chance to do their work.
- Labor market reform is, in any case, not exactly a politically neutral, purely technocratic process, where people can be expected simply to yield to the experts. For example, some of the structural reforms proposed for Greece involve weakening the power of unions. Recall how battles over unions have played out here in the US, in Wisconsin. Now ratchet up the stakes by placing these battles in an economy facing the equivalent of the Great Depression.
- Will Greece’s young people stay in Greece long enough for the structural reforms to do their promised magic? Greece’s demographic difficulties may get still worse if they leave.
Thank you for the continued updates. I am not familiar enough with economic theory to begin to have ideas on how Europe can get out of its quandary. Perhaps, the experiment of multiple countries maintaining government autonomy while sharing a single currency is proving not feasible. If all Europe were one country, that country could share both success and failure in ways not possible with the autonomous states.
In a nation where 30% of workers are with the government, it will be hard move these people into private industry. All the protesters in Athens were unionized workers, fearing competition from privatization. Government is not concerned with costs or profits, as the private sector is. Taxes always go up, and never down. The retirement age, as in America, needs to be at least 67 with people living longer, and all welfare which does not have a time limit needs to end, along with restrictions on companies in hiring and firing decisions, and the compensation/benefits they pay their workers.
Cuba is seeing the bad effect of having 80% of its citizens working for the state, but moving them to private companies as the current leader proposes will be the end of the communist state in power for decades, thus resistance.
America also has a high level of government employees at all levels. In Wisconsin, like Greece, the GOP governor is being recalled for restricting government workers from collective bargaining, in an economic downturn.
So, end the end, socialism will win, with its great appeal. It always does!
How many nations have actually had their governments shrink, along with taxes?
Thanks much for this terrific post. I’ve been looking for a list of proposed Greek structural reforms. This is a great addition.