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A Growth Strategy for Greece

Interviewee: George Papandreou, former Greek prime minister
Interviewer: Christopher Alessi
March 20, 2013

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Greece last week failed to secure the next $3.6 billion installment of its bailout package from the troika of international lenders--the European Commission, the European Central Bank, and the International Monetary Fund--due to its failure to adequately pare down its unwieldy government bureaucracy. Still, the troika conceded that Greece had made "significant progress" in getting its fiscal house in order and plans to return to Athens in early April. Former Greek prime minister George Papandreou suggests the strict austerity mandated by the troika has stymied Greece's ability to implement growth-enhancing structural economic reforms. Papandreou calls for a loosening of austerity targets and "debt restructuring or an elongation of the repayment of the debt" so Greece can focus more on structural challenges. "If you look at Greece, the political and administrative structures are the major impediments to a sustainable economy."

What is the current fiscal situation in Greece?

Greece has made major efforts over the last years in cutting its deficit and doing so with difficult austerity measures--cuts, hiking taxes, fighting tax evasion. We have been, for the major part, successful. The coalition government that exists now is one with a broad base of support, despite the difficulties. At the same time, the progress of Greece is also linked to a wider question of growth policies in the European Union. Austerity measures alone will not solve our debt problem or even our deficit problem. We need to see some type of growth policy, particularly if you think of unemployment [26.6 percent and 56.4 percent youth unemployment]. This becomes a vicious circle of recession and to get out of that vicious circle you need some kind of a push—a stimulus to help make sure that we get away from a simple formula of austerity. We have been on track with what our [EU-IMF bailout] program has asked from us and we want to consolidate our budget, but that needs to be complimented by some wider European measures.

Can you provide some examples of potential European measures?

We absolutely need to cut down on the austerity measures and move toward a slower adjustment, sort of a grand bargain from inside the European Union.

First of all, Greece [needs a] reengineering of the administration and of the economy. We need to have investment in infrastructure, education, training, innovation--to use our comparative advantages. Our tourist industry is a booming industry, but it can become even more competitive. We can combine it with cultural wellness--the Mediterranean diet, which is the new trend--but this takes time and investment. We have comparative advantages in fisheries, agriculture, and green energy. These are new areas that can really be developed.

Secondly, [there should be a] European program for investment in wider Europe. This would mean to go out in the market through eurobonds, or through the European Investment Bank, and fund big projects such as transportation. We need to connect north and south Europe, east and west: broadband, energy grids, green growth, and education. This is the kind of thing that will make Europe more competitive.

I would add to that that we need to also have a targeted European program for our unemployed. So I have proposed a program [similar to the] Erasmus Program in Europe, which is a student exchange program funded by the EU. The unemployed in Greece can get a voucher and choose a training program somewhere in Europe to be retrained during this crisis and when this crisis is over, we make sure that that person hasn't fallen off the cliff and can come back into the labor market with new skills to find a job.

High unemployment and a deepening recession have fueled political extremism on the right and left in Greece. Can you explain this tendency and how to address it?

We have a rise of extremism because we need to give a sense that we are targeting some of the deeper problems in Greece, the injustices. For example, a tax system which helped the tax evaders at the top echelons--the richer part of society--and put the burden on the middle and lower class wage earners. That has been revamped, up to a point, and we are fighting tax evasion. [Greece should] give a sense of empowerment. For example, when I asked for a referendum [on the European bailout program in 2011], I wanted to have our citizens decide on the future of Greece. We see very often populism and a rise in extremism when people feel disempowered. So we need to find ways to bring in our citizens to participate more. And I think we absolutely need to cut down on the austerity measures and move toward a slower adjustment, sort of a grand bargain from inside the European Union, which says, 'These countries are under this adjustment program, we'll give them more time. They can cut their deficits, but they can do it over a longer period of time. Maybe their debt should be restructured in a way that gives them a longer time to pay it back. Or maybe with even better terms for loans.' If we do that on one side, then also prioritize the structural issues of institution building, creating transparency, making us more innovative, making us more capable in our administration, in the end it will make us a more sustainable economy. We need to make sure there is light at the end of the tunnel if we want to fight extremism and frustration in our society.

Is the current EU-IMF bailout program sufficient to address Greece's economic troubles? What are potential alternatives to the program, such as a Greek exit or debt restructuring?

We need to make sure there is light at the end of the tunnel if we want to fight extremism and frustration in our society.

These programs are unique in the sense that even the IMF had never dealt with this type of a problem within a currency zone. So, one of the tools that it had for dealing with these problems, let's say with our neighbor Turkey, was the devaluation of currency. You don't have that [possibility for Greece because it's part of the eurozone]. Does that mean we should leave the euro? The pros and cons have showed us that the pros of staying outweigh the pros of leaving. At the European level, this would create contagion. Certainly if Greece left, down the road, another country would be targeted and be asked, 'Why don't you leave the zone also?' So we would unravel the European project. From a Greek point of view, we are an import country still, highly dependent on imports--particularly in energy. So leaving the eurozone would be a huge devaluation of our capacity to buy, and since we don't have many exports, we'd still have to import. We'd have huge inflation, a major recession, possibly the destruction of much of our industrial infrastructure, and a panic run on the banks. So for all these reasons, despite the problems of staying in the eurozone, we think that it's a safer road and less painful road, giving us the time to reorganize our economy and become more competitive and more sustainable.

Greece does need reform, and I'm not just talking about market reform, but also the administrative capacity--[it's] a bloated state with a lot of clientelism. Let's have a grand bargain. On the one hand, rather than austerity, have a slower and less painful adjustment of our deficit, and at the same time, look at the necessity--not only for Greece but for other countries like Portugal, possibly Spain, Ireland--for debt restructuring or an elongation of the repayment of the debt. This, combined with certain measures to stimulate investment and growth in the wider region. On the other side, we--the countries that are under adjustment--would then commit to much deeper reform and make sure that these major changes do take place. This would be politically much more important. If you look at Greece, the political and administrative structures are the major impediments to a sustainable economy.

What's the progress on some of the structural reforms currently under way such as public sector restructuring and reducing the size of the public workforce?

We have made major reforms in Greece. When I took over after a landslide victory we had a mandate for change and I knew my major focus would be re-organizing the state. We didn't do this after the dictatorship [which fell in 1974]. So we papered over some of the intrinsic problems of the public administration: the clientelism, the bureaucracy, the lack of transparency, the way we wasted resources. This basically blew up the debt and the deficit at a time of crisis, just before I was elected [in 2009]. So when I came into government, for example, I said, 'How many public servants do we have?' Nobody knew, so we had to do a census of how many public servants we had: Somewhere close to a million; that's quite a few in a population of eleven million. We have already reduced that by around 200,000. We made a major reform in the pension system; one of them, of course, was to raise the age of the pensions to about sixty-five, and this will be changing according to longevity in Greece. We've cut high pensions but even some of the lower pensions, too, to make this a sustainable pension system. We reformed the university system to make it more efficient and more competitive. We have published everything online. We have re-organized local governments, consolidating fifty-seven regions into thirteen regions, and six thousand public entities of local government into two thousand. We have opened up thirteen professions that were closed professions--despite the austerity and despite the fact that politically it's [a] very difficult [thing to do]. But we were able to make so many reforms so that now we are number 1on the OECD's chart of [countries that have] done the most reforms [for the 2011-2012 period].

What are the future prospects for Greece and the wider eurozone? And what is your sense of the future of the European project?

The pros and cons have showed us that the pros of staying outweigh the pros of leaving.

Well, Europe is an experiment in working together beyond nations, beyond conflicts, beyond our different traditions, our different languages. It's come out of the Second World War, it's come out of the Holocaust, as a peace project. And the Greek crisis has tested the capability of us to work together in dealing with these. Beyond being a peace project we now have to be a project that [is about] how we work together in a global economy. It's not simply working with each other to maintain peace; it's now working together to deal with different challenges such as global climate change, financial crisis, immigration, poverty, and competitiveness with emerging markets. How do we deal with these issues? Well, there are two narratives. One is to go back to more of a nationalistic approach. This has been part of the rhetoric in the politics of Europe in the recent years, but it's been undermining and splintering and it's created new stereotypes and bitterness. It's been driven by the fear. 'Why should we take on the risk of another country and why should we be responsible for another country?' But in fact, there's a wider risk. If we don't pool our strengths, not only will we splinter but we won't be able to deal with these major issues around the world.

My hope is that we'll be able to move on this narrative of further integration. We've made some theoretical decisions about fiscal unions, banking unions and economic unions and so on, and we have to move forward and bring along our citizens also. Now we have to bring in our population to say: this is a project which actually is worthwhile, whether you're German, Greek, Swedish, French, Italian, Spanish, or Polish. We can get beyond our national identities and work together, and that's our real power in the world. So we do have the capacity—but do we have the political will? Electing a president of Europe, for example, would be a nice move to give a sense of ownership to our citizens. We need the political will to move forward more quickly and more decisively.

Is Greece's future inextricably tied to that of the eurozone and the EU?

Greece's future is tied with that of Europe and the eurozone.

Absolutely, Greece's future is tied with that of Europe and the eurozone. This is something that has been borne out [over time], and election after election parties that have won, even during this crisis, have been those who have been supportive of our European membership. That doesn't mean that we are not critical of some of the European decisions. But whatever happens, we will be deeply affected one way or another.

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