On the lack, the need, and the possibility of a reform dynamic

Nikos Vettas argues that the Greek economy can exit its current deep crisis only if a strong dynamic for reform develops. While this has been explained by many analysts since the crisis became apparent, the focus of economic policy in the last couple of years has been, with few exceptions, on fiscal tightening through austerity measures and on short-term tactical moves. Likewise, the political debate has largely avoided the question of how to genuinely reform the economy. See a related article (in Greek, Reporter.gr), interview (in French, Liberation) and quote (in English, BBC news) as well as a background paper on product market competition.

The political debate, even as we are entering one of the most important elections in the country’s recent history, has largely avoided the key question of how to genuinely reform the tax system, procurement in public works and the military, education, health care, product market competition and the justice system. The recent ‘haircut’ applied to part of the public debt is by no means a substitute for reforms – in fact such measures should be viewed as operating strictly complementary with reforms. Thus, whereas a credible plan for fiscal and political stability is a necessary condition for turning the economy around, a number of specific reform initiatives also need to be urgently undertaken. These refer to different areas of the economy, but a connecting thread for all of them is the need to support or re-build institutions that have been abused and to set up new rules.

Despite a popular (or rather ‘populist’?) belief, Greece’s problems did not start two years ago with the IMF-EU-ECB intervention. This was the outcome, not the cause. The twin deficits of the Greek economy, from a fiscal and a competitiveness viewpoint, have been built gradually during at least a couple of decades. Their common source has been the mode of operation of the political system and in particular how partisan objectives and related special interests have been interrelated with the functioning of the economy, both in the public and the private sectors. Is there hope? Only to the extent that – by facing the prospect of an uncontrolled bankruptcy – the political powers are forced to redefine their relation with the economy, we can have a real end to the crisis.  As the potential of the Greek economy is huge, and has been much suppressed, a fast and genuine convergence to the core of the euro-zone economies is very likely to be initiated in such a case.

About N_Vettas

Athens University of Economics and Business

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