The Greek dimension of the EU sovereign debt crisis is by now well known to all. Investor anxiety over excessive national debt throughout the EU led to demands for higher interest rates from several governments with higher debt levels and current account deficits. This in turn made it difficult for some governments to finance further budget deficits and service existing debt. Unable to pay for its public debt, the Greek government turned to the EU for financial assistance.
The first bailout package was approved on May 2010, which provided the Greek government with a three-year, €110 billion loan. In February 2012, the lending troika (EU, IMF, and ECB) eventually agreed to provide a second bailout package worth €130 billion. This second package included an agreement with banks to "voluntarily" accept a 53.5 percent write-off of some Greek debt, the equivalent of €100 billion, to reduce the country's debt level from €340 billion to €240 billion – or 120.5 percent of GDP – by 2020.
So far, all the reforms forced upon Greece centers on how to reduce the government budget. These reforms include reducing the minimum wage for public (and therefore, also private) sector employees by 22 percent, cutting benefits to pensioners and health-care recipients, reducing the government payroll by laying off 150,000 public sector employees by 2015, privatizing government companies, and opening up some industries that were closed to competition.
For now, Greece has been brought back from the brink of bankruptcy. Though safe for now, the country could find itself struggling to meet the strict conditions outlined in the second bailout agreement if key structural reforms don’t take place. It is not too late for the crisis to serve as an opportunity.
From Crisis to Opportunity
It is obvious to all that Greece needs a new set of rules that will allow for the smooth transition from the informal to the formal economy, through the simplification of processes and the deregulation of markets. The country will need a simple, fair, and efficient taxation administration system that would create a friendlier business environment. Greece will need to simplify judicial services and enforcement of the rule of law, as well as apply quality control on goods and services, eliminate organizations with overlapping mandates, and rationalize the public sector.
The most recent OECD Economy Survey of Greece for 2011 argues that the authorities should continue this vigorous reform process and their efforts to convince markets of their capacity to implement fundamental economic adjustments. Overall, the Greek government should:
Continue deficit reduction to halt and then reverse the rise in public debt, by strengthening tax collection and ensure fair sharing of the burden and the benefits of reforms. Boost privatization and the development of public assets to reduce the debt burden and associated debt-servicing costs. Reinforce structural reforms in the labor and products markets to enhance competitiveness and raise welfare and incomes.
What these reforms have not included is a growth strategy. The country desperately needs to switch from deficit reduction to economic growth, pursuing reforms that will promote entrepreneurship. With Greece under a continued threat of bankruptcy, the country desperately needs to generate sustainable growth and lift competitiveness if it is to ever pay down its debt and disengage itself from a chain of international bailouts.
A New National Growth Model
According to McKinsey’s ‘Greece 10 Years Ahead’ report (PDF), published in November 2011, Greece needs a new National Growth Model. Primarily, this new growth model requires that the economy becomes more outward-facing, focusing on foreign markets both for producing export goods and services and for importing foreign capital. Along with traditional tradable sectors like tourism, agriculture, and manufacturing, business services should get a large share of resources and investments.
Fundamental to this new growth model, according to McKinsey, is transitioning the funding of the economy from public debt to private sector equity and debt. This will require higher levels of foreign and domestic investment. Therefore, Greece needs to construct a business-friendly environment that will attract local and foreign investment in order to generate new jobs and the economic growth required to gradually reduce the country’s reliance on debt.
According to the World Bank, net inflows of foreign direct investment (FDI) in Greece was last reported at $2.25 billion in 2010, down from $5.3 billion in 2008. In 2008, when the global recession started, net inflows of FDI in Greece were 1.55 percent of the country’s GDP. By comparison, the World Bank reports 2008 FDI net inflows in Israel were reported at $10.8 billion or 5.38 percent of GDP.
Greece desperately needs more foreign investment if it is to achieve any meaningful economic growth. Already, foreign investors from China, Germany, and elsewhere are looking for bargains in the Greek economy, including in the tourism industry (which accounts for a third of GDP) and in the shipping business (which is very lucrative and growing fast).
However, for a country like Greece, which lacks the major export sector that would allow it to raise capital through exports, there is only one way to get new money into the economy: direct transfers. Be it through tourism, education, or health care, direct transfers of money by foreigners visiting the country and spending locally could be the only way to jump-start the contracting economy.
Risk-takers Needed
In order to achieve that goal, Greece will need risk-taking entrepreneurs. According to an article by Joshua Chaffin of the Financial Times, many Greek entrepreneurs believe that the growth of the state over the past 30 years and its all-embracing nature may have blunted youth’s appetite for risk. For many students, due to their parents’ risk-aversion (“every parent wants their children to be safe”), the dream remains a cushy government job with a regular pay-cheque – not a business career.
However, Greeks are not that risk-averse, and per capita they have the largest number of small and medium size enterprises (SME’s) than any other EU country. Half the economy is dominated by SME’s while the other half is ‘safely locked’ under government control. In comparison to other EU countries, Greece has the highest concentration of SMEs.
Furthermore, the Greek diaspora is prosperous, and legions of Greeks have thrived working abroad. While the government may be broke, private wealth is still plentiful. Just consider that by some estimates, the Greek treasury is deprived of €50 billion each year due to tax evasion. This coincides with the estimated €60 billion that have been withdrawn from Greek banks since the crisis began at the end of 2009.
One of the positive unintended consequences of this over-protectiveness is that Greece has an abundance of young people with college educations – English speaking, highly educated young adults with degrees in science and technology, medicine, health-care, and of course hospitality and tourism.
The ‘Silicon Island’ of Europe
In theory, Greece should be able to duplicate at least some of the success of Israel, another small Mediterranean country that has managed to become a technology powerhouse. By investing in research and development, Israel was able to leverage its educated workforce, its affluent and well-connected diaspora, and its strategic location to become a global technology exporter. All of the underlying elements are present in Greece as well.
According to the ‘Invest in Greece’ Agency, Greece offers a favorable environment for Information and Communication Technologies (ICT) investment, with strong market fundamentals, availability of a superb talent pool, leading R&D activity, a welcoming ICT ecosystem, and rewarding public and private sector projects. The availability of ICT talent and its required low compensation (compared to other places) should make Greece a particularly desirable destination for international information and communication technology firms.
The specific model is something along the lines of ‘Sophia Antipolis’, the ‘Silicon Valley of the French Riviera.’ This science park is set in the hinterlands of Nice, attracting ICT companies whose researchers and engineers commute from nearby hilltop villages and picturesque harbor towns. It is no coincidence that technology innovators and entrepreneurs have made California their home – location, climate, and quality of life play a major motivating factor.
On the other hand, Greece needs to restructure its higher education (currently one of the ‘closed sectors’ of the economy) and create ‘University Innovation Zones’, modeled after Free Trade Zones. With the right regulatory reforms and some government assistance, foreign universities and research companies could be encouraged to set up campuses in Greece, an ideal location for students to study and innovate. These will be university towns, where student innovators, venture capitalists, and producers can come together and start technology-driven companies that will be protected from the rest of the market.
Of course, entrepreneurs need start-up capital and a government commitment to provide the regulatory and legal framework that would accommodate the creation, attraction, and growth of technology information/services driven companies, as well as international research and education institutions. Usually, the hardest part is the people, not the infrastructure – and Greece definitely has the people.
The ‘Florida of Europe’
Another objective for Greece coming out of the sovereign debt crisis would be to cater to the health care and retirement needs of Northern Europeans. Greece has an army of well-educated doctors and nurses, most of which are practicing their medicine abroad because of the closed nature of the industry in Greece; the country can also boast a very pleasant climate for retirement.
Healthcare, like higher education, is a sector suffering severe government control and financial inefficiency, thus contributing negatively to the government’s debt. However, all this government subsidization of the healthcare industry has created a large number of well-educated doctors, nurses, professionals, and academics. The challenge should not be to dismantle the system so it is no longer a financial burden to the government; rather it should be to harness the people and grow the clientele – importing patients and elderly, and profiting from providing services to them.
Therefore, Greece should aspire to be the ‘Florida of Europe’, where the young go to attend college and stay for the summer to enjoy the weather and the beaches, and the old go to retire and receive quality healthcare and nursing coverage. Transforming the healthcare and education sectors to cater to the needs of other Europeans will not be easy, but the current crisis presents the once in a lifetime opportunity to fundamentally restructure the way the society and the economy operate.
If You Build It, They Will Come
The next eight years will not be easy for the Greek people. Bankruptcy might have been averted, but if the economy does not grow the government will be in need of new money in no time. Temporary solutions focusing on tourism and exports could keep the country limping for a while, but only a fundamental restructuring of the economy focusing on technology innovation, education, and healthcare services can provide lasting growth.
If the Greek government can create the necessary infrastructure for ICT start-ups, for higher education growth, and for retirement healthcare, then Europeans will come and invest in Greece. If the right conditions were present, who would not want to run their ICT firm from a Greek island, or retire by the coast?
Nasos Mihalakas is a Washington, DC-based writer and foreign policy analyst. Contact: nasos.mihalakas@gmail.com
Photo: Sharon Mollerus
This article was originally published in the Diplomatic Courier's May/June edition.
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Greek Entrepreneurs to the Rescue: How to Reinvent the Greek Economy After the Sovereign Debt Crisis
May 16, 2012
The Greek dimension of the EU sovereign debt crisis is by now well known to all. Investor anxiety over excessive national debt throughout the EU led to demands for higher interest rates from several governments with higher debt levels and current account deficits. This in turn made it difficult for some governments to finance further budget deficits and service existing debt. Unable to pay for its public debt, the Greek government turned to the EU for financial assistance.
The first bailout package was approved on May 2010, which provided the Greek government with a three-year, €110 billion loan. In February 2012, the lending troika (EU, IMF, and ECB) eventually agreed to provide a second bailout package worth €130 billion. This second package included an agreement with banks to "voluntarily" accept a 53.5 percent write-off of some Greek debt, the equivalent of €100 billion, to reduce the country's debt level from €340 billion to €240 billion – or 120.5 percent of GDP – by 2020.
So far, all the reforms forced upon Greece centers on how to reduce the government budget. These reforms include reducing the minimum wage for public (and therefore, also private) sector employees by 22 percent, cutting benefits to pensioners and health-care recipients, reducing the government payroll by laying off 150,000 public sector employees by 2015, privatizing government companies, and opening up some industries that were closed to competition.
For now, Greece has been brought back from the brink of bankruptcy. Though safe for now, the country could find itself struggling to meet the strict conditions outlined in the second bailout agreement if key structural reforms don’t take place. It is not too late for the crisis to serve as an opportunity.
From Crisis to Opportunity
It is obvious to all that Greece needs a new set of rules that will allow for the smooth transition from the informal to the formal economy, through the simplification of processes and the deregulation of markets. The country will need a simple, fair, and efficient taxation administration system that would create a friendlier business environment. Greece will need to simplify judicial services and enforcement of the rule of law, as well as apply quality control on goods and services, eliminate organizations with overlapping mandates, and rationalize the public sector.
The most recent OECD Economy Survey of Greece for 2011 argues that the authorities should continue this vigorous reform process and their efforts to convince markets of their capacity to implement fundamental economic adjustments. Overall, the Greek government should:
Continue deficit reduction to halt and then reverse the rise in public debt, by strengthening tax collection and ensure fair sharing of the burden and the benefits of reforms. Boost privatization and the development of public assets to reduce the debt burden and associated debt-servicing costs. Reinforce structural reforms in the labor and products markets to enhance competitiveness and raise welfare and incomes.
What these reforms have not included is a growth strategy. The country desperately needs to switch from deficit reduction to economic growth, pursuing reforms that will promote entrepreneurship. With Greece under a continued threat of bankruptcy, the country desperately needs to generate sustainable growth and lift competitiveness if it is to ever pay down its debt and disengage itself from a chain of international bailouts.
A New National Growth Model
According to McKinsey’s ‘Greece 10 Years Ahead’ report (PDF), published in November 2011, Greece needs a new National Growth Model. Primarily, this new growth model requires that the economy becomes more outward-facing, focusing on foreign markets both for producing export goods and services and for importing foreign capital. Along with traditional tradable sectors like tourism, agriculture, and manufacturing, business services should get a large share of resources and investments.
Fundamental to this new growth model, according to McKinsey, is transitioning the funding of the economy from public debt to private sector equity and debt. This will require higher levels of foreign and domestic investment. Therefore, Greece needs to construct a business-friendly environment that will attract local and foreign investment in order to generate new jobs and the economic growth required to gradually reduce the country’s reliance on debt.
According to the World Bank, net inflows of foreign direct investment (FDI) in Greece was last reported at $2.25 billion in 2010, down from $5.3 billion in 2008. In 2008, when the global recession started, net inflows of FDI in Greece were 1.55 percent of the country’s GDP. By comparison, the World Bank reports 2008 FDI net inflows in Israel were reported at $10.8 billion or 5.38 percent of GDP.
Greece desperately needs more foreign investment if it is to achieve any meaningful economic growth. Already, foreign investors from China, Germany, and elsewhere are looking for bargains in the Greek economy, including in the tourism industry (which accounts for a third of GDP) and in the shipping business (which is very lucrative and growing fast).
However, for a country like Greece, which lacks the major export sector that would allow it to raise capital through exports, there is only one way to get new money into the economy: direct transfers. Be it through tourism, education, or health care, direct transfers of money by foreigners visiting the country and spending locally could be the only way to jump-start the contracting economy.
Risk-takers Needed
In order to achieve that goal, Greece will need risk-taking entrepreneurs. According to an article by Joshua Chaffin of the Financial Times, many Greek entrepreneurs believe that the growth of the state over the past 30 years and its all-embracing nature may have blunted youth’s appetite for risk. For many students, due to their parents’ risk-aversion (“every parent wants their children to be safe”), the dream remains a cushy government job with a regular pay-cheque – not a business career.
However, Greeks are not that risk-averse, and per capita they have the largest number of small and medium size enterprises (SME’s) than any other EU country. Half the economy is dominated by SME’s while the other half is ‘safely locked’ under government control. In comparison to other EU countries, Greece has the highest concentration of SMEs.
Furthermore, the Greek diaspora is prosperous, and legions of Greeks have thrived working abroad. While the government may be broke, private wealth is still plentiful. Just consider that by some estimates, the Greek treasury is deprived of €50 billion each year due to tax evasion. This coincides with the estimated €60 billion that have been withdrawn from Greek banks since the crisis began at the end of 2009.
One of the positive unintended consequences of this over-protectiveness is that Greece has an abundance of young people with college educations – English speaking, highly educated young adults with degrees in science and technology, medicine, health-care, and of course hospitality and tourism.
The ‘Silicon Island’ of Europe
In theory, Greece should be able to duplicate at least some of the success of Israel, another small Mediterranean country that has managed to become a technology powerhouse. By investing in research and development, Israel was able to leverage its educated workforce, its affluent and well-connected diaspora, and its strategic location to become a global technology exporter. All of the underlying elements are present in Greece as well.
According to the ‘Invest in Greece’ Agency, Greece offers a favorable environment for Information and Communication Technologies (ICT) investment, with strong market fundamentals, availability of a superb talent pool, leading R&D activity, a welcoming ICT ecosystem, and rewarding public and private sector projects. The availability of ICT talent and its required low compensation (compared to other places) should make Greece a particularly desirable destination for international information and communication technology firms.
The specific model is something along the lines of ‘Sophia Antipolis’, the ‘Silicon Valley of the French Riviera.’ This science park is set in the hinterlands of Nice, attracting ICT companies whose researchers and engineers commute from nearby hilltop villages and picturesque harbor towns. It is no coincidence that technology innovators and entrepreneurs have made California their home – location, climate, and quality of life play a major motivating factor.
On the other hand, Greece needs to restructure its higher education (currently one of the ‘closed sectors’ of the economy) and create ‘University Innovation Zones’, modeled after Free Trade Zones. With the right regulatory reforms and some government assistance, foreign universities and research companies could be encouraged to set up campuses in Greece, an ideal location for students to study and innovate. These will be university towns, where student innovators, venture capitalists, and producers can come together and start technology-driven companies that will be protected from the rest of the market.
Of course, entrepreneurs need start-up capital and a government commitment to provide the regulatory and legal framework that would accommodate the creation, attraction, and growth of technology information/services driven companies, as well as international research and education institutions. Usually, the hardest part is the people, not the infrastructure – and Greece definitely has the people.
The ‘Florida of Europe’
Another objective for Greece coming out of the sovereign debt crisis would be to cater to the health care and retirement needs of Northern Europeans. Greece has an army of well-educated doctors and nurses, most of which are practicing their medicine abroad because of the closed nature of the industry in Greece; the country can also boast a very pleasant climate for retirement.
Healthcare, like higher education, is a sector suffering severe government control and financial inefficiency, thus contributing negatively to the government’s debt. However, all this government subsidization of the healthcare industry has created a large number of well-educated doctors, nurses, professionals, and academics. The challenge should not be to dismantle the system so it is no longer a financial burden to the government; rather it should be to harness the people and grow the clientele – importing patients and elderly, and profiting from providing services to them.
Therefore, Greece should aspire to be the ‘Florida of Europe’, where the young go to attend college and stay for the summer to enjoy the weather and the beaches, and the old go to retire and receive quality healthcare and nursing coverage. Transforming the healthcare and education sectors to cater to the needs of other Europeans will not be easy, but the current crisis presents the once in a lifetime opportunity to fundamentally restructure the way the society and the economy operate.
If You Build It, They Will Come
The next eight years will not be easy for the Greek people. Bankruptcy might have been averted, but if the economy does not grow the government will be in need of new money in no time. Temporary solutions focusing on tourism and exports could keep the country limping for a while, but only a fundamental restructuring of the economy focusing on technology innovation, education, and healthcare services can provide lasting growth.
If the Greek government can create the necessary infrastructure for ICT start-ups, for higher education growth, and for retirement healthcare, then Europeans will come and invest in Greece. If the right conditions were present, who would not want to run their ICT firm from a Greek island, or retire by the coast?
Nasos Mihalakas is a Washington, DC-based writer and foreign policy analyst. Contact: nasos.mihalakas@gmail.com
Photo: Sharon Mollerus
This article was originally published in the Diplomatic Courier's May/June edition.
