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A Silver Lining? Why Recent Reforms in Greece Warrant Cautious Optimism

A Silver Lining? Why Recent Reforms in Greece Warrant Cautious Optimism

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This policy brief argues that the economic situation in Greece is improving.
This policy brief argues that the economic situation in Greece is improving.

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Published by: German Marshall Fund of the United States on Jun 04, 2013
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06/04/2013

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Summary:
2012 was a very
difcult year for Greece. Inspite of a new government anda renewed reform effort, theeconomy still appears to beshrinking. Recently, however,rst signs of a silver lining are appearing on the horizon.The economic sentiment hasimproved and, upon closeranalysis, the total reformrecord over the past years isconsiderable. Although theGreek economy still has severalobstacles to overcome, the glassactually appears half full ratherthan half empty.
 A Silver Lining? Why Recent Reforms inGreece Warrant Cautious Optimism
by Jürgen Matthes
1744 R Street NWWashington, DC 200091 202 683 2650F 1 202 265 1662E ino@gmus.org
June 2013
Paper Series
 
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TheEuroFuture Project
 
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The Reform Record
2012 was a very dicult year orGreece. In spite o a new governmentand a renewed reorm eort, theeconomy still appears to be shrinking.o many observers, the prospects orGreece seem to still be dark despitethe delivery o a third aid packagerom the eurozone.Recently, however, rst signs o asilver lining are appearing on thehorizon. Te economic sentiment hasimproved and, upon closer analysis,the total reorm record over the pastyears is considerable.
1
Furthermore,Greece has continuously met itsrelevant short-term reorm goals andmilestones. Tus, although the Greek economy still has several obstacles toovercome, the glass actually appearshal ull rather than hal empty.Since the summer o 2012, the newly elected government in Athens hascaught up on addressing several previ-ously neglected reorms, reducingthe reorm backlog considerably.A large part o the progress canbe attributed to a single eort, theso-called Omnibus Law 4093, whichbecame law on November 12, 2012
1 The Troika’s recent reviews from the European Com
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mission make this clear, too. The following remarksabout reforms of the scal administration and structuralreforms in labor and product markets are broadly basedon these reviews.
and combined a long list o individualreorms. Pressure rom the roika(the International Monetary Fund, theEuropean Commission, and the Euro-pean Central Bank) was undoubtedly important to achieve this goal. Teroika’s decisive approach helped toput the Greek reorm program back on track. In response to these reormsas well as the worsening governmentdebt situation, urther support orGreece was agreed upon late in 2012.Tese measures included a reduc-tion o interest rates on Europeanassistance loans, a partial deerralo interest payments on these loans,and considerably extended repay-ment schedules. Moreover, due to theongoing deep recession, the EuropeanCommission provided Greece withadditional time to meet its decittargets by postponing the deadlinerom 2014 to 2016.
Consolidation and Reforms in theState Budget
Despite the act that consolidationneeds are still considerable in orderto meet the decit targets, the amounto progress to date is substantialand should not be trivialized. It isimportant to remark on our notableachievements. First, Greece will havereduced its primary governmentspending (without interest payments)
 
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by more than 29 percent between 2009 and 2013, accordingto recent data rom the EU Commission.
2
Second, theGreek government revenue ratio (revenues in percent o GDP) increased by more than 6 percentage points to nearly 45 percent o GDP between 2009 and 2012. Tird, thescal decit has decreased by a remarkable 9 percentagepoints relative to GDP, when one-o scal measures areexcluded. Fourth, the structural (cyclically adjusted) decit(excluding one-o measures) even shrank by nearly 14percentage points. Such an adjustment is almost unprec-edented. Hence, the structural primary balance (withoutinterest payments) has reached positive gures in 2012(around 4 percent o GDP), a signicant achievement.With Greeces budget or 2013, passed in all o 2012, thistrend is expected to continue. Te roika set clear stan-dards with regard to a reliable medium-term nance planuntil 2016. Consequently, the proposed consolidationmeasures or 2013 and 2014 are clearly ormulated andmostly already implemented. Tese austerity measuresparticularly address those expenditure items that increasedsignicantly aer 2000 until the beginning o the nancialcrisis, essentially, welare spending and the governmentwage bill. Further, the government plans to reduce publicsector employment over the medium term by 150,000positions. It wants to replace only one in ve voluntary or age-related exits rom its workorce.
3
Moreover, themedium-term strategy will be supported by clear expen-diture limits, which are broken down to the level o indi- vidual ministries. Newly introduced online reportingobligations on expenditure developments are intended tomake compliance with these limits easier to veriy.ax collection has improved, as the signicantly highergovernment revenue ratio shows. However, the ghtagainst tax evasion and corruption will remain a reormpriority. Special units o skilled tax inspectors have beenormed to collect taxes rom wealthy individuals and romthe sel-employed. Key tax inspectors will rotate their posi-
2 The data for 2013 is based on Commission estimates. Between 2009 and 2012,primary government spending in Greece was reduced by 15 percent. When one-off measures are excluded (such as those related to nancial aid to the nancial sector inGreece), the reduction is signicantly higher and amounts to more than 20 percent.3 The most recent milestone to be reached included the identication of 15,000 em
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ployees for mandatory dismissals by 2015. These redundancies are intended to makeroom for new and better qualied employees, for example to improve the government’scapacity to supervise the nancial sector. After rst persistently resisting mandatorydismissals, Greece has now provided a plan for stepwise dismissals of 15,000 publicemployees in total. The implementation of this measure should be closely surveyed bythe Troika.
tions regularly in the uture. According to media reports,withholding inormation about tax evasion will becomea criminal oense or tax inspectors. Additionally, therewill be investigations to ensure that the individual wealthlevels o tax inspectors are in line with their ocial sala-ries. In light o the well-known and chronic problems withtax collection, these steps are highly welcome; however, itremains to be seen how eective they will turn out to be.
Labor Market Reforms
Tere has also been signicant progress with regard tolabor market reorms. Unortunately, this has not yet ledto an improvement in the current employment situationdue to the deep recession. Once the economy recovers,however, this reorm progress should become worthwhile,as major obstacles to employment have been removed.Beore the reorms started, the system o collective wagenegotiations was rather rigid. Tere were hardly any work-place-related wage agreements. National and industry-widewage agreements were oen extended to rms not partici-pating in collective agreements and had a long-lastingeect even aer expiration. Tis institutional arrangementmeant that collective bargaining oen ailed to take intoaccount the economic situation and evolution o produc-tivity at the plant level. In addition, price competitivenessdecreased via rising unit labor costs. Furthermore, sticky wages and working hours led to an excessive rise in unem-ployment during the recession, as rms had no alternativesto laying o their employees when sales contracted sharply.By now, much has changed. Several reorm steps haveallowed workplace-related wage agreements to gainground. Te automatic extension o industry-wide collec-tive agreements to rms not participating in collectiveagreements has largely been abolished along with a clausethat subordinated wage agreements at the plant level.Furthermore, employees are now allowed to directly negotiate their wages with their rms management
There has been signicantprogress with regard to labormarket reforms.
 
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without necessarily involving a labor union. Consequently,wage development will better take into account currenteconomic conditions at the plant level and will, thereore,become more employment-riendly in the uture. o thisend, rms can now also determine working hours morereely. Tus, similar to short-time working arrangementsin Germany, rms can reduce working hours in times o recession instead o having to lay o their employees.Moreover, wage bargaining rounds will be more requentthan in the past, so that rms can better react to changingeconomic situations. Several reorm items contribute tothis achievement, including the ollowing provisions:Te maximum duration or collective bargaining agree-ments has been reduced to a maximum duration o three years.Automatic extensions o collective bargaining agree-ments have been abolished.Instead, there will be automatic wage reductions aerexpiration.Tese reorms should also help to normalize the balance o power during negotiations between employers and laborunions.In addition, signicant wage reductions were achieved inan increasing number o new collective bargaining agree-ments. Tis will help to reduce ormerly sky-high wages,thereby making labor more protable and competitive. Areduction o minimum wages urther contributes to thisaim.Relative to other countries, minimum wages in Greecewere previously very high, at least when compared withthe general living standard. Tese wages posed a signi-cant barrier or young people to enter the labor marketas well as or unemployed to enter or re-enter. Tus, thereduction o minimum wages — by around 22 percenton average and 32 percent or young employees — willincrease employment opportunities or these disadvan-taged groups. Tis step is also signicant since xedminimum wages threatened to prevent the required overallwage reductions. Finally, employment protection rules,which were extremely rigid and protected insiders at thecost o outsiders, were made more fexible. Tis was mainly achieved through a reduction o severance payments.
Product Market Regulation and Competition
Sucient competition in the product markets is not only necessary to ensure that employers have an incentive tolimit wage increases in collective bargaining. Due to low competitive pressures, when rms are able to raise salesprices in reaction to higher labor costs, they becomeless likely to insist on limiting wage increases. Likewise,higher competitive pressure strengthens the link betweenlower labor costs and decreasing export prices, which inturn increases international competitiveness. In addi-tion, reducing entry barriers to closed proessions lowersprices, enhances productivity, and creates new employmentopportunities (especially or young, well-educated Greeks).For these and other reasons, structural reorms in productmarkets, which create more competition, are crucial.Compared to scal consolidation, structural reormswere not given sucient attention in the roika’s initialreorm program. But over the course o the program, theemphasis has shied in this direction. However, while theGreek parliament enacted many laws, including liberal-izing closed proessional services, the bureaucracy as wellas proessional organizations oen ailed to implement thelegislation. In some instances, incompetence on the parto public servants was the problem, in others oppositionto reorms was the cause o delay, especially by those whobenet rom the existing regulations. Tis problem wasaddressed by the roika in the all o 2012, by ocusingprimarily on the eective implementation o reorms or20 economically vital proessional service groups, suchas auditors, lawyers, and tourist guides.
4
For example, thegovernment broke up the monopoly o so-called “customsbrokers,” rms that can directly clear customs. In addi-tion, ees o notary publics were reduced by 30 percent.However, niches remain in which some proessional servicegroups, with little competition and high ees, remainunchallenged.
4 However, the most recent review of the Greek adjustment program by the Commissionindicates that progress is still protracted in this area.
Structural reforms in productmarkets, which create morecompetition, are crucial.

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