"HELLENIC SME's REQUEST CHANGES IN EU & IMF APPROACH TO GREEK ECONOMY"

Vassilis Korkidis
President of National Confederation of Hellenic Commerce &
Piraeus Chamber of Commerce and Industry

 

The root-cause of the financial and economic crisis that has crippled Europe as well as Greece is a complicated matter and is still not answered whether Greece brought  the crisis to Europe or the opposite. The truth is that Greece faced a mixture of financial problems. The twin deficits, of current account balance and public budget balance, created a huge public debt, worsening competitiveness and caused the banking crisis. Generally the non sustainable growth model that was being followed all those years led to the economic crisis. The development for the Greek economy was triggered by the arrival of the global economic recession in October 2008 and the downgrading of the Greek government debt to junk bond status. This means that there was none willing to lend money to the Greek government and the up to then way of living, without any credibility, couldn’t continue. On the other hand, Europe dealt with the same type of problems but Greece was among the PIIGS countries which faced from all of them, to such great extend, the most dangerous financial problems. The smaller size of the Greek economy gave to Troika the European authority for non well targeted austerity experiments.

The lack of a joint economic policy among the EU members and the unbalance among commercial, financial, and manufacturing sectors, has been one of the reasons behind the deepening of the economic crisis across the continent. The measures of the EU implemented to resolve this issue towards the joint economic policy among EU members were not adequate. There is of course a lot of discussion and meetings going on right now concerning issues such as the “eurobond”, the “Banking Union” (Single Supervisory Mechanism-SSM) or even the harmonization of the legislation. However, these processes require the consensus of all the EU members and of course a lot of time. So far, in Greece very few things have been done in financial support through various Eurofunds, which have either been activated too late or have a very limited effect, if any. I think the most successful measures in Europe were the ones supporting the SME's and the results of "think small first" were obvious, during 2013, when 620.000 new jobs were created by the 24.000.000 SME's in EU of 28 member states.

Despite the fact that the economic downturn in Greece stems, to a great extend, from its budget deficit, many Greeks blame Europe as an undeniable factor for our financial mess. If anyone compares the roles of the EU and USA in respect to this issue, we can see interesting interventions. The first to blame should be ourselves for not realizing earlier that over borrowing and overspending were the main factors for our financial mess. Nevertheless, it is true that the global economic, or better said financial, crisis started from the bursting of the US housing bubble during the summer of 2007 which led to the decline of the values tied to US real estate pricing. Large financial institutions were seriously threatened with collapse, stock market entered a downturn, housing market suffered and unemployment went very high. The crisis was soon expanded to the rest of the world and contributed to the European sovereign debt crisis. It was the US economy that actually triggered the crisis and the fact that the first reactions were delayed and timid. During the crisis, the US government seemed too busy to cure its own problems and threats. Despite these circumstances, the US officials tried to press their EU colleagues to support Greece, when things seemed totally uncontrolled (Grexit). And, to be completely honest, the Greek basic economic fundamental figures reveled that the structural problems have hurt the Greek economy long before the summer of 2007.

The EU financial crisis is well demonstrative of the fact that the European Central Bank cannot determine the continent's economic, financial, and monetary policies without reflecting on the status quo of each EU countries, and that the EU countries' different political, cultural, and economic policies are of significant importance. The European Central Bank (ECB) has a very difficult role to handle indeed. Since the economies of the Eurozone member states are so different with each other in terms of size, growth, structure, prospects and culture, it is almost impossible to design and actual implement an economic policy which fits all. However, the efforts of Mario Draghi to sustain the cohesion of the EU and to support the euro by reducing the interest rates, among others, met with the central European countries refusal and disappointment. This cannot be overcome unless there are three conditions met: 1. Real integration of EU to a federal style union, USE such as the USA, 2. Actual independence of the ECB and 3. Provide the authority to ECB to implement growth policies, when necessary, besides price stability. 

The European Union's prescriptive style of policy-making for Greece for implementing austerity to solve the economic turmoil, proved to be a bad idea, since such strict austerity can no longer be implemented. Greece has lost more than 25% of its GDP (income -32%, consumption -27% etc) in real terms, since 2009, unemployment has gone sky high (27,8%) and all the quality of life indicators have been dramatically worsened. The developments for the twin deficits or the primary deficit seem encouraging. However the social cost has overcome every prediction. Three things seem to be more puzzling for the Greeks, leading to second thoughts concerning the results of their great sacrifices: 1. The competitiveness of the Greek economy has not been improved substantially (from 96th place in 2012 to 91st in 2013-World Economic Forum), 2. Growth rates seem to be far away, even today and 3. The public deficit has exceeded every limit (171,8% of GDP, Q3 2013), despite the “haircut” and all the austerity programs and reforms.

Back in 2009 and when the financial crisis had not erupted across the EU, many experts from the International Monetary Fund had predicted that the financial crisis in Greece would come to an end by 2011. The International Monetary Fund's mistaken prediction, was not the only one, since there is always the answer concerning the “multipliers” and the huge issue that emerged. The IMF experts fell out by at least two years, if not more. Of course, if you ask them, they will probably blame the Greek officials for their decisions, the mixture of the implemented policies, the postponements etc. This estimation caused a lot of side effects, besides the fact that even IMF experts can make mistakes. The first is that a lot of Greeks lost their trust to the government and to the efforts to exit the crisis and the second is that foreign governments officials blamed the Greek people in order to justify themselves to their electoral bodies. However, I think that almost everybody would agree with the fact that the social effects and the risks of implementing such a harsh austerity programs were at least underestimated. Despite its experience, IMF could not realize that Greece was a developed country with a currency that could not been devaluated.

EU's financial institutions and the International Monetary Fund certainly can play a role in resolving the financial turmoil to Greece and across the South EU region, if they allow to the Greek government to make the best, out of the efforts made so far.

The lack of liquidity seems to be the No 1 problem of the Greek enterprises. Despite the recent recapitalization of the financial institutions in Greece, the credit is extremely weak and the majority of Greek enterprises suffocate. On the other hand, the uncertainty conditions, the high unemployment, the non performing loans (almost 35% of the total), the deposits withdrawal and the prospects of the economy put pressure on the Greek financial institutions fundamentals. Without the help and the support of the EU’s financial institutions to the Greek financial system, the challenges cannot be dealt. The IMF contribution could be towards the direction of not including the recapitalization cost as part of the Greek public debt and to encouraging foreign financial institutions to support Greek banking system. 

ECB and other central banks hold 56 billion greek bonds excluded from PSI, which bought them between 35-70% of their value with high interest rate and paid on maturity the 100% of their value. Up to now, in that way they have collected almost the purchase price. The best they can do is to extend for 50 years the maturity of the rest of the bonds and specially those expiring within the next two years...

The International Monetary Fund had earlier announced that it would keep aiding Greece financially only if Athens achieved the monetary targets set by the International Monetary Fund. The IMF approach is to try to set the rules of the game and to show to all the parties concerned a reliable strategy. The most important thing is to see at which level these monetary targets are set and whether the social conditions such as exhaustion of tax capability and sky high unemployment, have been taken into consideration. If it is a matter of just drawing a line, no matter the cost, as it has been proven so far, then this kind of approach is condemned to total failure. I think, Greek people achieved to stay alive during the 6 years crisis period and 4 years without banking system. This is not only  an achievement, but is a case study, how to obtain an ISO in business survival.

The future of those European states who wish to join the European Union, despite recent years' financial experiences of member states is not crystal clear. From a first glance, joining the EU despite the recent financial experiences doesn’t seem a wise choice. It is of vital importance to understand that deciding to enter the EU or not, includes mainly 1. Political (political stability and modernization of the institutions) and 2. Security (Defense) criteria, besides 3. Economic ones. Latvia is an example. The future of those countries can not been foreseen. If they manage to retain their comparative advantages, continue the reforms, adjust to the new conditions and take advantage of all the opportunities provided by the EU, then their future looks promising. In any other case they will face problems. Put differently, the inclusion to the EU is not entering a permanent safe mode. Its rather new challenges that have to be faced in a new European and competitive environment. As far as Greece is concerned, we entered the Eurozone in 2001 unprepared, but as the 10th older member of the EU we were expecting a total different supporting approach from the other member states. Germany and France seems to panicked most in 2010 from the Greek situation and were preparing our sacrifice.

The Greek market resisted bankruptcy by trying hard, to recover after a heavy recession and go back to stability situation, but the first signs of recovery for Greek SME's are without effects of unemployment. The volume of retail trade is still going down by -10%, but in much slower tempo than before. The climate in trade and tourism is improving, but the turnover is not following. Industry, constructions and services sector are also effected by the weak internal demand. The four legacies of the crisis such us low growth, high unemployment, great inequalities and lack of confidence, are still ruling the Greek market through memorandum. The future of Greece depends on its ability to establish sustainable growth and jobs creation. The behavior of the economy will change with more trade, more investments and more credit for the Greek SME's. Overtaxation is not attracting neither internal or overseas investments and a flat tax of 15% to max 20% has to be implied, since the twin deficits changed to twin surpluses and the recession to marginal growth.

The primary surplus of 2,3 billions lets hope that will give to the Greek government a major advantage to negotiate with troika on different basis, reconsidering the front loaded reform program well before the Euro-elections in May of 2014.

Is about time for EU and IMF to give us a chance, to trust Hellenic people and rethink their approach, since Greece not only belongs to Europe, but it is Europe.