Articles & Interviews

Interview of Bank of Greece Governor Yannis Stournaras to The Agenda program of "CGTN" and to Juliet Mann

29/07/2023 - Articles & Interviews

Juliet Mann: This week on The Agenda. We are in Athens for an exclusive interview with the Governor of the Bank of Greece, Yannis Stournaras. For thirteen years, Greece faced a debt crisis and financial stagnation, three international bailout programs and a global pandemic later. The economy is steadily growing. The cost of living still soars and unemployment remains high. But growth in Greece is outpacing most eurozone countries. So, what is behind the economic revival? And what has Greece learned from the economic crisis? We are in Athens to talk to the Governor of the Bank of Greece.

Mr. Stournaras, thank you very much for having us here in Athens, where we are in the midst of a heat wave. But it is not slowing you down, is it?

Yannis Stournaras: It is a great pleasure to have you here. Even under these conditions.

Juliet Mann: In terms of where the economy is going, how things are moving?

Yannis Stournaras: The economy is moving fast. There is no doubt that Greece has been a success story, with the economy coming back from the cold during the crisis. But now it is growing fast. It is reducing its public debt-to-GDP ratio very quickly. It has embarked upon a number of structural reforms. So, all in all, a success story, but with a lot of suffering, I should point out.

Juliet Mann: To what extent would you say that Greece's economic revival is still a work in progress?

Yannis Stournaras: Of course, it is a work in progress. Just to tell you the big picture, I think we have solved the big problems, the first of the problems, which is debt refinancing, the recapitalization of Greek banks during the crisis, staying in the euro. Do not forget that ‒ because many people had doubts that Greece would stay in the euro, both in 2012 and in 2015. Now, these are problems of the past. With a lot of restructuring, a lot of consolidation, we reduced the gigantic twin deficits, the public sector deficit and the current account deficit. We recapitalized the banks. We have made interventions to the social security system, to the tax system. These have been the first of the problems that have been solved. Now, we have a number of, I would say, second-order problems. Important, of course, like still bureaucracy in the public sector, delays in justice, the triangle of knowledge, education, connection of education with the production, with the development model of the country. These are, I would say, second-order problems, but these are the ones that we are trying to solve now.

Juliet Mann: Is high unemployment and the soaring cost of living of those second-order problems?

Yannis Stournaras: Unemployment is falling very quickly. Actually, now Greece has vacancies. We have lack of hands and there is excessive demand for labor now. Of course, there is a paradox. The numbers show unemployment going to as high as 10.5%, but also there are vacancies. That shows that there are still certain distortions in the labor market and a mismatch between skills. So the skills we want, they do not exist. Perhaps we need to bring labor force from abroad. These are the questions we have to answer now.

Juliet Mann: And that is a conversation that many years and economies are having, isn't it? I wonder, is Greece's economy changing fast enough?

Yannis Stournaras: It is changing fast enough. It has become much more extrovert. It has become much more competitive. It has resolved many, many problems that it had in the past. But still, there are problems remaining: tax evasion, delays in justice. I would say the labor market has a number of problems in tourism, in agriculture, in construction. There is lack of hands. There are many vacancies there.

Juliet Mann: You have said before that Greece had nearly left the euro. That was a serious conversation. I reported on it. You lived through it. It was very, very close. Now it seems to be a turnaround and Greece seems to be very much the darling of the eurozone. With growth, it is outpacing many of the other eurozone economies. Where has that come from? Has it been financial support from your peers? Has it been the government's direction? Or something else?

Yannis Stournaras: I think it is a combination of mainly two things. The first is that the Greek people bore a huge restructuring. We increased taxes, we reduced expenditure, we reduced pensions, because unfortunately there is no other way that, in the short run, you can solve a gigantic public sector deficit problem. There was a lot of austerity and suffering, I am afraid, but there was not any other way to solve the problem in such a small period. We also had the refinancing of the Greek banking system, the creation of new institutions, like the independent authority for the tax revenues that, in my view, was a very important reform. So that was on our part. Our partners contributed to these by refinancing our public debt very generously. Now, the Greek public debt has been fixed; its average remaining duration is more than 20 years; the average effective interest rate on public debt is 1.3%, one of the lowest in Europe; it is in official hands. So that is why I said that was the most important problem. Of course, now our consideration is to have a primary surplus of 2% of GDP, so that this large public debt is falling steadily for a number of years. But also we are trying to have a high growth rate and we actually do. Now we have one of the highest growth rates in Europe. It is very important that what we call ‒ sorry to use a technical term ‒ the “snowball effect” is helping us a lot. What is the snowball effect? The snowball effect determines, to a large extent, public finances and it is the difference between the nominal growth rate and the average interest rate on public debt. In the past, during the crisis, that was negative, which means nominal growth was very small and the average interest rate on public debt was very large. So that was dragging us down. Now it is the other way round. The normal growth rate is much higher than the average interest rate on public debt, and that picks us up, just to put it in non-technical terms.

Juliet Mann: There is something that is niggling me. You talk about austerity and the suffering as that was in the past, but there are still people who are struggling to put food on the table. The prices of basics have gone sky-high. I know high inflation and the rising costs of living is something that is not unique to Greece. How are you tackling that?

Yannis Stournaras: As you know, inflation in Europe is a common problem. It is mostly a supply-side shock. It came out of the pandemic. Then we had the war in Ukraine, which created an energy shortage in the beginning. And Europe, as you know, is a very large net energy importer. It is not like the United States, which is an energy exporter. In Europe, we import a lot of energy. And then we had a food crisis. So there was another supply-side shock. Under these circumstances, bringing inflation down and, at the same time, having a soft landing is not an easy thing at all. But I think in the ECB we have done a good job. We have used monetary policy in a very careful manner. Do not listen to all these critics who say that we were late to raise interest rates. This is not correct, in my view. We have followed a very moderate monetary policy tightening. Now it is accelerating and we have managed to have much lower inflation. I remind you that last October inflation was more than 10%. Now it is half of it. And also, we have a soft landing. We do not have this huge recession that many people had predicted. Of course, we are not growing fast. In Europe, growth is almost zero. We expect 0.9% growth this year, which, given the circumstances, is not a bad achievement.

Juliet Mann: It is interesting you say inflation has come down, so we are still celebrating a five point something percent. So it is still expensive today.

Yannis Stournaras: It is expensive, of course. And food prices are still very high. But we live in a huge uncertainty. I mean, after the pandemic, after the war in Ukraine, the geopolitical conflicts. That means that the world now faces much more uncertainty than before. So economic policy takes place under much more difficult conditions than before. And we have to be very careful. That is why governments, banks, companies, want to create buffers for the next day.

Juliet Mann: I want to talk to you more about the eurozone in a moment. But let's stick with Greece, because I sense that you are very optimistic about what is happening and how things are changing. You said in March that Greece was months away from an investment grade rating after 12 years in the junk bond wilderness. Do you stand by that? What is going to happen now?

Yannis Stournaras: First of all, now we have a government with a full majority in the parliament. It is a pro-European government, a reformist one, and is doing the right thing. It is not easy for the central banker to concede that, but many of these people were my colleagues in the previous governments, and I know they are dedicated to fiscal sustainability, they are dedicated to reform. The Prime Minister has announced a very ambitious reform program in the Parliament a few days ago. So, all in all, I am optimistic, yes.

Juliet Mann: Since 2019, this government has been very pro-business. Foreign direct investment has grown steeply. But Greece still has the highest debt load in the eurozone. You talked about bringing it down, but still the economy is much smaller than it was. So what reforms are needed now?

Yannis Stournaras: I would say two things. First of all, we should continue on being fiscally very careful. We need to increase our primary surplus. It is going to be 1% of GDP this year to 2% next year and stay there in cyclically adjusted terms. We need a 2% primary surplus for a number of years in order to bring down this large public debt-to-GDP ratio. But it is falling down. I mean, Greece is not an outlier in terms of public debt. It might be an outlier in terms of numbers, but in terms of servicing the debt, which is what matters, is not an outlier anymore. And this is important. This is number one. Number two, the reforms that I have talked about before: delays in justice, labor market distortions, skills mismatch, connecting more universities with the economy. I would say these are the big challenges.

Juliet Mann: Let's talk about the green economy. What role do you see Greece playing now?

Yannis Stournaras: On the green economy? Well, as you know, perhaps one of the omissions we have made in Europe is that it is not sufficient to invest in photovoltaic or in windmills. We also need two more things: grid to connect the various parts of Greece with the islands and with other countries of Europe, and Africa perhaps. And we also need batteries, we need storage capacity. So a lot of investment has to take place in grid and in storage capacity, because green energy, without these two things, is no good, because it is wasted. Unless we can store electricity or unless we can disperse electricity through the grid, it will be wasted.

Juliet Mann: So those are things you say the Greek economy needs. What are you doing about it?

Yannis Stournaras: We invest a lot. It is true that the European Union provides Greece and other European Union countries with a lot of investment money, especially after the pandemic, but also Greece invests a lot in these areas.

Juliet Mann: And in terms of drawing that investment, where are you looking? Where is that green money going to come from?

Yannis Stournaras: Both the private sector and the public sector. It is public investment, partly financed by the European Union, but also private investment. So it is a combination of private investment and public investment.

Juliet Mann: I want to go back to inflation. How do you think that high inflation has dampened the economic outlook, not just in Greece, but also beyond?

Yannis Stournaras: Of course, as you know, inflation reduces the disposable income because wages have not adjusted as much as prices have adjusted. So we are witnessing a real wage drop in the previous years. Now there is some catching up. We want this catching up to be moderate, because we do not want to create a spiral between wages and prices. Actually, we want two things: we want wages to increase no more than the sum of inflation and productivity and we want companies, especially in certain sectors, to bring down their profit margins, which have increased a lot. Especially in energy, food, but in many other sectors as well. For the first time in many years, prices have outpaced wages to a very large extent. Also they have outpaced costs, which means that profit margins have gone up. I hear arguments that we need to create buffers for the future, but this is stagflationary. If this continues, it will be fatal. It will create stagflation. It will create inflation through a wage-price spiral and a reduction of production and GDP, which will not be good for societies.

Juliet Mann: What would you say is particularly different about this inflationary cycle?

Yannis Stournaras: Compared to the previous ones? I think it is mostly a supply-side inflation. It came through a series of supply-side shocks ‒ that is how it started. In the US, it was both demand and supply. In the US, I would say it was 60% or let's say it was 50/50. In Europe, it was 80% supply, 20% demand. In Europe, for instance, domestic expenditure is still not at the pre-pandemic level. In the US it is higher.

Juliet Mann: Okay. So how to fix it?

Yannis Stournaras: Unfortunately, monetary policy is not enough to tackle inflation which comes from the supply side and at the same time have a soft landing and financial stability. Monetary policy is one instrument, but we need more instruments. We need macroprudential policy, which means that we have to look after the health of banks. We need fiscal policy. We cannot increase interest rates and at the same time have governments expand fiscally. So we need a helping hand from fiscal policy and also structural policy. We want reforms like the ones I described for Greece. We want energy policy. I think the European Commission has now taken serious steps on energy policy. So it is a combination of policies that are needed to tackle supply-side inflation, if we want to have, at the same time, financial stability and a soft landing in the economy.

Juliet Mann: But in terms of using the tool of raising interest rates to bring down inflation, do you think it is working?

Yannis Stournaras: It is working. Not as good as compared to a case where it would have been a demand-led inflation. But even in a supply-side inflation, monetary policy has helped to contain inflationary expectations, which are now very close to 2%. To a large extent, this is because of monetary policy, which also has so far prevented a spiral between wages and prices.

Juliet Mann: You sit on the European Central Bank Governing Council. How do you really feel about the direction the interest rates have been moving in?

Yannis Stournaras: So far, so good, I think. I agree with what we have done and we have done it with careful steps and that's why we have managed to bring down inflation and also to have a soft landing and financial stability. We do not have bank episodes in Europe.

Juliet Mann: Greece was the first European country to sign up to China's Belt and Road Initiative. It is going to mark its 10th anniversary this year. The port of Piraeus is just a few miles from where we are right now. That was the first European stop on the Maritime Silk Road. How has Chinese investment changed the Greek economy?

Yannis Stournaras: I think this COSCO investment in Piraeus turned out to be a good investment. It has turned Piraeus around. It has made it a very competitive port. So it is a successful investment all in all and I think it has much more to offer. I think it should connect the port with the railway system, create logistic centers. So there's still a long way to go, but it is a successful investment.

Juliet Mann: And in terms of Chinese investments, will they generally increase?

Yannis Stournaras: China, of course, is a commercial partner of Greece. Imports of Chinese goods in Greece are about 8% of total imports. We export services to China, especially maritime services. Again, about 8% of the total exports of our services go to China. So China is an important partner for Greece, but also there's some direct investment coming to Greece from China and Hong Kong. It is not only COSCO, but also some real estate development coming from China.

Juliet Mann: You mentioned Greece is very open, open for business and exporting services. How important would you say China is as a market for Greek businesses? And how can you, as the country's chief banker, help them tap into that and other global markets?

Yannis Stournaras: China is a very large country, of course it is very far from Greece. Still, I think there are opportunities to increase exports, Greek exports of services to China, but also of goods. Olive oil is one example. I think there is still some way to go. And in terms of investment, we welcome investment, provided international rules are being obeyed. So we are very open to investment from China.

Juliet Mann: We have talked about the Greek economy. We talked about where it sits in the eurozone and prospects for growth there. But the backdrop is complex, isn't it? Economic fragmentation, slowing growth in general, high inflation. So what is your take on prospects for 2023?

Yannis Stournaras: For Greece, according to our forecast, we are quite optimistic: 2.2% growth this year, 3% next year, 2.7% the year after. So, much higher than the European average, which means real convergence. Of course, the important thing is to have real convergence, but without macroeconomic imbalances, and this is why we were very careful on our fiscal policy. For Europe, the main task is to bring inflation down to 2% as soon as possible. We think we will be very close to 2% into 2025. We are pleased to see inflation falling. Now, of course, the question is to have a soft landing, to avoid a recession in Europe and to have financial stability, that is healthy banks. The world is complicated, full of uncertainty. Just to tell you one example, the so-called advanced countries contributed half to the world growth before the crisis. Now this has fallen to less than one-fifth. That shows that most of growth now comes from Asia, from China, India and other Asian economies. So they have become tigers again.

Juliet Mann: Let's put the growth numbers and the forecast to the side for a moment and just think about those risks to financial stability that you fear, that you see out there for the rest of the year. What might be the main roadblocks to returning to growth and shaking off the specter of global recession?

Yannis Stournaras: That is why I said before that we should not continue raising interest rates, because a combination of still high inflation, low growth, uncertainty and rising interest rates might cause something to break and we do not want that. That's why we are now on a thin edge. We have to be very careful with monetary policy, with fiscal policy. All policies should be available to achieve the target of bringing inflation down, but with a soft landing and financial stability, this is the important thing. It is complicated because of the uncertainty worldwide.

Juliet Mann: But you like a bit of complication. You have worked all around the world.

Yannis Stournaras: Yes.

Juliet Mann: So, if there was one economy that you could get your hands on now, which one would it be?

Yannis Stournaras: That is a good question. Let me turn the question and say that I believe very much in cooperation between economies, especially between the giants, especially between China and the United States. I do not believe that in the economy the game is a zero-sum game. I believe that the game in the economy is a win-win one. So I believe in cooperative policies. It is never a first best to have trade restrictions. I believe in open trade between economies. You can achieve whatever you want with other means, but not with tariffs. I think tariffs and trade restrictions create welfare problems in all economies. So it is never a first best. I would like to answer your question by giving a piece of advice. Of course, Greece is a small economy, so I hope that what I am saying does not sound very arrogant, but, if I could advise both the US and China and the other big economies, I would tell them to be cooperative. I think cooperation is better than conflict. What unites us is much more than what divides us.

Juliet Mann: It has been an absolute pleasure talking to you, Governor.

Yannis Stournaras: Thank you. Thank you very much.

To view the interview of Bank of Greece Governor Yannis Stournaras on "CGTN" (China Global Television Network), click here.