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Interview of the Bank of Greece Governor Yannis Stournaras by Johanna Treeck, POLITICO

16/05/2017 - Articles & Interviews

The end is in sight for Greece’s long economic crisis as it and its creditors inch closer to finalizing a political agreement on the country’s reform commitments for its €86 billion bailout program, according to Bank of Greece Governor Yannis Stournaras.

In an interview with POLITICO, he underlined that the Greek economy and political landscape have been transformed, paving the way for sound growth. Surrounded by nautical paintings in his office, Stournaras nevertheless cautioned that Greece and its creditors still have to navigate a few potential problems.

“Greece has done everything its partners have asked for,” he said. “The ball is now in the lenders’ court. I am cautiously optimistic.”

To ensure smooth sailing ahead, creditors must offer clarity on debt relief and ease primary surplus targets for the period after 2020. Meanwhile, Greece has to show greater efforts in privatization and structural reforms, said Stournaras, who also served as the country’s finance minister in 2012-2014.

Would it be accurate to say that the Greek economy is at a tipping point?

The Greek economy is at a turning point. Starting in 2010, Greece has achieved a huge rebalancing of the economy. Twin [fiscal and current account] deficits have now become twin surpluses. A 25 percent improvement in labor cost competitiveness has been achieved. Many structural reforms in the product and labor markets, as well as in the public sector, have been completed. No one should disregard these achievements that came with many sacrifices by the Greek people since 2010.

How does Greek politics play into this?

There is a strong political consensus now for remaining in the eurozone. The large majority of the political parties in Greece not only are they pro-euro, but they have voted in parliament appropriate measures to keep Greece in the eurozone as well. That is also why I am more optimistic. There is less room for populism now.

However, there is still a long way to go. What has been achieved is just the beginning of a new economic model for Greece, based on sound fundamentals and higher competitiveness.

What is the biggest risk facing the Greek economy?

In the short term, the biggest risk is to have a disagreement between the International Monetary Fund and the European partners, and the IMF stepping away from the bailout program. This would be a problem because IMF participation is part of the original agreement, and it would complicate matters if it happened. In such a case, nobody knows what would be the legal consequences for certain member states, especially in Germany, where they have stated explicitly in parliament that they need the IMF as a partner. I am sure, however, that, in the unlikely event that the IMF steps away, a solution would be found. But this development may delay the solution. I strongly hope and believe that the IMF will remain in the program. After all, it is only one year before its end.

Are you confident that the government is ready to deliver on structural reforms?

The government’s approach has changed a lot since July 2015 as far as economic policy is concerned. However, more ownership of privatizations and structural reforms is needed. I am relatively optimistic that at the end of the day, we can return to sustainable growth. But, as I mentioned before, this is just the beginning of a new economic model for Greece and it is not the end of the road. There is much more that should be done to return to sustainable growth.

Are you confident that the European Central Bank will include Greek bonds in its quantitative easing (QE)?

If the Parliament approves the measures and the Eurogroup decides on something more specific and binding on debt sustainability, then, yes, I think the executive board of the ECB will bring the matter for discussion in the governing council.

What would be the impact of QE inclusion?

It will be a seal of approval that the ECB thinks Greece is now on the right path. It will also facilitate the re-entry of Greece into financial markets in 2018. The inclusion of Greek bonds into the public sector purchase program is, of course, not a panacea.

Would you push for the ECB to keep QE going while hiking interest rates, so Greece can benefit for longer?

We have not changed our forward guidance regarding QE and interest rates. There is plenty of time for Greece to benefit from QE, including the reinvestment period.

Is there a risk Greece will need another bailout program?

No, I do not think there is such a risk. In any case, there is no appetite either on the side of Greece or on its partners to have another program. Greece needs to return to markets after the end of this program in 2018.

How worried are you that high tax rates harm the economy?

In my view, taxation is rather excessive given GDP per capita in Greece, and this is why it would be very positive if Greece manages to reduce the final surplus target of 3.5 percent of GDP to 2 percent after 2020. This fiscal space should be used to reduce taxation on labor and capital. That would help growth significantly. High tax rates are hampering growth and entrepreneurship. I think our creditors understand that.

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