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Opening Remarks by Dimitris Malliaropulos, Chief Economist, at the IFFR Conference “Understanding Challenges for the Greek economy”

12/09/2019 - Speeches

Opening Remarks by Dimitris Malliaropulos,
Chief Economist, Bank of Greece & University of Piraeus,
 at the Conference “Understanding Challenges for the Greek economy”
organized by the Institute of Finance and Financial Regulation at the Bank of Greece

1. Introduction

It is my great pleasure to welcome you to today’s event organized by the Institute of Finance and Financial Regulation here at the Bank of Greece. The conference participants are both distinguished academics and high profile professionals who will discuss the challenges that the Greek economy is facing and will share with us their views on how to best tackle them.
Let me first say a few things about what we do here at the Bank. Next, I ’ ll give you an overview of the progress achieved since the beginning of the crisis and I will highlight the crisis legacies and challenges that lie ahead. Finally, I will put forward some policy proposals to address these challenges.
An important aspect of our responsibilities at the Directorate of Economic Analysis and Research, which I am pleased to head, is the analysis of current economic conditions, forecasts of the future course of the economy, the identification of weaknesses and structural problems of the economy and the formulation of realistic policy proposals.
Before the crisis, the Bank of Greece warned of the problems and structural weaknesses of the Greek economy and continued to do so during the crisis with its reports and publications and with the Governor’s public interventions. With full respect for the Bank’s statute and fulfilling our institutional role, we have consistently assisted successive governments in proposing ways to address various aspects of the crisis.

2. Progress since the start of the crisis

It took eight years, three economic adjustment programmes, one major debt restructuring and three rounds of bank recapitalization and the imposition of capital controls over a period of fifty months to resolve the Greek crisis. Despite the missteps, occasional backsliding and delays, significant progress has been made

since 2010 in eliminating the root causes of the Greek crisis. It is particularly worth noting that:

• The fiscal adjustment was unprecedented, turning a primary deficit of 10.1% of GDP in 2009 into a primary surplus of 4.3% of GDP in 2018. The primary surplus exceeded the programme target for the fourth year in a row.
• The current account deficit has been reduced by 12 percentage points of GDP since the beginning of the crisis.
• Labour cost competitiveness has been fully restored, and price competitiveness has recorded substantial gains since 2009.
• A bold programme of structural reforms was implemented, covering various areas, such as the pension and healthcare systems, goods and services markets, the business environment, the tax system, the budgetary framework and public sector transparency.
• The banking system has been restructured. The role of the Bank of Greece was pivotal in the restructuring and recapitalisation of the banking system, as well as in the enhancement of its corporate governance. Today, banks’ capital adequacy ratios stand at satisfactory levels, and their loan-loss provisions are sufficient to address potential credit risks.

A number of important reforms have been implemented, aiming to provide banks with an array of tools to tackle the problem of non-performing loans (NPLs), including a strengthening of the supervisory framework by setting operational targets for NPL reduction, the creation of a secondary NPL market and the removal of various legal, judicial and administrative barriers to the management of NPLs.

These actions have started to bear fruit, as shown by the continued reduction of the NPL stock in line with the targets set. On account of the reforms implemented since the beginning of the crisis and the effort of enterprises to make up for declining domestic demand by exporting to new markets, openness has increased substantially, and the economy has started to rebalance towards tradable, export- oriented sectors.

• The share of total exports in GDP increased from 19.0% in 2009 to 36% in 2018. Exports of goods and services, excluding the shipping sector, have

increased in real terms by 62% since their trough in 2009, outperforming euro area exports as a whole.
• The volume of tradable goods and services in the economy increased cumulatively between 2010 and 2017 by approximately 14% relative to non- tradables in terms of gross value added.

3. Crisis legacies and future challenges

Despite the progress made so far, major challenges and crisis-related legacies remain. In particular, the main challenges are:

• Τhe high stock of non-performing loans (NPLs), which impairs banks’ lending capacity and delays the recovery of investment and economic activity.
• The high public debt. Despite the fact that debt sustainability improved significantly in the medium term with the measures adopted last year, maintaining large primary surpluses over a prolonged period to repay the debt impacts negatively on GDP growth. The restrictive effect of large primary surpluses is even more pronounced when accompanied by very high taxation, which increases the informal sector of the economy, and public investment spending under-execution.
• The still negative current account balance and the negative net international investment position.
• The slow digital transformation of the economy. Based on the Digital Economy and Society Index of the European Commission, Greece for the year 2019 is ranked 26th among the 28 EU countries, which implies a high risk of technological lag and digital illiteracy.
• The still high unemployment rate, which generates inequalities that threaten social cohesion and increases the risk of human capital erosion.
• The projected demographic decline (due to population ageing and outward migration), which exerts downward pressure on potential growth.
• The significant investment gap which risks permanently impairing the productive capacity of the Greek economy through a hysteresis effect. In fact, the net capital stock of the Greek economy (at constant 2010 prices) declined by €65.1 billion in the period 2010-2016. In-house estimates of the Bank of Greece indicate that, in order to raise the net capital stock over the next decade to pre-crisis levels, gross fixed capital formation at constant

prices needs to increase by about 10% per year by 2029. However, excluding residential investment, gross fixed capital formation at constant prices needs to increase by about 5% per year over the next decade in order to raise the net capital stock to pre-crisis levels.
• Finally, attracting capital is a challenging task given the high tax rates, excessive red tape, barriers and obstacles that have proven to hamper investment, and delays in court proceedings and rulings. In this context, it should be noted that non-price competitiveness, so-called "structural competitiveness", is low compared to the European partners, according to the ease of doing business index of the World Bank, the global competitiveness index of the World Economic Forum and the global competitiveness ranking of the IMD World Competitiveness Center.

4. Outlook and policy actions to address the challenges

To address the risks and future challenges facing the Greek economy, speed up the recovery and strengthen investor confidence in Greece’s long-term economic prospects, economic policy should focus on the following policy actions:

1st Reducing the high stock of NPLs with the timely implementation of a systemic solution, which will supplement banks’ own efforts. The decline in NPLs will improve financing conditions for companies and households and speed up the recovery.

2nd Stepping up the pace of the privatisation and reforms programme and improving the management of state assets in order to attract foreign direct investment (FDI), as domestic savings are insufficient to meet the investment needs of the Greek economy. Hence, emphasis should be placed on improving public administration efficiency and removing major disincentives, such as bureaucracy, legislative and regulatory ambiguity, especially regarding land use.

3rd Reducing the primary surplus target from 3.5% of GDP to 2% until 2022 as well as changing the fiscal policy mix, with an emphasis on lower tax rates and higher public investment, so as to boost the growth impact of fiscal policy. With a public debt-to-GDP ratio of 180%, higher growth is 1.8 times more effective in reducing the debt ratio than a higher primary surplus. Hence, if a reduction of the

primary surplus by, say, 1% of GDP leads to an increase in real GDP by 0.8% (given a reasonable fiscal multiplier), the public debt to GDP ratio would still decline by 0.44 percentage points (= 1.8x0.8 - 1). The crucial question is whether this effect will be a permanent or a temporary one. In my view, this depends on the nature of the fiscal stimulus. If the reduction of the primary surplus is the result of an increase in government consumption, then the effect of fiscal loosening on real GDP and the debt-to-GDP ratio will be rather temporary. However, if the decline in the primary surplus is due to a permanent tax cut which stimulates investment and labour supply, the effect could be permanent because it would increase productivity and potential output growth in the long run.

5. Final remarks

In general, what I just mentioned summarizes the Bank of Greece's main views on the topic. Now, I am looking forward to hearing from our distinguished conference participants their own views on the future challenges of the Greek economy and the appropriate way to address them.

Thank you!

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