The full text of the commentary signed by Papaconstantinou reads: “One year after Greece agreed the economic adjustment programme and 110 billion euro loan with the European Union and International Monetary Fund, it is back in the spotlight - and conventional wisdom is more pessimistic than ever on overcoming the crisis. What went wrong? And can it be fixed?
To answer, it is important to recall what has happened since May 2010: the biggest fiscal consolidation yet achieved in one year by a eurozone country. And it was done the hard way: to reduce the deficit by 5 percentage points, public sector nominal wages were cut by 15 per cent, pensions by 10 per cent, public sector employee rolls by 10 per cent, operational and military spending was slashed, value added tax raised by 4 percentage points, and excise taxes increased 30 per cent.
Fiscal consolidation was accompanied by long overdue structural reforms. A comprehensive pension reform raised the retirement age and linked pension benefits to lifetime contributions. Labour market reform reduced severance payments and cut overtime remuneration. The statistical authority was granted full independence, while fiscal management was strengthened. Tax reform shortened judicial procedures for tax cases, and included a determined - but as yet incomplete - effort to combat tax evasion. Local administration reform reduced the number of municipalities from 1,034 to 325. The start-up of businesses was simplified; a “fast track” process for large investments was legislated; the road haulage sector was liberalised; cabotage was abolished; closed professions were opened.
These are considerable achievements in a very short time. They involved heavy sacrifices by the Greek people, battling a public administration clearly inadequate for the task; and expending of political capital by a government pitted against a populist opposition. Of course, mistakes were made and delays occurred. But this cannot explain the negative attitudes held today by many and the near-certainty of pundits that Greece will not make it. Would spreads be down to 600 from today’s (ridiculous) 1,400 if the deficit reduction was 5.5 percentage points, as envisaged in the programme, rather than the 5 points achieved, or if some reforms were not delayed?
It is clear that the programme design was flawed and had to be subsequently corrected: the interest rate was set too high and the repayment period too short. And capacity problems hampering implementation were not addressed vigorously enough. But the reason Greece will not be able to access markets in 2012 and needs a new loan (coupled with privatisation receipts and a private sector voluntary rollover of maturing bonds) has less to do with flaws in the programme’s design or implementation and more to do with broader systemic eurozone issues, EU electoral calendars, as well as with the reality of debt numbers.
Last October, a few months after the programme was agreed, spreads were falling rapidly - by more than 350 points in just over a month. Then came the Deauville decision to embed debt restructuring in the post-2013 permanent bail-out mechanism, while subordinating the claims of private bondholders to those of official creditors. That reduced incentives for the private sector to hold on to, never mind buy, government bonds in peripheral economies. This was recognised and addressed in the recent Eurogroup decision exempting from subordination the bonds of countries in a programme.