Montag, 3. März 2014

Ansgar Belke on macro-economic adjustment in Greece and the underestimated fiscal multiplier

This interview with Open Europe Berlin advisory board member Professor Ansgar Belke was published in Greek by the Greek newspaper "Sunday Eleftherotypia", March 1st 2014.

You were one of the authors of the briefing paper on the "State-of-play in implementing macro-economic adjustment programmes in the Euro area", which had been requested by the Committee on Economic and Monetary Affairs (ECON) of the European Parliament. Can you summarize some of the key findings of the study?

Our key conclusion regarding Greece is that the initial programme had underestimated the fiscal multiplier and thus the depth of the recession which was partially unavoidable.

However, one element which could not have been anticipated at the time (i.e. 2010) was that Greek exports would not increase for several years. This is difficult to explain because exports increased by about 5-6 % per annum in the case of Portugal, which faced also sluggish markets (Spain is its biggest market) and also faced a domestic credit crunch. The lack of export growth made the recession in Greece much longer and deeper than it would have been otherwise - and also made the fiscal adjustment much more difficult.  If Greek exports had increased at the same rate as those of Portugal (or Spain), the recession would have ended by now.

Going forward we do not see any hope for a sustained recovery unless exports start growing. This will require deep structural reforms. Not just the adoption of new laws in parliament, but profound changes in the way the administration works.

Without export growth the debt level is not sustainable and there will need to be repeated official sector involvement (OSI) until the economy starts growing again. So the key conclusion is that the lack of export growth is more important than the primary surplus.

Much of the hope for the recovery of the Greek economy has been placed, indeed, on exports, yet Greek exports are not only showing any substantial increase, but the much acclaimed policy of allegedly achieving competitiveness through wage deflation had proven to be a hoax, given that the slight improvement of Greek exports is with non-EU countries. What is the study’s conclusion on the police of wage deflation as a tool of improving competitiveness?

What makes Greece special is the lack of growth in exports despite a considerable fall in wages. The only explanation for this puzzling phenomenon must be that the Greek economy has remained so distorted that it has not responded to changing prices signals.

We find little evidence that structural reforms have increased the adjustment capacity in any of the countries under consideration. But the starting point for Ireland and Portugal was already one of considerable quality. In Greece, by contrast, the quality of the institutions, as far as one can measure, was already much lower than that of the other programme countries. And the little evidence that exists suggests that since the start of the programme many indicators have deteriorated. 

Greece has gained more competitiveness through lower wages than other countries, but exports are still stagnant. Does this imply that competitiveness is not important? Without deep structural reforms exports will not grow.

The IMF and the EU have different perspectives on assessing government debt sustainability. Even so, Greek debt is totally unsustainable no matter which perspective one chooses to adopt. Does the study recommend a new “haircut” on Greek debt, since, without one, Greece is simply doomed into a permanent state of peonage?

Our study shows that the burden of the debt is not higher in Greece than in Italy. The debt ratio is much higher in Greece, but the interest rate is also much lower. The Greek government is thus spending the same proportion of GDP in interest on its debt as the Italian government.  

Part of the improvement in the deficit in Greece has actually been due to the low interest rates on the official debt, which now constitutes the bulk of Greek public debt. Interest payments amount to a lower percentage of GDP in Greece (4.1% projected to rise to above 5% of GDP) as in Italy (currently 5.4% of GDP) although the Greek debt/GDP ratio is much higher. Moreover, much of Greek public debt is now very long term. This implies that the fact that the Greek debt-to-GDP ratio is at 175% of GDP, much higher than all other euro-area countries, does not imply immediately that it is not sustainable.

The key issue is thus not the debt burden, but the perspectives for growth. As we argued above: without export growth the debt level is not sustainable because without export growth the domestic economy cannot recover and then there will need to be repeated official sector involvement (OSI) until the economy starts growing again.

Unemployment is the biggest problem facing Greece and the rest of the peripheral eurozone nations. Yet, the EU has shown criminal indifference to this problem, insisting in turn on the intensification of policies that reduce domestic demand, thereby suppressing economic activity and sending an ever growing number of people to the unemployment line. Did the study have anything to say with regard to the problem of unemployment?

Our study did not concentrate on the problem of unemployment. All adjustment programs lead to an increase in unemployment. This is unavoidable. However, in a flexible economy, employment recovers as the export sector expands. This key element is missing in Greece.

The EU policies on the table that are supposed to have an immediate effect, such as increased lending from the European Investment Bank to SMEs for the hiring of young people, will only have a very marginal impact on youth unemployment. Moreover, this impact will come mostly to the detriment of older unemployed persons excluded from such a scheme.

Across the Atlantic, a number of highly respected economists are strongly recommending for Greece and other eurozone countries facing socially unacceptable rates of unemployment the introduction of a direct employment scheme along the lines of the “Employer of Last Resort.” Why are European authorities unwilling to consider such public policy measures when it is rather obvious that mainstream approaches to dealing with unemployment and poverty have failed miserably?    

Let me first stress that we were not asked and hence did not deal in our study with the ELR proposed by Hyman Minsky and resuscitated, for instance, by Randall Wray. Anyway, its proponents are still confronted with too many important questions which they have not been able to answer yet, such as: (a) At what level is each type of job remunerated? (b) If the ELR jobs are paid too little, don’t they risk to extend poverty? (c) Where to offer the jobs? (d) What kind of jobs are in the focus of ELR? (e) Who does the supervision?, (f) How does all this affect private companies that provide the same products and/or services as ELR agencies? 

According to all experience, thus, one has to fear the ELR would create a giant bureaucracy plus jobs that provide neither satisfaction nor represent true drivers of sustained growth, and jobs that interfere with the process of job search. A probable scenario under ELR would instead be a Greek nation probably filled with non-productive equivalents of US fast food servers and US Walmart greeters. 

Rather than installing an ELR, we would suggest (again, not included in the study) the government should enable the private sector to provide greater employment opportunities. 

Prof. Dr. Ansgar Belke is full Professor of Macroeconomics and Director of the Institute of Business and Economic Studies (IBES) at the University of Duisburg-Essen. Since 2012 he is (ad personam) Jean Monnet Professor. Moreover, he is member of the Adjunct Faculty Ruhr Graduate School of Economics (RGS Econ) and visiting professor at the Europa-Institute at Saarland University, Saarbrücken, and since 2009 Member of the European Parliament's Monetary Experts Panel. 

1 Kommentar:

  1. Isnot the most important question why would an exporter invest AT THIS MOMENT at all in Greece and not in some of its competitors (as nations). It is remote and expensive.
    High overall cost structure (not only labour); high taxes (to pay for the finacial crisis, with very little but red tape in return); not particularly well trained and educated labourforce, remote with very high logistic costs; small declining local market; no brand value etc etc.
    Simply looks like a complete write-off tbo.
    Social programms look completely unrealistic btw. They simply donot have money for that. Plus organised by the state it would mean more of what is simply not working. In other words also social a complete write-off.