The third Greek bailout has so far again failed to produce the desired results predicted by the EU.
The main reason cited by researchers at the Kiel Institute for the World Economy (IfW) in a recent policy brief is the unwillingness of the political elites and population to implement the kind of reforms that have proven successful in other crisis-hit EU countries. The proceeds of privatization are likely to fall far short of expectations and Greek debt is unsustainable at its present level.
A survey of the current economic situation in Greece makes sobering reading. In what is now the seventh year of rescue efforts, major structural deficiencies remain unresolved. Greece continues to lag far behind the EU with regard to almost every important parameter, such as economic growth, labor productivity, and real incomes. In some respects, the country's economic condition has actually worsened over recent years. This is despite three bailout programs in a row. Similar programs implemented in Ireland, Portugal, Cyprus, and Spain were successful first time around, although aspects of the reform process remain unfinished in the individual countries. That is the conclusion drawn by the report's authors, David Benček, Claus-Friedrich Laas, and Klaus Schrader from the Economic Policy Center of the Kiel Institute. "The third adjustment program is merely a new attempt to do the same old things, which have not been achieved during the past seven years," said lead researcher Klaus Schrader. "The poor state of the Greek economy is mainly due to the lack of willingness to implement reforms on the part of policymakers and the population. The EU must take some blame for making unrealistic promises that have had to be corrected year after year, leading to frustration and a lack of confidence in the reform program both inside and outside Greece. The anticipated revenue from privatization of EUR 50 billion is as much an illusion today as it was in 2010—a figure of less than EUR 15 billion is more likely."
Third bailout package will not deliver a fast turnaround
The third rescue package for Greece provides, among other things, for labor market reform, modernization of the education system, deregulation of product markets, improvements in the business environment, better regulation of network industries, continuation of the privatization process, and the reorganization of public administration and other state institutions. "Many objectives, including some fundamental reforms, were laid out in the first bailout package but still form part of this third package. Even if, contrary to past experience, the reforms are now implemented, they will only take effect in the medium to long term. Accordingly, the growth breakthrough forecast by the EU for each and every rescue program, which this time is scheduled for 2017, will again fail to materialize," commented Schrader.
Greek economy uncompetitive, debt unsustainable
In the period from 2008 to 2016, real gross domestic product (GDP) in the EU rose by almost 5 percent, but shrank in Greece by more than 25 percent. While real disposable incomes in the EU have increased since the 2008 financial crisis, Greek households suffered a 23 percent loss of real income up to 2015. The authors regard the structure of the Greek economy as particularly problematic. The highest share of employment in the country is accounted for by sectors like retail & wholesale and agriculture, where labor productivity is well below the EU average. Greek industry is concentrated in labor and resource-intensive sectors, such as the production of foodstuffs and animal fodder, tobacco, and generic drugs. "With its focus on labor and resource-intensive industries, the Greek economy competes with developing and emerging countries. As such, it is unlikely to be successful in international markets over the long term. It lacks the kind of growth industries that are characterized by a potential for knowledge-intensive innovation," said Schrader. In terms of employment, Greece remains below pre-crisis levels in absolute terms. Where there are signs of recovery, it mostly involves low-pay jobs in areas like the restaurant sector. "The country is still struggling to overcome its long-standing structural problems."
The economic policy environment in Greece likewise remains poor. The biggest weaknesses identified by the authors are the inadequate land registry system, poor enforceability of contracts, and difficulties in obtaining loans. "What is particularly alarming is that, instead of beginning to catch up, Greece has tended to become less competitive in recent years. The environment for entrepreneurs is very poor when compared with Europe as a whole and other OECD countries, with political and administrative stability, administrative efficiency, tax legislation, and corporate funding scoring particularly badly," said Schrader. "Given this backdrop, further debt relief—however necessary—will not help solve Greece’s problems. There is no reason to believe that Greece can reduce its debt burden on its own, and debt relief or debt restructuring will only contribute to economic recovery if accompanied by lasting structural reforms."
"The situation in Greece shows that stagnation and delays in carrying out reform do not help preserve prosperity. Rather, they accelerate the erosion of incomes. With this in mind, it would be in Greece's interest to implement the reforms in full and without further delay during the course of 2017. If this scenario turns out to be wishful thinking and a fourth bailout looms, the parties involved would need to ask themselves what the chances are that it will succeed—and consider terminating the bailout process."