News analysis

Greece must shed its cosy old ways, modernise economy

A frayed Greek national flag flutters among antennas atop a building in central Athens, Greece on July 20, 2015.
A frayed Greek national flag flutters among antennas atop a building in central Athens, Greece on July 20, 2015.PHOTO: REUTERS

ATHENS • For Greece, it is the economic equivalent of the Big Bang. So far, the questions about the tentative Greek bailout deal have focused on the pact's austere insistence on further cost cuts and new tax increases.

But just as disruptive to Greek life could be the fundamental changes the pact is demanding in the cosy old ways that the country conducts business - changes meant to make Greece a more modern, efficient euro zone economy.

The question is whether the economic overhaul, assuming that Prime Minister Alexis Tsipras can make it happen, would enable Greece to grow its way out from under the country's staggering pile of debt.

Nearly every area of the nation's economy is ensnarled by rules and practices that discourage investment and innovation.

The bailout agreement asks Greece to open some of the main bottlenecks, like the sluggish judicial system, in which it can typically take more than four years to enforce a commercial contract.

Economists say the changes demanded will make little difference over the short term, unless the economy begins to emerge from its latest recession. But with around €4 billion (S$5.9 billion) in new spending cuts required, analysts say the economy may be held back even more.

Cossetted industries like pharmacies, which are protected by fixed working hours and a guaranteed profit margin on medicine sales that keep drug prices artificially high, would face new competition.

And creditors want a further crackdown on corruption in the public sector, where the average asking price of a bribe, for services ranging from a tax audit to a driver's licence, runs around €1,400 (S$2,075).

Euro zone officials such as Dr Mario Draghi, president of the European Central Bank (ECB), contend that the €86 billion bailout plan can work.

The measures, Mr Draghi said last week, "ensure that Greece will become a thriving economy." But that is not a consensus opinion.

"This bailout is not really about a growth plan for Greece, but a plan to make sure the ECB and the International Monetary Fund get paid, and the euro area doesn't break up," said Mr Mujtaba Rahman, chief euro zone analyst for London-based Eurasia Group.

"With so many interests at play, it's hard to devise an optimal economic strategy for Greece."

Many of the changes demanded by creditors were agreed to by previous Greek governments, in two earlier bailouts since 2010, but they have yet to be fully carried out.

The toughest measures this time include additional cuts to pensions and prying open the labour market by streamlining collective bargaining and making it easier to lay off workers.

Economists say the changes demanded will make little difference in the short term, unless the economy begins to emerge from its latest recession.

But with around €4 billion in new spending cuts required, analysts say the economy may be held back even more.

Still, some Greeks see the prospect of an economic overhaul as long overdue.

Mr Spyros Xanthis, the managing director of Xanthis, a family-owned marine exporting company in Piraeus, said his costs would drop markedly if there was more competition in areas of the economy like the legal and transportation professions.

"If I could pay transportation costs of €600 instead of €1,000, that would help the bottom line," he said.

"If my legal fees fell because the legal and notary professions were fully opened, that would be better too," he said.

The Greek economy has shrunk by 25 per cent since 2010, which Mr Tsipras and many economists argue has been caused mainly by the austerity demands made by previous bailouts.

The economic hole has been dug deeper by the government's decision on June 28 to shutter the banks and impose tight restrictions on the withdrawal and movement of money.

The shutdown, and its impact on the economy, added an estimated €20 billion to the bailout tab.

After the ECB said last week that it would at least temporarily resume emergency lending to Greek banks, the government said the banks would reopen yesterday.

However, the controls on money flow, which hobbled Greek businesses, might stay in place for weeks or months.

Still, if Greece could find the political will to carry out the overhauls - many of which drew from an Organisation for Economic Cooperation and Development assessment of what needs to be done - it would make a huge difference, economists say.

It is not that Athens has made no reforms under the previous bailout programmes. As of last year, the European Commission reported, Greece had substantially reduced pension costs and cut government employment by 150,000 workers.

Wages fell by an average of more than 21 per cent in five years, helping to lure new investment.

In tourism, an engine of growth, increased competitiveness and simplified visa procedures helped stoke business.

NEW YORK TIMES

A version of this article appeared in the print edition of The Straits Times on July 21, 2015, with the headline 'Greece must shed its cosy old ways, modernise economy'. Print Edition | Subscribe