Memorandum to Prime Minister George Papandreou: Towards a reform and growth strategy

During a two-day international conference at SEESOX, St Antony’s College, Oxford, entitled: Whose crisis? Greece’s politics, economic and society in an era of uncertainty (27/28 May 2011) 35 speakers and more than 100 participants engaged in a frank and constructive discussion on the causes, implications and future outcomes of the current crisis. Inspired by some of the ideas in this conference, we have continued the discussion in Oxford and we are ready to engage in a cooperative spirit with your administration during these challenging times, if you so wish.

Our initiative offers a dialogue, contributing in a critical and constructive manner to key issues of your reform and growth agenda. The focus is on five aspects. Let us lay out the case for each one.

1. Striking a new social contract. The crisis marks the end of an epoch in Greece. What we are facing today and in the coming months in Greece is the challenging attempt to formulate a new social contract between state and society, between political elites and citizens. This requires an assertive government leading the effort for change and an entrepreneurial class supporting the reform and growth agenda. The realistic timescale for such systemic change is more like a decade in order to deliver a competitive and market-driven economy governed by the rule of law.
2. Greece stands at a crossroads. The magnitude of the challenge is enormous and your administration deserves greater international credit for the significant accomplishments in 2010. Stiff headwinds from the domestic and international environment require improved message discipline in Greece and simultaneously among its euro area partners. The implementation of your reform agenda in 2011 and going into 2012 stands at a crossroads, requiring added legislative momentum, reinvigorating structural reform efforts and emphasizing continued financial and political support for Greece’s efforts.
3. Engineering a catharsis. Against this backdrop, in our view the situation in the coming months requires attention on a socially fair impact of the fiscal measures to be adopted. Moreover, as citizens across the country repeatedly emphasize in a peaceful manner, they continue to demand a catharsis of those responsible for the crisis’ origins and consequences. This cannot be carried out by parliamentary committee alone. It requires greater visibility, efficiency and accountability in a state governed by the rule of law. It also requires a better communication strategy that the recent sacrifices have paid off and that the additional will lead to brighter future. People are seeking fairness and hope.
4. Broadening the reform agenda. After one year in operation, the present framework as agreed in May 2010 between your government and the Troika is increasingly showing to have been unrealistic in substance and far too optimistic regarding the timetable (e.g. when Greece would be able to return to international bond markets). Hence we are now entering the re-engineering phase of the Growth & Stability Agreement with the Troika. This extension of the agenda is necessary and constructive. It should lead away from a narrow focus on spending cuts and austerity policies to a promising growth strategy.
5. Our suggestions cover ways of working towards a consensus with European partners regarding co-operative sovereign debt approaches for Greece. The menu of options currently being discussed – albeit far too publicly – has various benefits and drawbacks in terms of legal procedure, time constraints, costs involved and level of political consensus required from European partners. But if handled reasonably and with competence, solutions can be identified and agreements garnered towards such options

Let us spell out more specifically our recommendations with regard to these five subject matters. They are by no means written in stone, neither are they a fixed road map. Rather they may serve as signposts for our discussions.

• The present framework needs re-adjustments in a pre-emptive manner that ease the debt and adjustment burden, but without the potentially searing costs of disorderly restructuring. The situation is intensely worrying for Greece as well as euro zone member states, including the other two programme countries, Ireland and Portugal. Timing is key here. Greece needs a new growth perspective and a job creation agenda around which Greek society can rally.
• Greece must be given additional time to place its debt burden on a sustainable trajectory. We understand the concern that demands for burden sharing through private sector involvement might undermine the government’s credibility. But such burden sharing may be necessary. The task is to ensure that any solution of private debt is not implemented in a disorderly and involuntary fashion. The same applies for any approaches towards public debt. Constructive and feasible options towards cooperative debt resolution arrangements are available, e.g. within the EFSF by extending official financing on terms fully adapted to the medium and long run nature of Greece's adjustment challenge. However, these actions will not create a silver bullet. If other aspects of your reform agenda are not implemented, the real economy in Greece will not reach a sustainable trajectory.
• Restoring growth and improving debt dynamics, depends crucially upon rebuilding the competitiveness of the Greek economy, through a significant reduction in domestic unit labour costs. This is difficult without the option of exchange-rate adjustment. It requires determined policy actions in relation to the labour market, of a kind large enough to achieve a very sizeable internal devaluation. Such actions will involve both significant wage reductions and the liberalization of regulated professions. Without such decisive action all other components of adjustment are likely to end in a slow-growth failure.
• Determined action is also needed in areas concerning the improvement of collection capacity and the enlargement of the tax base, in particular among the self-employed. But the widening of the tax system needs to address primarily those who evade their taxes. The fairness of the tax system is not only in making those who already contribute to pay more in a proportionate manner. It is also about bringing in additional resources from those who have been escaping personal income tax and/or corporate taxation in one way or another during the past decade.
• Public administration reforms are necessary, e.g. in the field of ‘fast track’ investment procedures. Any strategy for sustainable growth in Greece must equally address how to support and expand domestic investment, improving the business environment. A credible commitment by the government and corporate sector that falling incomes and higher profit margins will be reinvested is key in sustaining citizens’ tolerance of real wage cuts, and cuts in allowances and pensions.
• Unlocking the Greek economy’s growth potential is already taking place. Net exports are now leading GDP performance. The sustainability of this dynamic needs further input on the structural fiscal side, the pooling of IFI resources for trade facilitation, credit financing of exports through commercial banks and regulatory innovation in areas such as licensing requirements, rules of origin and non-tariff barriers. However, investment in export-creating activities will critically require that the sovereign debt risk premium as well as yields on private sector debt needs to be pushed back down short-to medium-term.
•  What Greece needs, and cannot shoulder alone at present, are targeted domestic investment projects, job creation schemes and qualification programmes, coordination of funding instruments from the EU’s structural and regional funds with the temporal suspension of co-financing requirements and supplemented by additional resources from the European Investment Bank (EIB). Whatever the title of such an initiative – Greek-style Marshall Plan or Hercules Plan – it must be organized quickly and implemented without delay, otherwise the real economy and its viable sectors risk losing their footing.

We are firm advocates of the need for European solidarity with the Greek people and for advancing an unprecedented reform agenda closely connected to growth. We are available to engage in an advisory capacity to create further momentum towards meeting the challenges Greece faces today and the achievements the government seeks to continue implementing. We have a pool of scholars, from an interdisciplinary perspective, in Oxford who have manifested a genuine interest on Greece’s successful exit from the crisis.

Dr Othon Anastasakis, St Antony’s College
Dr Jens Bastian, St Antony’s College
Professor Kalypso Nicolaidis, St Antony’s College
Professor David Vines,  Balliol College