Daily Archives: July 27, 2011

European leaders have called for a comprehensive strategy for growth and investment in Greece and a task force will be appointed to set out the details of how European Union structural funds could be used to that end. We had floated such ideas in February. Here is what the EU should do.

Money is available in substantial amounts. According to our calculations, Greece still has more than €12bn in unused structural funds, which could be used to leverage loans from the European Investment Bank, potentially increasing the funds available over the next two to three years to €16bn. This, equivalent to 7 per cent of Greece’s gross domestic product, would not involve any additional transfer to Greece beyond what has been already allocated to it in the EU budget.

However, governance must be reformed. The EU structural funds are earmarked for regional development and subject to long procedures, not least because of political give-and-take. Spending priorities have little to do with current urgencies. The EU should pass emergency legislation reallocating the money available to an Economic Revival Fund for the duration of the IMF/EU assistance programme. Spending priorities for this fund should be set to match the economic objectives of the programme, with a focus on growth and competitiveness. And disbursement procedures should be expedited.  

In setting priorities, we propose to earmark the €16bn for the following purposes.

First, to increase the quality of higher education. Before the crisis, the quality of education was identified by the OECD and others as an important impediment to Greek growth. There is now a serious risk that budgetary cuts will further worsen the quality of higher education. €4bn should be allocated to funding institutions of excellence, providing means-tested scholarships and financing mobility programmes on strict condition that the funds are used for education only.

Second, it should be used to foster internal devaluation. Greece’s exports amount to 20 per cent of GDP only, too small a proportion for a country of its size. Greek corporations already have  some export basis and demand for services such as tourism is very sensitive to price changes. Lower labour costs would thus quickly benefit exports through an improvement in cost competitiveness. The Fund should set aside €4bn for temporary wage subsidies in the tradable sectors (manufacturing and hotel and restaurants), to be introduced on 1st January 2012 and phased out in 2013-2015. These subsidies should serve to front-load the reduction of labour costs while offsetting part of the cost to employees. Some wage subsidies might more specifically target R&D intensive sectors to raise their growth potential. To avoid wage cost reduction being captured by rents, internal devaluation must be accompanied by strong measures to reduce market power and stimulate competition.

Third, the fund should better support enterprise. Economies grow by upgrading the products they already produce and by introducing the production of similar products. In the case of Greece, there is a high potential for upgrading. For this to succeed, small and medium sized start-ups must have access to finance. This is even more urgent in a situation where weakened banks may restrict access to credit. The Economic Revival Fund should allocate €4bn to supporting loans to small and medium sized enterprises and providing capital for entry in the production of new products. Public support should be given on a competitive basis to the sectors with most potential.

Fourth, the fund should support “Lighthouse” innovation products. Greece must target more varied, and higher value-added, production if it wishes to substantially increase exports and income. A further €4bn should be earmarked to foster the creation of local centres of innovation combining centres of academic excellence with special business zones that allow for technological spin-off. Top European research institutions (Oxford, Max-Planck society, etc) should be given a financial incentive to set up campuses in Greece. These subsidiaries should focus on a few key areas (such as bio-technology or green growth technology), with independent management to ensure excellence at a global level by avoiding influence from other parties and being able to attract top international researchers with attractive salaries. Such academic centres of excellence could be the nucleus of a new growth centre.

For sure, financial incentives by themselves will not be enough. Economic institutions need to be improved. The rule of law, a corruption-free environment and an efficient state apparatus are key determinants of innovation and investment. Now and in the future, the European funds should be conditioned on improving the institutional environment.

Our programme has a strong interventionist flavour. This is because as long as the price system delivers the wrong signals, only intervention will trigger the necessary shift of resources towards the tradables sector. A hands-on approach is temporarily needed. Money should be put at its service.

This article was co-authored with Benedicta Marzinotto and Guntram B. Wolff. The writers are scholars from Bruegel, the European think tank

 

Response by Miranda Xafa

Cut back the red tape to make Greece competitive

There has been no shortage of proposals to help restart growth in Greece, where the economy is contracting for the third year running with no prospect of a quick recovery. What is different about this proposal is that it is clear both about the interventions that are needed and the resources that can be tapped. The authors propose diverting some €12bn in unused structural funds already earmarked for Greece to an Economic Revival Fund to directly support education, enterprise and innovation. This would expedite disbursement procedures and directly support export-oriented enterprises and sectors during the three year adjustment programme backed by the European Union and International Monetary Fund.

As the authors acknowledge, financial incentives alone will not be enough. Economic institutions and the investment climate need improving to attract investment. Greece ranks 109th out of 155 countries in the World Bank’s Doing Business report, lower than some in Africa. Competitiveness is eroded by impediments to domestic competition, restrictive labor practices and red tape. The IMF/EU-supported programme is already tackling the first two of these problems. What is needed is for the Greek government to set up a Sunset Legislation Committee, similar to the one established under the Reagan administration in the US, to abolish useless rules and regulations that increase the cost of doing business and can be a source of corruption. EU officials and private sector representatives should participate in the committee to prevent political horsetrading and resistance from special interest groups, mainly from inside the state apparatus.

No state bureaucracy can function efficiently without performance-related rewards and penalties. The ongoing effort to link pay to performance in the public sector should also come under this committee’s purview. Its work would be facilitated by a positive outcome to the referendum prime minister George Papandreou plans to hold in September, in which one question would be whether life tenure for civil servants should be abolished.

Finally, the Greek government’s intention to reform the tax system should also be used as an opportunity to simplify the tax code so that it can fit into no more than 50 pages. The current maze of tax rules and regulations make the system impossible to administer and prone to corruption.

The crowning achievement of the proposed Economic Revival Fund would be to abolish the Greek ministry of development at the end of the three year adjustment programme. The ministry’s role in the past has been to distribute budget subsidies to preferred regions and sectors. Thrace in northern Greece – a poor border region – is littered with the remnants of short-lived factories. By creating a far more efficient, temporary mechanism to allocate structural funds, the Fund would allow the ministry’s operations to be wound down.

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