With the economy on life support, Greece is making Herculean attempts to maintain vital functions so that no one pulls the plug.

The country’s interim governing coalition managed to survive negotiations in Brussels and secure a new 130-million-euro bailout. It also got a hated IMF-EU memorandum passed through parliament, despite violent protests.

It would seem that things can only get easier, right?

Well, if only it were that easy. The hardest part is trying to get parliament to put through 3.2 billion euros’ worth of additional budget cuts targeting pensions, healthcare and education. As many as 150,000 public sector layoffs are also on the cards. So is a 22 percent cut to minimum wage.

And, more importantly, Greece is going to have to address the underlying causes of the country’s economic crisis.

It’s time we all go back to the basics.

The solution requires radical and comprehensive structural reforms that will organise the correct incentives to rebuild the rickety foundations of Greece’s productivity. There is an urgent need to speed up the structural changes. It is also necessary to develop a fresh foundation from where we can clearly outline the rules of the game and ensure the smooth and worthwhile transition from the informal to the formal economy.

One example is the creation of a simple and fair taxation system. This will radically decrease incentives to cheat. Another example is to simplify the land registry procedure.

So, why isn’t all this being done?

Up until now, our priority has been to put through fiscal austerity measures and not structural reforms.

The crisis has been addressed from the top down. We have been passing laws that need time for their implementation. Despite being the 28th richest nation in the world, Greece is suffering from an unproductive, uncompetitive and grossly inefficient capital base, making deeper the solvency crisis we are really facing.

While countries across Europe (except Germany) also lose their competitive edge (vis a vis up and coming China and India), the problems are more pronounced in Greece.

For many years, a series of structural problems have contributed to a low level of productivity in the Greek economy. There are still barriers obstructing the entry and exit from a given market, especially in the traditional sectors of tourism, agriculture and energy.

And all the while, Greece is juggling with two economies: the formal and informal. The latter is a necessary evil and it is not necessarily illegal.

In fact, Greece’s economy is characteristic of a large and growing informal sector — a high level of activity that steers clear of the cumbersome bureaucracy and the unpredictability of extralegal procedures, rules and regulations, as well as overregulation.

This informal activity (also known as informality) is an “unmeasurable” component in the formal GDP.

In Greece, the informal labor sector currently represents close to 50 percent of the country’s potential workforce. It is the result of high labor costs and rigid labor market (labor costs include both direct and indirect ones such as labor taxes covered by both employees and employers, social security, burdensome oversights regulations) that make it too expensive to have any incentive to be fully registered per each job. Thus we notice a hybrid version of semi-registered employees. This makes the labor market difficult to regulate and very a source of informality.

Transforming the informal sector, is not an easy task nor a quick task. Usually, there are many vested interest to keep the status quo. Many benefit from the convoluted bureaucracy. Numerous service professionals have thrived over the years by taking advantage of complicated legal prerequisites or formal requirements in various transactions.

Here’s another example of what the informal economy looks like in Greece. In the area of property, transactions of any sort involve a long and elaborate maze in which buyers and sellers are required to take 27 different steps and shuffle back and forth between lawyers, notaries and more than a dozen other professionals and agencies — from the national cadastre, the national registry, the local municipality, the tax office and more. A property sale can take as long as six months to complete from the day the buyer gives the seller a down payment.

It is no wonder the World Bank’s latest Doing Business survey of 183 economies ranked Greece 150 — one of the lowest in Europe — when it comes to registering property.

But don’t think this bureaucratic muddle is unique to Greece. The situation is not that much better in France (149) or Brussels (174). Even Germany, Europe’s largest economy, ranks 77 — nowhere near its neighbors Switzerland (14) and Denmark (11).

Surprised? Don’t be. Much of Greece’s legislative framework (civil, commercial and land codes) was imported from France and Germany. The French and German civil code was adopted in Greece back in the 19th and early 20th centuries.

Even though these legal tradition forms the backbone of Greece’s formal economy, they were never transferred in such a way so as to take reflect the Greek reality.

Back to Greece’s solvency crisis

The crisis is very much based on the intractability of bureaucracy — all this overregulation, the under-regulation and the super-regulation that requires heroic endeavor to deal with.

It has dealt a serious blow to the country’s productive capacity.

And, it is why Greece is suffering from a severe inability to boost its capital base. This is its superb human capital — one that has been historically trapped in a complicated bureaucratic maze. It’s something that has created huge inertia, “leakages” of resources and widespread inefficiency in the public sector.

The European economic model is also based on a high level of transaction costs. This has resulted in a gradual drop in economic growth rates in major Eurozone countries since 2002. Economists have been trying to pre-empt this since the 1990s by urging policymakers to reform the rigid labor markets and ease market rigidities.

How to solve the crisis

In the case of Greece, it must embrace a holistic approach to reforms that would be guided by an overall reduction of transaction costs, concentrating in simplifying processes. Simplification would be the best start and maybe go even further:

Deeper market deregulation and specialized professions deregulation — such as notaries and lawyers.

Simplification and standardisation of procedures involved in all types of registries (land, intellectual, civil, movable, company registration)

Administrative and civil service reform (by rationalizing public agencies and establishing clear control mechanisms)

Judicial reform (accelerating litigation procedures)

Training the country’s political leadership (MPs and civil servants) to apply best practices

Reality check

The reality looks grim and it’s staring us right in the face.

It’s time to correct the diagnosis of the Greek crisis and make sure it receives the proper treatment.

In my opinion — as long as we continue to address the Greek crisis as if it were a liquidity problem we will be doomed to fail and informality will keep growing, because the structural problems and the informality are feeding off each other and drastically hurting productivity and eroding the country’s GDP.

The clock is ticking. Reforms need to be visibly leading the present and the future of Greece leading the country to a clear vision, a vision to rebuild the competitive edge of the economy and the pride of its people.

Though the results of this national effort will not bear fruit from one day to the next, they will be impressive. With each step we take, with each goal that is realized, with each pledge we keep we will gradually win back the trust of the citizens towards the state and the country’s credibility abroad.

by Taki Theodoracopulos February 24, 2012

“What Brussels demands of Greece is as realistic as asking a middleweight boxer to bulk up to heavyweight while on a starvation diet.”

Who is worse—the pusher or the addict? I’d say it’s fifty-fifty as they sustain each other, although the addict has the moral high ground. Greece is the addict. The German and French banks are the pushers, with Brussels the Godfather shipping the stuff in from Afghanistan. The Godfather is not the cuddly Brando type, but rather an autocoprophagous degenerate who managed a coup d’etat while Europe slept. The Godfather is now defending his turf with Caligulan levels of depravity.

If I had one wish, it would be to see Europe’s dregs—dwarfs such as Barroso, Draghi, Rehn, Van Rompuy, and the rest of the scum—in the dock the way the Greek colonels ended up. At least the brave Greeks who pulled the coup on April 21, 1967 had the courage to roll the tanks out and take their chances. One of them, Costa Papadopoulos, brother of the leader George Papadopoulos, is still in prison, the junta having collapsed in 1974.

I am very serious. These midgets who have done away with democracy in the name of democracy need to be tried, convicted, and jailed for life. When the Austrians voted in Jörg Haider some time back, the scum in Brussels said no way. They threatened a boycott because they didn’t like the way the Austrians had voted. When the French and the Dutch rejected the 2005 referendum, they were rejected in turn by the Brussels commissars. The Lisbon Treaty, ditto. In Hungary the people have overwhelmingly voted for the Fidesz party, but the Brussels apparatchiks lectured the Hungarian premier on his internal policies. Daniel Cohn-Bendit, a Green euro MP and probably the most disgusting man in Brussels and Berlin, told the Hungarian premier to show more respect for the EU or else. Instead of instantly kicking Cohn-Bendit in his nonexistent balls, the Magyar went home with his tail between his legs. What in the hell is going on here?

Let’s now get to the Greeks. They are caught between the Scylla of debt and the Charybdis of default. What Brussels demands of Greece is as realistic as asking a middleweight boxer to bulk up to heavyweight while on a starvation diet. The Greeks cannot and will not ever be able to pay the debt and interest simply because even under the cruelest austerity by the year 2020 the deficit will still be more than the GDP. Most likely the economy is in freefall and will continue to fall for years to come. The Euro Scum Elite know this but have an agenda of their own—keeping their perks and positions of power in Brussels—so they are immune to Greek suffering.

The ones suffering are the innocent poor made up of those who work for a salary in the private sector, pensioners, and small businessmen and women. Worse, the Greeks do not seem to have learned anything since the crisis began. They still believe in the most thieving politicians this side of Nigeria, and the next Greek prime minister will be Antonis Samaras, a malevolent, blackmailing, opportunistic demagogue.

Not a single Greek politician has been charged with corruption, yet there are socialist ministers from the Andreas Papandreou period of twenty years ago who have been caught stealing hundreds of millions of euros in German kickbacks for arms sales. All the EU money went into paying for votes by both right and left parties—by appointing voters to civil-service jobs for life, protected by a constitutional amendment—yet the electorate is ready once again to go the polls and vote the same old crooks back in.

I left Greece back in 1994 because politicians and civil servants demanded bribes from me to conduct my business. I refused to pay fakelaki, hence I couldn’t do business in Greece. So I cut my losses, got on my boat, and hit Europe’s beaches. When dumb hacks ask why most successful Greeks are outside Greece, the answer is because staying in Greece means paying protection money just like the poor wops in the Lower East Side paid the Godfather.

Greece has secured a second bailout from the eurocrooks. If Greece defaults there will be super-inflation and the nation could become the first failed eurozone state. The Greeks will remain poor and the country’s infrastructure and human resources will be unable to turn the situation around. It simply postpones the inevitable.

After the 2004 Olympics, while the various stadiums built for the games began going to seed, I tried to buy the judo stadium to turn it into a martial-arts dojo. I am still waiting for an answer. Two friends of mine had a similar experience. They were expected not only to pay for the rotting stadiums, but also to bribe the appropriate civil servants and ministers. Greece went rotten once it did away with the monarchy, which kept the politicians honest. The politicians cooked the books and sent the bill to the people. End of story.

Hi Elena,

I heard you a couple of weeks ago on BBC radio, and quoted you in my blog: http://www.emergingmarketsoutlook.com/?p=1772

Hope all is well.

Charles Krakoff, Managing Partner
Koios Associates LLC
99 Nagog Hill Road
Acton, Massachusetts, USA 01720
Tel: +1-978-263-7738 (office)/+1-603-943-3701 (mobile)
ckrakoff@koiosllc.com
www.koiosllc.com
Blog: www.emergingmarketsoutlook.com

By Ricardo Hausmann

The generosity of the world is again being wasted on Greece. As officials meet in Athens to thrash out the details of the latest bail-out, we must urgently recognise that our approach to understanding the crisis is flawed.

Greece has so far been analysed through either a fiscal or a Keynesian lens. The fiscal view argues Greece can only be fixed by raising taxes, cutting spending and restructuring debt. The Keynesian one says these measures hurt growth and tax revenues and so undermine the very purpose of the policies.

Both approaches neglect that Greece must export its way out of the crisis or face ruin. Greece has a large external deficit, reaching 8.6 per cent of gross domestic product in 2011. This gap is funded by an unsustainable level of external debt that markets are no longer willing to fund. At present it is being paid by official sources, who expect this to be temporary. Greece will have to bring its current account deficit down to zero at some point.

This can happen in two ways: either Greece exports more or spends less. Adjusting the current account by spending less would require an additional fall in GDP of 25 per cent, given that in Greece only one in four US dollars of spending cuts goes abroad. This is clearly not a pretty picture. But adjusting by raising exports would require they increase by 50 per cent, not an easy feat. Achieving it through tourism alone would require the industry to triple in size – an unlikely prospect.

It is less painful to raise exports than to cut spending. But two problems conspire against this more humane solution. First, while in the eurozone, Greece cannot devalue to make its exports more competitive.

Second, Greece does not have what it takes to be as rich as it is. In our book The Atlas of Economic Complexity , my co-authors and I calculated the amount of “productive knowledge” across various countries. A country with a high level of productive knowledge is one that exports many different goods and where these goods are complicated to make. Productive knowledge predicts how rich a country will be and hence how fast it will grow.

Here’s the bad news for Greece: in our sample of 128 countries, it had the biggest gap between its current recorded level of income and the knowledge content of its exports. Greece owes its income to borrowed foreign spending it cannot pay back. It produces no machines, no electronics and no chemicals. Of every 10 US dollars of worldwide trade in information technology, it accounts for one cent.

This problem cannot be addressed by fiscal Keynesian stimulus, by bland trade facilitation or by paying lip-service to structural adjustment as the November International Monetary Fund agreement implicitly assumes.

The problem in Greece is uncommon in Europe. Ireland, for example, is also struggling with a fiscal burden caused by the bursting of its housing bubble, but has been able to move quickly to a current-account surplus, thanks to the knowledge base of its competitive export sector. In other words, Ireland does have what it takes to be as rich as it is now.

Greece should use its international support to reduce rather than postpone the pain of adjustment. It needs to expand its export base, not delay pension and public wage cuts. It needs to be able to fund Irish-style institutions that lure potential new exporters by guaranteeing specific investments in infrastructure, labour training and research and development. This should be funded by the EU but, if not, it is better to make cuts elsewhere.

Greece is a good place to try to replicate this aspect of the Irish model. We have calculated how easy it would be for countries to move to exporting more complex goods. Greece ranks second only to India in this dimension, a heartening finding. It needs to identify the missing knowledge and infrastructural inputs required by new industries and assure their provision, the way the Irish Industrial Development Agency does. Putting resources into creating the productive base for a more prosperous future is more important and less painful than wasting them in protecting an unsustainable past. Unfortunately, this lesson is not being heeded and Greece is ever closer to the brink.

The writer is a professor at Harvard University and the director of its Center for International Development

Copyright The Financial Times Limited 2012.

http://www.ft.com/cms/s/0/ec138fb2-524c-11e1-9f55-00144feabdc0.html#axzz1n7ysCsHS

Greece is safe from a disorderly default, but not out of the woods yet. The European Union and the International Monetary Fund approved Greece’s second rescue package – worth €130bn – after 13 hours of difficult deliberations. This is the good news.

The bad news is that Greece is still wading neck-deep in murky waters. Worse still, the country’s economic crisis (the worst since the second world war) can be transformed into a crisis of confidence between its people and the state – regardless of which party is in government.

Greeks are starting to question whether their economy can ever be revived. They are losing faith and growing increasingly pessimistic about whether the sacrifices they are making will be enough to end the crisis.

How possible is this? The real economic situation in Greece is worsening. The unemployment rate has hit a record high, currently 17.7% and close to 50% for young people. Pensions and salaries are being cut. Businesses are shutting down every day. New taxes are being levied. The “informal” labour market is swelling – it’s pushing 50% of the country’s potential workforce.

And as fear and insecurity spread, many Greeks are packing their bags again and leaving their country. They want a new political system. Dissatisfaction crosses party lines, as people are no longer willing to play by the old rules of empty pre-election promises. They want to see results.

Even the smallest amount of progress, however, will require politicians to roll up their sleeves and propose viable reforms that can and will be implemented. What we need is radical structural reforms that will help us to rebuild the country’s wobbly foundations of productivity. We need reforms that will promote entrepreneurship and generate new ideas.

We need a new set of rules that will allow for the smooth transition from the informal to the formal economy. One example is through the simplification of process and deregulation of markets – a simple and fair taxation administration system would be more efficient and would create a friendlier business environment. This would increase the investment possibilities in Greece not only for foreign investors, but also for local ones.

The country was brought to the brink of bankruptcy. Though safe – for now – Greece could find itself struggling to meet the strict conditions outlined in the second bailout memorandum if these key structural reforms don’t take place.

Let’s not forget, however, that there are no quick fixes for the Greek economy. Any viable solution will require a lot more than just another round of bailout and austerity measures. The new measures include an immediate 22% cut to the minimum wage and the elimination of 150,000 public sector jobs by 2015.

The alternative, however, would have been a messy default – a nightmare scenario that would have opened the floodgates and piled on more misery. It would also guarantee our ousting from the world markets for at least 20 years – our partners would make sure punishment would take place.

As such, a solution would directly benefit the eurozone. This is why we need to focus on the structural and institutional reforms. Though these reforms will take time to bear fruit, they will eventually yield the best results.

Success depends on how well we can reform the Greek state. What we need to do is simplify judicial services and enforcement of rules and laws. We also need to apply quality control on goods and services, eliminate organisations with overlapping mandates and rationalise the public sector.

It’s not too late for the crisis to serve as an opportunity. It might, however, be Greece’s best chance to make all the necessary changes and put the country back on the path of prosperity.

For the article: http://www.guardian.co.uk/commentisfree/2012/feb/22/greek-entrepreneurship-crisis

Approved by European finance ministers after 13 hours of negotiation on February 20, the agreement put an end to the perennial threat of a disorderly default. The situation, however, remains precarious.

A full economic turnaround is only possible if Greece follows through on widespread structural reforms.

Greece, which is in its fifth year of recession, can no longer rely on bailouts. We need to lean more on Greek and foreign investment.

What we need is to find people with new ideas and to invest in them. This will help us to boost Greece’s competitiveness and attract investment.

Entrepreneurship should be the new buzzword on our roadmap for growth.

The country’s future is riding on structural reforms in the labor market and the deregulation of industries.

To achieve this, goals must be reset and strategies redrawn. So what needs to be done?

Greece needs to turn back the clock and rebuild its production base. We need to find ways to make optimal use of our vast human capital. The potential is boundless. Investing in our people — boosting entrepreneurship — can become a real growth engine.

The same recipe should also be applied in the other European Union member states. Just like Greece, the entire bloc must prove it is made up of 27 countries with a robust productive base that is capable of innovating, attracting new ideas and boosting entrepreneurship.

The EU’s 2020 strategy (adopted two years ago) is aimed at transforming Europe into a “knowledge-based” economy by increasing the number of people in employment and boosting investment in research and development.

The 27-member bloc boasts a combined population more than 500 million people.

Economists, however, have questioned the EU’s commitment. For years they have been calling for deregulation and simplification to reduce production costs and increase productivity.

The EU, however, has been moving towards a deep recession. The consequences are now being felt in board rooms and living rooms across the EU. The repercussions are also being seen at central squares in Brussels, Athens and other European capitals where demonstrations and strikes have become an almost-daily occurrence.

So, what’s the solution? Every EU country needs to develop a robust economy — one that is strong and diversified. Reforms should be aimed at boosting their capital base and generating growth. The ultimate goal is to make the 27-member bloc an attractive destination for both foreign and domestic investors.
Read the post: http://www.huffingtonpost.com/elena-panaritis/greek-bailout_b_1291283.html