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Παρουσίαση καθηγητή Γιάννη Στουρνάρα και Γ.Δ του ΙΟΒΕ | Εκδήλωση του PMI-GREECE στις 22.3.2012

Παρουσίαση καθηγητή Γιάννη Στουρνάρα και Γ.Δ του ΙΟΒΕ | Εκδήλωση του PMI-GREECE στις 22.3.2012

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    Stournaras-pmi-greece-march-2012 Stournaras-pmi-greece-march-2012 Presentation Transcript

    • Presentation at PMI-GREECE Event | 22.3.2012 ΙΔΡΥΜΑ ΟΙΚΟΝΟΜΙΚΩΝ & ΒΙΟΜΗΧΑΝΙΚΩΝ ΕΡΕΥΝΩΝ FOUNDATION FOR ECONOMIC & INDUSTRIAL RESEARCH Τ. Καρατάσσου 11, 117 42 Αθήνα, Tηλ.: 210 92 11 200-10, Fax: 210 92 33 977, www.iobe.gr 11 T. Karatassou Str., 117 42 Athens, Greece, Tel.: (+30) 210 92 11 200-10, Fax: (+30) 210 92 33 977 The Greek Economy under Reform: Turning a problem into an opportunity Yannis Stournaras Professor of Economics, Dept. of Economics, University of Athens & General Director IOBE Nicholas Ventouris Economist – Research Associate IOBEMarch 19, 2012
    • Presentation at PMI-GREECE Event | 22.3.2012 The Problems:1. GreeceA. Fiscal derailmentB. Loss of Competitiveness2. EurozoneA. “Currency without a state”B. Deflationary Bias: Fiscal discipline needs a Growth counterpart 2
    • Presentation at PMI-GREECE Event | 22.3.2012 Fiscal Derailment: The lost decade Gen. Government Revenue / Expenditure / Deficit (% of GDP)55% 54% Euro accession period Revenues fell despite dynamic growth rates (above EZ average) – collapse of tax collection mechanisms 51% 50%50% 48% 48% 15.8% 47% 47% 47% 46% 46% 46% 46% 9.9% 10.7% 45% 45% 45% 45% 45% 44% 44% 44% 3.7% 9.0%45% 44% 6.8% 5.0% 4.4% 5.5% 4.4% 4.9% 3.8% 3.1% 5.7% 6.0% 3.9% 5.9% 7.5% 43% 5.6% 6.7% 42% 9.0% 42% 42%40% 41% 41% 41% 41% 41% 41% 40% 39% 39% 40% 39% 39% 39% 38% 38% 37% 37%35% The objective is to return to Gen. Government Deficit (% of GDP) Excessive historically ‘viable’ levels of spending government expenditures & revenues Gen. Government Revenue (% of GDP) Gen. Government Expenditure (% of GDP)30% 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 * * * * * 11 12 13 14 15 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 3* Estimate. Sources: AMECO database, ELSTAT, 2012 Budget, Ministry of Finance, November 2011
    • Presentation at PMI-GREECE Event | 22.3.2012 Fiscal Derailment Main characteristics on the expenditure side Expansion of the state: General Government Employees: Numbers and Compensation as share of Total Economy  Increase in the number of civil servants (x2 since (2007) 1980)  Provision of special privileges to social groups – Safeguarding status quo  The average spending on public sector wages increased by 100% during the last decade, employment in public sector climbed over 10%. • Public Sector: Lack of planning & measurement – transparency – incentives– quantification of results. Civil servants account for a larger share of total employment Over the past decade, public payroll has grown faster, and in Greece (17%) than the OECD average (15.3%) is now higher as % of GDP than the eurozone average 4* Sources: Greece at a Glance, Policies for a Sustainable Recovery, OECD,March 2010 – OECD Economic Surveys: Greece, AUG 2011
    • Presentation at PMI-GREECE Event | 22.3.2012 Fiscal Derailment Main characteristics on the expenditure side Pension Replacement Rate (before the reform) The social security system was not viable Pensions (% of GDP) 2009 2010* 2060 2060**Germany 10.4 12.7Greece 11.7 13.2 24.1 13.9Spain 8.4 15.1France 13.0 14.0Ireland 4.7 11.1Italy 14.0 13.6 6.00 Pharmaceutical Expenditure of Social 2.5%Portugal 11.4 13.5 EUR bn Security Funds 2.2%Finland 10.0 3.3 5.00 1.9% % of GDP 5.09 2.0% 1.8% 1.9%Cyprus 6.3 17.7 1.7% 4.53 4.00 4.25 1.5% 4.04 1.5%Poland 11.6 8.8 +12% -17% 1.5% 1.3% 3.51 +12%EU-27 10.2 12.6 3.00 3.22 2.87 +15% -24% 1.0%Euro Area 11.1 13.9 2.43 +22% 2.00 +18% 0.5% 1.00 0.00 0.0% 04 05 06 07 08 09 * * 10 11 20 20 20 20 20 20 20 20* Estimate, Ministry of Labor & Social Solidarity (Nov 2011) ** Following Social Security System reform in June 2010Sources: 2009 Ageing Report: Economic and Budgetary Projections for the EU-27 Member States (2008-2060), European Commission - Greece at a Glance, Policies for aSustainable Recovery, OECD, March 2010, OECD Economic Surveys: Greece, AUG 2011 / General Secretariat of Insurance Funds and Pharmaceutical Department of Naval 5Insurance Fund
    • Presentation at PMI-GREECE Event | 22.3.2012 Fiscal Derailment The paradox of social policy 30% 30% While total expenditure on social protection has Social Protection Expenditure vs. 28% 28% Poverty Line in Greece 28% increased, the at-risk-of poverty rate has remained the same. Why? 26% 26% 25% 24% 24% 24% • Waste in pension spending 23% 22% • High pensions without corresponding contributions 22% 22% • Wasteful pharmaceutical drug prescription 20% 20% 20% • State hospitals lacking accounting standards / system (+under- 20% 20% 20% capacity) 18% 18% Total Social Protection Expenditure (% of GDP) • Overpricing of medical supplies & equipment At risk of poverty rate (% of total population)* 16% 16% • Lack of expenditure monitoring • High profit margins of pharmacists 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 Sweden Denmark Luxembourg Finland Netherlands Relative effectiveness of social protection Germany expenditure to the poverty rate (Index) Ireland (avg 1995-2009) Austria Belgium Spain EU-15 France Italy Greece Portugal UK* (cut-off point: 60% of median equivalised income after social transfers) 6Sources: Eurostat, INE GSEE – Observatory of Social-Economic-Fiscal Developments: Poverty & Inequality, University of Athens – Department of Economics1.6 0.0 0.4 0.8 1.2 2.0
    • Presentation at PMI-GREECE Event | 22.3.2012 Fiscal Derailment Main characteristics on the revenue side The size of shadow economy (% of GDP) High tax collection inefficiency2 2 Tax efficiency, calculated as the ratio between effective (potential revenue from value added taxes on private consumption) and statutory ratesThe most acute problems of efficiency & evasion relate to personal incometax: Measured as a proportion of• Revenues from personal income tax were 4pps of GDP lower than the household disposable incomeeurozone average for 2005-2009 (despite comparable tax rates) plus personal income taxes per capita• For 2009, 94% of tax payers reported annual incomes of less than EUR30,000• Personal income tax evasion: 2.5% - 3.8% of GDP1 (also related to thelarge share of the income of self-employed: 24% of GDP on avg. 2005-2009 vs.12.5% of GDP in EZ).Sources: Greece at a Glance, Policies for a Sustainable Recovery, OECD, March 2010. Schneider, F. (2009), “The Size if the Shadow Economy in 21OECD Countries Using MIMIC and Currency Demand Approach”. - OECD Economic Surveys: Greece, AUG 20111 National Bank of Greece (2010), Matsaganis & Flevotomou “What are the margins for increasing PIT revenue in the Greek Economy?”, Monthly 7macroeconomic Outlook, May 2010
    • Presentation at PMI-GREECE Event | 22.3.2012 Debt dynamics190% 181% no PSI170% 163% 145%150% 146% General130% 129% Government Debt 107% 107% 113% with PSI (% of GDP)110% 104% 105% 103% 100% 100% 101% 98% 97% 95% 98% 95% 88% 90% 86% 90% 80% 72% 74% 73% 73% 72% 69% 68% 68% 69% 70% 70% 69% 70% 66% 70% Greece Eurozone-17 50% 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 * * 11 12 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 400% 18% 350% 62% Private Debt Public DebtPrivate Sector – Public 300% Sector Debt 2010 250% 97% (% of GDP) 64% 83% 65% 70% 140% 200% 119% 342% 84% 70% 293% 83%The private sector debt in 150% 76% 99% 49% 41%Greece remains relatively low 183% 181% 173% 100% 165% 165% 123% 48% 42% 120% 116% 115% 104% 99% 96% 96% 50% 79% 0% 6 e ta ce us ia y al nd n ly ia g d m ia s -1 c an ai ur nd an I ta ug r al ak iu en an pr ee la st EU Sp bo M rm la lg nl ov rt Au Ire Cy Fr ov Gr Be er Fi Po em Ge Sl Sl h et x Lu N 8* Estimates. Sources: AMECO, ECB, 2012 Budget, Ministry of Finance, November 2011
    • Presentation at PMI-GREECE Event | 22.3.2012 Greece has lost ground in Structural Competitiveness Overregulated product marketsLoss of Structural Competitiveness Composite indicator of product market regulation in• IMD World Competitiveness Yearbook : the EU (1998-2008) 56th position in 2011 (out of 59 countries) – 37th position in 2004.• World Economic Forum: 83rd position in 2010 (out of 139 countries) - 35th in 2004• Doing Business Report (World Bank): 100th position among 183 countries in 2011 - 80th position in 2006 Restrictions in Service sectors As a result of the overregulated market Barriers to entry in Services: composite indicator (1998-2008) framework and the various restrictions in entrepreneurship and investments, the average profit margin in the non-tradable goods & services sector is 15% higher than the relevant eurozone margin, while in the labor market the margin is 10% higher (vs. eurozone) Source: OECD, from European Economy, Occasional Papers, no. 68, August 9 2010, European Commission
    • Presentation at PMI-GREECE Event | 22.3.2012 Structural Competitiveness problems Barriers to entrepreneurship (2008)1 Index scale of 0-6 from least to more restrictive Regulation of professional services (2008)1 Index scale of 0-6 from least to more restrictiveSources: OECD Economic Surveys: Greece, AUG 20111 The reference year is 2008 for all countries. The product market regulation & indicators for Greece for 2011 are based on an intermediate updateconducted in the context of the OECD survey, thus accounting for the recent reforms towards improving business environment and opening closed 10professions
    • Presentation at PMI-GREECE Event | 22.3.2012 Greece has lost cost competitiveness (relative unit labor cost) - but it is not aloneRelative unit labor cost has increased by 19% during 2000-2010, but this is broadly in line with the performance of theperiphery of the EU. 30% 25% 22% 19% 19% 20% 16% 12% 11% 10% 10% Increase in relative unit labor cost 0% (performance relative to the rest 35 industrial countries) -5% -10% -13% -20% -22% -30% -30% -40% ly 7 nd SA e m n y n l K e ga an -1 pa ec ai nc Ita U iu la rt u U Sp EZ re Ja m lg a Ire Fr Be er G Po G 15.0% Relative unit labor cost (% y-o-y change) Greece 11.4% (performance relative to the rest 35 industrial countries) 10.0% 10.1% In 2010-2011 cost EZ-17 competitiveness has 5.0% 3.2% 4.2% 4.8% 4.2% improved significantly. 1.1% 2.7% 0.7% 1.8% 3.2% 4.0% 1.7% 2.4% -0.7% 1.6% 0.0% Relative Unit Labor Cost: -0.3% -2.2% -3.2% -2.4% -5.0% -6.7% -3.0% -3.9% 2005-2009: -4.5% +7.5%, 2010-2012f: - -10.0% -7.6% -10.4% 6.8% -15.0% f 00 01 02 03 04 05 06 07 08 09 10 11 12 20 20 20 20 20 20 20 20 20 20 20 20 20Note: we account for the nominal unit labor cost 11Source: European Commission Statistical Annex, Autumn 2011
    • Presentation at PMI-GREECE Event | 22.3.2012 EU-17 GDP Structure (Demand side) (2001-2010 avg.) Greece consumes too much (91% of GDP) and exports too little (22% of GDP). Final Consumption Investments Exports Imports (% of GDP) (% of GDP) (% of GDP) (%of GDP) Εurozone-17 77,4% 21,2% 41,6% 40,3% Belgium 74,0% 21,7% 88,0% 83,9% Germany 75,6% 19,5% 44,0% 39,2%• Chronic general Esthonia 73,8% 33,7% 79,2% 90,3% government Ireland 63,1% 21,7% 101,6% 85,0% imbalances Greece 90,7% 22,3% 22,4% 35,3% Spain 78,9% 27,2% 29,5% 35,9% France 80,8% 19,7% 29,3% 29,9% Italy 79,5% 21,0% 26,7% 27,2% Cyprus 86,2% 19,9% 51,9% 57,1%• Private sector Luxembourg 54,0% 23,6% 170,0% 147,8% Malta 85,3% 16,4% 91,4% 93,1% imbalances since Netherlands 72,8% 20,3% 78,0% 71,0% euro entry: rapid Austria 72,4% 22,8% 55,2% 50,5% private sector Portugal 85,3% 24,4% 32,9% 42,8% Slovenia 73,8% 27,9% 65,2% 67,1% leverage through Slovakia 74,0% 26,8% 86,4% 86,8% bank credit Finland 70,8% 20,1% 46,4% 38,5% Sweden 72,4% 18,5% 50,8% 41,4% United Kingdom 84,4% 17,5% 28,5% 32,1% Source: Eurostat 12
    • Presentation at PMI-GREECE Event | 22.3.2012 Current Account Balance (% of GDP) Result: a high Current Account Deficit: Nobody paid attention! 10.0% 7.5% 6.3% 5.1% 6.2% 5.8% 5.8% 4.7% 5.1% 5.0% 4.4% 2.0% 0.0% 1.9% 0.8% 0.6% 0.1% -0.1% 0.4% 0.1% 0.0% -0.1% 0.0% -0.7% -0.1% -1.7% -5.0% -6.5% -6.6% -5.8% -7.9% -7.2% -7.8% -7.6%-10.0% -9.9% -11.3% -12.3%-15.0% -14.6% -14.3% Germany Ireland Eurozone Italy -17.9%-20.0% Spain Portugal Greece * * 00 01 02 03 04 05 06 07 08 09 10 11 12 20 20 20 20 20 20 20 20 20 20 20 20 20Sources: Eurostat/European Economic Forecasts, European Commission, Autumn 2011 13
    • Presentation at PMI-GREECE Event | 22.3.2012 Problems with the current policy mix Ανταγωνιστικότητα και ανεργία Competitiveness & Unemployment • Despite improvement compared to ο δρόμος προς τη σύγκλιση 2009, recent large deviations from fiscal 200 the road to convergence targets 180 SS 160 • Liquidity squeeze, credit crunch due to Competitiveness 140 5th MoU (December 2011) banking problems DD 120 100 O • Large increases in indirect taxation instead of drastic reduction in current expenditure 80 60 • Drastic cuts in public investment to meet 40 1st MoU (May 2010) the deficit target 20 EL • Very limited structural reforms 0 (product, services, professions and labor 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 markets still overregulated) Unemployment Rate Inflation & Output gap • Very limited progress in removing barriers Πληθωρισμός και παραγωγικό κενό to private investment & entrepreneurship 6 (out of 250 barriers, less than 10% have Real Effective been removed) 4 Exchange Rate 2 Inflation CPI Labor Cost • Very limited privatizations and no 0 Output Gap κενό παραγωγικό 2010 -0.3 -7.0 development of state lands -2 2011 0.9 -3.5  Price rigidities despite wage flexibility -4 -6  Recession larger than expected -8-10 2005 2006 2007 2008 2009 2010 2011 14
    • Presentation at PMI-GREECE Event | 22.3.2012The Economic Policy Program – Medium-Term Fiscal Scenario
    • Presentation at PMI-GREECE Event | 22.3.2012 Medium Term Fiscal Strategy Framework 2011-2015 Baseline Macroeconomic Scenario % y-o-y change 2011 2012 2013 2014 2015 2009 2010 MinFin IOBE MinFin IOBE EC IOBE EC IOBE EC IOBEGDP -3.3 -3.5 -6.5 -6.7 -4.2 -4.0 0.7 -0.3 2.4 0.8 2.9 1.4Private Consumption -1.3 -3.6 -6.2 -7.1 -4.1 -6.8 -0.9 -1.1 0.6 -0.2 0.7 -0.2Public Consumption 4.8 -7.2 -8.0 -7.1 -7.5 -8.3 -7.0 -7.4 -4.0 -6.2 -1.0 -3.3Gross Fixed Capital Formation -15.2 -13.3 -15.0 -17.6 -3.6 -5.3 6.3 1.6 8.6 5.7 8.4 6.4Imports of goods & services -20.2 -7.2 -5.9 -6.8 -2.8 -6.6 0.6 0.0 2.7 3.1 3.0 3.4Exports of goods & services -19.5 4.2 4.5 4.2 6.4 5.2 6.5 4.8 7.0 5.5 7.0 6.0HICP (%) 1.3 4.7 2.8 3.2 0.6 1.5 0.8 0.6 1.0 0.6 1.1 0.8Unemployment Rate (%) 8.9 11.7 15.4 17.4 17.1 19.4 17.5 19.6 16.9 19.7 16.3 19.2Current Account Balance (% of GDP) -14.3 -12.3 -9.9 -10.6 -7.9 -9.1 -6.8 -8.7 -5.8 -8.3 -4.5 -8.1Primary Balance (% of GDP) -10.6 -5.0 -1.8 -2.6 -1.0 -1.2 0.5 0.9 1.7 2.8 2.1 4.2General Government Budget Balance (% of GDP) -15.8 -10.8 -9.2 -9.5 -6.3 -6.4 -6.1 -5.3 -5.1 -2.9 -4.2 -1.1General Government Budget Balance (% of GDP) (target) -5.3 -2.9 -1.1General Government Debt (% of GDP) 129.0 144.9 162.8 166.3 145.5 145.7 146.7 154.2 139.2 152.1 125.6 143.7 Note: The estimates for 2012 take into account the PSI effect Sources: Eurostat / 2012 Budget / Medium-Term Fiscal Strategy (Update), Ministry of Finance, November 2011/ The Economic Adjustment Programme for Greece – 5th 16 Review (draft) , Directorate-General for Economic and Financial Affairs, European Commission, Occasional Papers 82, October 2011
    • General Government Deficit (% of GDP) Presentation at PMI-GREECE Event | 22.3.2012 Significant progress in fiscal consolidation which is largely underestimated An unprecedented fiscal adjustment is occurring General Government Deficit Fiscal adjustment in 2010-2011: reduction in 2010-2011 reached c. 40 EUR 16.6bn, exceeding the target From 15.8% of GDP in 2009  9.3% of GDP in 2011 (i.e. 6.5% of GDP) 18.0% set in the initial MoU (EUR 15.3bn) !!! 15.8% vs. 36.3 Initial target of: 13.6% of GDP in 2009 7.9% of GDP in 2011 (i.e. 5.7% of GDP) 16.0% 35 (we remind that the deficit figures were revised upwards in November 2010, and therefore the starting point of the fiscal adjustment process was higher). 14.0% 30 The 2010-2011 fiscal adjustment amounts to c.51% of total fiscal adjustment needed by EUR bn 2014, in order to reduce deficit at 3% of 12.0% 10.8% 25 GDP. There is progress being Target 9.9% made, which is largely underestimated. % of GDP 23.1 24.1 10.0% 9.0% It is noted that this is the largest deficit 20 Target reduction ever observed in the Eurozone. 19.7 8.0% 6.8% 7.0% Without 15 6.1% PSI 6.1% 14.5 14.9 6.0% 5.1% 5.3% 12.1 5.4% 13.2 With 11.4 4.2% 10 PSI 11.4 11.3 9.6 4.0% 2.9% 5 6.4 2.0% 1.1% 2.6 0 0.0% 06 07 08 09 10 11 12 13 14 15 20 20 20 20 20 20 20 20 20 20Sources: Eurostat/2012 Budget Draft, Ministry of Finance, October 2011/The Economic Adjustment Program for Greece – 5th Review , Directorate-General for 17Economic and Financial Affairs, European Commission, Occasional Papers 82, January 2012
    • Presentation at PMI-GREECE Event | 22.3.2012 Structural Reforms are being implemented… albeit with delays Fiscal Reforms Restructuring of the Public Sector• Independent Statistical Authority (ELSTAT). • Restructuring of the railway sector (OSE): EUR 150mn savings in• Overhaul of the tax system (new management information 2010. systems, shortened judicial procedures for tax cases). • Restructuring of the Urban Transport Entity (OASA).• Law on combating tax evasion & restructuring of the tax services (fines EUR 3.4bn, +182% yoy).• Fiscal Management & Responsibility Act (3-year budgets, Medium- Social Security –Health System Reform Term Fiscal Strategy, Parliamentary Budget Office, binding expenditure ceilings in Ministries). • Private and public sector pension reform: reduction of the actuarial• Single Payment Authority for the wage bill in the public sector. deficit to 2060 by 10% of GDP; retirement age raised to 65 years (40• Online publication of all decisions involving commitments of funds years of work required for full pension). in the general government sector. • Healthcare reform Support of the Financial System Market Regulation Reforms• Establishment of the Hellenic Financial Stability Fund (EUR10bn). • Labor market reform: firm-level agreements, measures promoting part-time employment, fully symmetric arbitration, cut in overtime Improvement of the Investment Framework remuneration by 20%, reduction in severance payments by 50%, increase of permissible dismissals from 2 to 5% per• Simplification of the start-up for a new business (GEMI): set up in 1 month, extension of probation period from 3 to 12 months. day (from 19 days), with the establishment of one-stop-shop. • Horizontal legislation of the EU Services Directive.• New Investment Law. • Liberalization of over-regulated markets (mainly professions): fully• «Fast-Track» Law for Strategic Investment (>EUR 200mn) effective as of July 1, 2011, covers 150 professions. • Liberalization of road freight transport: unlimited licenses with fees gradually declining to zero between Jan-2011 and Jun-2012. Local Administration Reform • Abolition of cabotage restriction in order to boost cruise tourism. • Transfer of the private insurance sector supervision to the Bank of• Merger of various local government authorities: reduction in Greece. municipalities from 1.034 to 325; decrease in local authority entities by 4.000. 18
    • Presentation at PMI-GREECE Event | 22.3.2012 Public debt evolution scenarios (IOBE estimates) Scenarios Baseline A B Scenario C D Debt / GDP 2020 210.6% 145.4% 123.1% 116.2% 102.0% Gen. Gov. Deficit (% of GDP) 2020 5.4% 1.4% 0.7% -0.6% -1.1% PSI 2012 (% of GDP) 0.0% 54.0% 54.0% 54.0% 54.0% Privatization Revenues (2014-2020) (% of GDP) 0.0% 0.0% 22.3% 22.3% 27.9% Primary Surplus (avg 2014-2020) (% of GDP) 3.1% 3.1% 4.1% 5.1% 5.1%Scenario A assumes noGDP growth rate (avg 2014-2020) Nominal privatization 3.4% 3.4% 3.4% 3.4% 4.3%revenues & no PSI . 240.0% Scenario B additionally takes into account Debt / GDP (IOBE estimates) 219.9% 220.0%the PSI (95% participation, EUR 107bn debt 210.6% (assume an implicit interest rate 2012-2020 ofreduction), which results to a debt reduction of 200.0% 3.5% - Scenario A: 4.4%)64pps of GDP. 180.0% The Baseline Scenario additionally 164.7% 157.0%accounts for privatization revenues amounting 160.0% 144.9% 155.6%to EUR 47bn, resulting in a debt reduction of 145.4% 140.0%22pps of GDP. 123.1% Scenario C additionally assumes a 1% 120.0% 112.6% 116.2% 103.4%higher primary surplus vs. the 97.4% 100.0% 102.0%baseline, resulting in a debt reduction of 7pps Moreover, we assume that the bank recapitalization will Scenario A Scenario B 80.0% reach EUR 40bn, which will not be later retrieved asof GDP. Baseline Scenario Scenario C Scenario D privatization revenue. Scenario D additionally assumes a 1% 60.0%higher nominal growth rate vs. the 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20baseline, resulting in a debt reduction by 14ppsof GDP. 19
    • Presentation at PMI-GREECE Event | 22.3.2012 The return to the drachma is NOT an optionAn eventual return to the drachma is a shift to another currency, affecting the balance sheet of thestate, banks, companies & individuals, triggering serial defaultsDisorderly default: drastic drop of the living standards, large reduction in real wages / pensionsCurrency crisis: the subsequent large devaluation of the drachma will increase public debt and trigger aforeign exchange crisis. It will NOT necessarily increase competitiveness. Reminder : during 1980-2000, despite the large devaluation of the drachma vs. the dollar, the trade deficit more than tripled.Inability to import basic goods (fuel, pharmaceuticals, equipment)Currency risk  higher cost of capital & increased uncertaintyHyperinflationCollapse of the banking systemSocial unrest / Political instability: black economy – mafia – national security concernsExit from the EU: Greece would lose its European orientation & EU structural funds (c. EUR 3bn nettransfers annually) – Exclusion from financial marketsContagion effect to other eurozone economiesLoss of the appetite for structural reforms: the political system will not have an incentive to promote themodernization of the economy – revival of clientelismWho will benefit? Those who have their property abroad and do not reside in Greece – Those who haveinvested in the country‟s defaultWho will lose? Citizens residing in Greece will see their real wages and pensions cut drastically 20
    • Presentation at PMI-GREECE Event | 22.3.2012Growth Potential – Policy Suggestions:A. Access to the largest bail-out scheme and to €15bn from European Structural FundsB. Large potential from market liberalization, reforms, privatization and the development of idle state propertyC. Rising sectors and investment opportunities
    • Presentation at PMI-GREECE Event | 22.3.2012 Large potential benefits from reforms will provide new sources of growth and facilitate fiscal adjustment Potential Gains from Market & Institutional Reforms - Results from a DSGE Model: Structural measures could produce benefits as large as 17% of GDP in the long run (increase 10% of GDP within 5 years), according to the GIMF model calibrated by the Foundation for Economic and Industrial Research (IOBE)Long-term effects of increased competition in markets of non-tradable goods-services and deregulation in the labor market (% changes w.r.t pre-reforms period) Non-Tradable Sector Labor Market Overall Effect Effect Effect GDP 13.5 3.2 17.0 Private Consumption 15.5 3.7 19.6 Private Investment 12.4 2.8 15.6 Real wage 12.8 -0.6 12.2 Employment (hours) 1.5 3.4 4.8 Exports 8.4 2.0 10.5 Imports 6.4 1.7 8.3 Source: ΙΟΒΕ, estimations by calibrating the IMF DSGE model (GIMF) to Greek/Euro Area economic conditions. 22
    • Presentation at PMI-GREECE Event | 22.3.2012 Greece needs a shift in aggregate supply & in aggregate demand (through investment)Competitiveness 200 180 SS΄ 160 140 DD΄ 120 Ο 100 DD 80 SS 60 EL 40 20 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Unemployment Rate 23
    • Presentation at PMI-GREECE Event | 22.3.2012 Sectoral Growth Prospects Shipping250 Greek-owned fleet capacity 25.0%200 20.0%150 15.0%100 10.0% Greek-owned fleet by ship type 50 5.0% (2009 data) 3.8% 4.6% Other Container 0 0.0% Ships Ships 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Deadweight tonnage (mn) Share to the World** Includes the 35 countries with the largest fleet capacity, accounting formore than 95% of capacity worldwide 44.8%Source: Review of Maritime Transport Reports, UNCTAD Oil Tankers The Greek fleet (both Greek and foreign flag 46.8% Ore & Bulk Carriers vessels) remains the largest in the world, although its capacity share fell in 2009 below the 2000-2009 period average. Source: Lloyd’s Register – Fairplay, January 2010
    • Presentation at PMI-GREECE Event | 22.3.2012 Sectoral Growth Prospects Tourism 18.0 Arrivals & Receipts 14.0 10.0% Arrivals grouped by departure area Arrivals (in mn of passengers) 9.0% 16.0 Receipts (EUR bn) 12.0 8.0% (share of total – excl. Europe) 14.0 10.0 7.0% 5.8%millions of passengers 12.0 6.5% 6.0% 5.2% 5.3% 4.9% 5.6% 8.0 EUR bn 10.0 5.0% 4.6% 8.0 4.0% 6.0 3.0% 2.3% 2.4% 2.5% 6.0 4.0 2.0% 4.0 0.9% 1.0% 1.1% 0.8% 1.0% 0.4% 2.0 0.4% 0.4% 0.3% 0.3% 0.7% 2.0 0.0% 2007 2008 2009 2010 6M11 0.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Africa America Oceania Asia 12.0% International Airport Arrivals • Tourism receipts have been falling since 2008, partly 9.6% 10.0% (% yoy change) reflecting the consequences of the global economic 8.0% crisis. 6.0% 4.0% • International airport arrivals have been rising since the 2.0% beginning of 2011, for the first time since 2008. 0.0% • Higher traffic from Asia is one of the driving forces of -2.0% -0.2% -0.7% this upward trend. The share of travelers to Greece from -4.0% Asia to the total number of international arrivals, has -6.0% -8.0% more than doubled in just one year, thus making Asia the -7.4% -10.0% departure area with the second largest share, after 2008 2009 2010 10M11 Europe (c. 89% of total). *to the 13 main airports of the country Source: Association of Greek Tourism Enterprises (SETE) • New Opportunities: Medical Tourism
    • Presentation at PMI-GREECE Event | 22.3.2012 Sectoral Growth Prospects Agriculture / Fishery18.0% Evolution of imports / exports of % share of Agriculture/Fishery to16.0% agricultural products GDP & employment 15.0%14.0% 12.0% ( % yoy change)12.0% 11.9% 10.0% 8.5%10.0%8.0% 7.1% 5.0% 3.6% 4.0% 5.5% 2.4%6.0% 4.0% 1.2% 3.8%4.0% 0.0% 2.3%2.0% -3.0% -5.0%0.0% Imports Exports 00 01 02 03 04 05 06 07 08 09 10 -6.6% 20 20 20 20 20 20 20 20 20 20 20 -10.0% EZ-17 (Gross Value Added) Greece (Gross Value Added) 2007 2008 2009 2010 8M11 EΖ-17 (Employment) Greece (Employment)Source: Eurostat, National Accounts Source: Hellenic Exporters Board• The sector’s contribution to the gross value added in Greece was 2x that of the EZ-17‟s average, for the period 2000-2010.• The difference between the sector‟s contribution to the economy in Greece vs. EZ-17 is much more evident in employment terms: More than 13% of labor force in Greece, was employed in the Agriculture/Fishery during 2000- 2010.• Agriculture/fishery is the sector with the highest employment growth during 2009-2010• Moreover, despite the recession in 2009-2010, the sector’s gross product continued to grow, unlike any other sector of the Greek economy.• Greece‟s potentials in agro business stem from its mild climate and its soil (exports of agricultural products account of c. 19% of total exports and mark a considerable increase since 2009)
    • Presentation at PMI-GREECE Event | 22.3.2012 International Competitiveness of the Manufacturing Sector Industries of the Manufacturing Sector that (1) are facing increased external demand and (2) have increased their export share to the relevant European exports (2000-2010) 267. Cutting, shaping and 4.0 331. Manufacture of medical 266. Manufacture of articles of and surgical equipment and finishing of stone concrete, plaster and cement orthopaedic 244. Manufacture of appliances 364. Manufacture of sports Pharmaceuticals pharmaceuticals, medicinal goods 265. Manufacture of cement, chemicals and botanical lime and plaster products 3.0 334. Manufacture of optical CAGR Industry / CAGR Sector (2000 - 2010, EU 27) 153. Processing and preserving 365. Manufacture of games and instruments and photographic of fruit and vegetables toys equipment Medical equipment 264. Manufacture of bricks, tiles 246. Manufacture of other and construction products, in chemical products Games & Toys 2.0 baked clay 241. Manufacture of basic 335. Manufacture of watches chemicals Basic Chemicals and clocks 155. Manufacture of dairy Dairy products products 1.0 242. Manufacture of pesticides and other agro-chemical Articles of products Processing & Preserving fruit & concrete, plaster & vegetables cement 0.0 -6.0% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% -1.0 Change in the share of the Greek exports of manufacturing industries to the relevant European exports (2000 vs 2010) ( in percentage units)Notes: (1) the size of the ”bubble” represents the relevant share of the exports of the manufacturing industry to the total exports of the sector in Greece, (2) dataanalysis is based on the matching of the Combined Nomenclature (CEN) to NACE Rev 1.1. (3) CAGR: Compound Annual Growth Rate - Source: Eurostat27
    • Presentation at PMI-GREECE Event | 22.3.2012 Sectoral Growth Prospects Pharmaceuticals The MoU has set strict targets regarding cut backs on public Unprotected1 market segmentation by pharmaceutical expenditure. While from 2004-2009 public volume (% 2009) pharmaceutical expenditure was increasing by approximately EUR 0.5bn per annum, with the measures implemented by the Greece 32 68 government according to the MoU targets, it was reduced by Japan 38 62 16.5% in 2010 and by 24.2% in 2011, according to IOBE Spain 58 42 estimations. France 62 38 Italy 65 35 The measures in the Memorandum include the increase in the UK 76 24 market shares of generics in the Greek market, which is intended Germany 79 21 to reach 50% of the total volume of pharmaceuticals in hospitals Canada 83 17 by 2012. Czech Republic 85 15 Poland 85 15 This can be considered as another opportunity for growth for the Slovakia 85 15 Greek generic companies, since they can enhance their US 90 10 production and exporting activity and generate significant value- Mexico 93 7 added in the employment sector. Turkey 95 5 Brazil 97 3 Note: Generics penetration in Greece is significantly lower vs. Generics Originals international markets (due to: 1. Generics prices fixed by law at Source: IMS Health Data; Hellenic Association of 90% of Originals‟, 2. internationally, Generics are typically priced at Pharmaceutical Companies 30-80% lower levels vs. respective Originals) 1 Off-patent drugs market
    • Presentation at PMI-GREECE Event | 22.3.2012 Sectoral Growth Prospects Energy Electricity Production (installed capacity in MW) Renewable Energy 50 3.362 Sources Biomass Lignite 6,250 4.826 Wind Natural Gas 7.610 60 700 Photovoltaic 3.456 1,200 184 Hydroelectric 4,486 Oil 3,237 2.146 1.268 2010 2020 2010 2020Source: Ministry of Environment, Energy and Climate Change • Natural gas still has a relatively low penetration in final energy demand in Greece (4% vs. 22% in the EU).• The electricity market is still dominated by the Public Power • Investment in renewables is backed by an incentive system Company (90% share in conventional power generation in 2010). with feed-in tariffs set to a level that ensures satisfactory• However, the breakdown of the dominant operator’s activities financial return and fixed for the duration of the contract with the is one of the basic requirements of the MoU. network operator (20 years).• Wholesale market liberalisation was de facto achieved in • According to the Ministry of Environment, Energy and Climate 2010, with shipments of spot-market LNG to independent Change, investments in renewables will reach EUR 16bn over suppliers and large-scale industrial consumers. the next decade, while the island interconnections and the• Meanwhile, the country has adopted ambitious targets for the remaining works on the grid will require EUR 4-5bn of new penetration of renewable energy sources in power generation capital expenditure. (40% of final consumption) and networks (10% of final • Significant investment opportunities are also envisaged in consumption). energy efficiency and smart grid sectors.
    • Utilization of State property – Presentation at PMI-GREECE Event | 22.3.2012 Privatizations, State Asset Management Targets 1. Attract private investment (foreign & domestic) to crucial productive sectors of economic activity – driver for growth, employment & competitiveness 2. Significantly reduce public debt: • Revenues:  EUR 15bn in 2011-2013, EUR 50bn in total until 2015  EUR 10-15bn from enterprises & infrastructure, EUR 25-35bn from the development of State Real Estate Assets. • ↓ Debt / GDP by 20pps until 2015 • ↓ annual interest expenditure by EUR 3bnState Commercial Assets:• Infrastructure: Airports, Ports, Motorways• Energy: Public Power Corporation, Public Gas Corporation (DEPA), Hellenic The Greek State Petroleum owns large real estate property:• Telecommunications: Hellenic Telecommunications Organization, Frequency Catalyst for solvency Spectrum and growth• Gaming: OPAP, Hellenic Casino of Parnitha, Hellenic Horse Racing Organization, State Lottery, e-gaming• Banking Sector: Agricultural Bank of Greece (ATE), Loan & Consignment Fund, Hellenic Postbank• Real Estate• Other Holdings: LARCO, TRAINOSE, Hellenic Defense Systems, Hellenic Vehicle Industry, Hellenic PostSource: Medium-Term Fiscal Strategy & Policies for Exiting the Crisis, (Ministry of Finance Presentation), May 2011, “The Complex Problem of Utilizing 30State Real Estate Property” – Vassilis Maglaras, Policy Brief, ISTAME (November 2010)
    • Presentation at PMI-GREECE Event | 22.3.2012 Processes A specialized entity Sales („Sovereign Wealth Fund‟), in which all individual State assets are included, has been createdConcessionAgreements NEW IDEAS: PPP 1. A „Marshall Plan‟ could be activated(Private-Public via a private capital vehicle Partnership) 2. Transfer part of Greek state assets to EIB. The proceeds will immediately be used to buyback public debt Strategic gradually. The EIB and the Sovereign Investors Wealth Fund will gradually develop these assets in order to avoid fire sales in a declining market 31
    • Presentation at PMI-GREECE Event | 22.3.2012 Proposals 1. Reforming Fiscal Management Expenditure side Revenue side• Lower public sector wage bill: Abolition of a large number • Revision & reduction of tax-free threshold & theof allowances - wage maturity should be provided more numerous tax exemptions in order to increasesparsely (e.g. every 5 years) & should be linked to evaluation. effectiveness & promote targeted social policies.Reduction in the number of public sector employees ( ↓ of • Introduction of book-keeping for all economic activities.fixed-term contracts, closing & merging publicentities, rationalization of business plans & structures of public • Simplification of tax coding.sector companies, reallocation of personnel) • Restructuring tax administration: Automation• Further Social Security Reform: Transform the (promotion of IT systems), central systemSupplementary Social Security Funds into Defined coordination, minimization of procedures, focus onContribution Funds (vs. Defined Benefits Funds collection, promote evaluation based on revenuecurrently), target social benefits to reduce poverty. collection, enhance internal audit control, reallocation of resources.• Further savings on health and defense expenditure. • Improve effectiveness in indirect taxation (e.g. the• Restructure the state compensation system of local abolition of tax advantage on heating oil will contribute togovernment: Compensation of local expenditure following tackling oil smuggling).evaluation and abolition of the automatic determination of itsrevenues provided by the Central Government. • Introduction of the Double – Entry Accounting System and IFRS to all General Government entities. 32
    • Presentation at PMI-GREECE Event | 22.3.2012 Proposals 2. Use EC Structural Funds to strengthen the privatization process –Boost private investments – Development of Public Real Estate Property • Substantial EC structural funds (c. EUR 15bn) to fund Public Investment Program. Reduce the „national‟ part of Public Investment and increase the co-financed part. Present eligible investment plans (e.g. a small number of big projects: National highways, modernization of airports, ports, touristic facilities, energy infrastructure). • Leverage part of the EC Structural Funds with the European Investment Bank • The EIB would provide guarantee to fill the financing gap that Greek & foreign commercial banks have left in major public work •Attract FDIs by adopting “fast track” procedures for all types of investment projects • Use Private-Public Partnership, such as the utilization of public hospital infrastructure, currently operating below capacity: 1.concession of beds to private insurance companies, 2.concession of hospital clinics to private practitioners or private providers of health-care services, 3. promotion of Medical Tourism. • Real estate development of numerous military camps which are not necessary to national security • Liberalization of energy markets - Breakdown of the Public Power Corporation into subsidiaries (see ENEL) •Eradicate all state arrears to private suppliers. 33
    • Presentation at PMI-GREECE Event | 22.3.2012 Proposals 3. Promote Structural Reforms• Elimination of all barriers to entrepreneurship and investments (including simplification of procedures andlicensing, determination of land use, adoption of the principle of „silent approval‟, opening up of all markets andprofessions, improving liquidation procedures for companies)• Labor market flexibility: Facilitate shifting of employment (10%-15% of labor force) from non-tradable goods & servicessectors to tradable-goods and services sectors. Role of the Social Partners and of the State: Study benchmark models(German Kurzarbeit, Scandinavian flexicurity)• Targeting social benefits spending (value for money): Longer duration unemployment benefits, professional re-training of theunemployed, introduction of a minimum income threshold in order to combat poverty, financed by eliminating waste and excessesin pensions, health and defense spending, as well as by tackling tax – evasion.• 10-year growth horizon needed:  To account for the macroeconomic effects of reforms, privatization and the rebalancing of the Greek economy away from consumption and towards exports, import substitution & investment.  To focus on sectors with comparative advantage (tourism, transportation (regional hub in Southeastern Europe), agriculture / fishery, green renewable energy, education, mineral resources, technology).• The private sector must also adapt to the new growth model:  Lower dependence on the State  Outward-looking entrepreneurship: Export orientation, import substitution, strategic international alliances  Rational use of human resources – training of employees  Introduction / use of ICT systems – modern organizational & management standards  Improvement in competitiveness through the appropriate adjustment of the corporate model  New growth cycle through innovation & investment in international networks 34
    • Presentation at PMI-GREECE Event | 22.3.2012 Greece: Conclusions Large current problems, but also strong potential: • Remove current uncertainty (PSI / loan agreement) • Open up (liberalize) markets for goods, services, professions and labor • Eliminate barriers to private investment • Privatize state property: use it as a catalyst to attract foreign capital • Eliminate tax loopholes and combat tax evasion • Cut wasteful public expenditure / Outsource state activities to the private sector • Use EU Structural Funds effectively to boost public & private investment Critical factors for success: • Maturity of the political system / Leadership / Ownership of the salvation programme • Social acceptance: explain the implications of failure as well as the implications of success • Present and adopt a “Greece 2020” business plan 35
    • Presentation at PMI-GREECE Event | 22.3.2012 The Eurozone needs a new model of economic governance in order to survive• Eurozone: a complete monetary union but incomplete economic union: Euro is “a currency without a state”, a currency without a common Finance Ministry, a crisis resolution mechanism and a common public debt policy.• Fiscal discipline necessary but not sufficient: Growth initiatives equally important• Insufficient monitoring of economic developments by the responsible EU authorities, insufficient monitoring of banking developments (leverage of European banks at historical levels).Need for:1. ECB acting as ‘lender of last resort’: Encouraging recent developments2. Strengthen EFSF-ESM / Issue Eurobonds  Increase their financial resources  Allow them to buy government bonds in the secondary market  The Eurozone authorities should provide guarantees, thus motivating bond holders to exchange old with new bonds at lower market prices (‘Brady’ type bonds, voluntary debt restructuring).  Final solution: Issuing fully fledged eurobonds (“several & joint liability”) in which all EZ-member states are jointly liable for each other’s obligations3. Fiscal integration: A Eurozone Finance Ministry ensuring fiscal discipline and monitoring the financial system4. Eliminate ‘Deflationary Bias’: Member – States with Current Account Deficits should reduce them but those with Current Account Surpluses should also reduce them: Symmetry of adjustment 36
    • Presentation at PMI-GREECE Event | 22.3.2012 Thank you Yannis StournarasProfessor of Economics, Dept. of Economics, University of Athens & General Director IOBE ystournaras@iobe.gr Nicholas Ventouris Economist - Research Associate IOBE ventouris@iobe.gr