Presentation by Michael Haliassos, Goethe University Frankfurt, CFS, SAFE, and CEPR at the Conference "Have We Learnt Anything from the Crisis?" in Riga, Latvia. 17.10.2014

1. Greece: Are We Wasting a Good Crisis?
Bank of Latvia Economic Conference, October 2014
Michael Haliassos
Goethe University Frankfurt, CFS, SAFE, and CEPR

2. What caused the Greek Debt Crisis?
The political process behind the numbers
• Following defeat of communists in civil war:
- The left and left-of-center were excluded from the public sector
• Election of PASOK socialists (A. Papandreou) in 1981:
- seen as a chance to compensate those previously excluded by offering party
supporters public sector jobs
• The Right followed this example in order to compete
• Key consequence for public sector recruiting:
- Pay (most) public employees little (max number), expect nothing
- Create an inefficient public sector
- No monitoring: all ‘excellent’
• Build a state-dependent private sector (turning producers to beggars)
- Offer public projects in exchange for party support or kickbacks
- Induce concentration of private sector to public works companies
- Drive exports to a negligible share of GDP
• Reduce legitimacy of paying taxes:
- tax evasion encouraged by bad use of funds
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3. What needs to be done in a fiscal crisis
• Measures
- Reduce budget deficit, ensure at least primary surplus
- Create repayment potential of borrowers over the medium run
• Deficit reduction
- Reduce Government Spending
• Reduce and streamline expenditures
- Reduce public employee salaries, wages, and pensions
- Reduce employment in the public sector
- Increase taxes
• VAT? Real Estate? Tax evasion?
• Creation of repayment potential
- Boost competitiveness
• Reductions in wages and salaries
• Open up professions
• Increase flexibility in labor markets: ease of layoffs
- Boost entrepreneurship
• Improve conditions for starting and running a business
• Improve investor protection
• Encourage innovation
- Boost investment
3

4. Greek Fiscal crisis: What has happened?
• Measures
- Reduce budget deficit, ensure primary surplus
- Create repayment potential of borrowers over the medium run
• Deficit reduction
- Reduce Government Spending
• Massively reduce and streamline expenditures
• Reduce salaries, wages, and pensions
• Massive layoffs in public sector
• Reduce public investment
- Increase taxes
• Especially on VAT and on real estate
• Creation of repayment potential
- Boost competitiveness
• Reductions in wages and salaries
• Protracted confrontation with closed professions
• Increased flexibility in labor markets: ease of layoffs
- Boost entrepreneurship
• Improve conditions for starting and running a business
• Improve investor protection
• Encourage innovation
- Boost investment
4

5. The assault on household liquidity
• Lower wages, salaries, and pensions: Did they boost competitiveness?
• Unemployment spells and greater unemployment risk: especially for the young
• Taxes on illiquid real estate: Taxes on the rich and liquid?
5

6. 2015. The ratio of unemployment has reached 27.3% in 2013. unemployment and wage agreements suggesting moderation, employees by 1.5% is expected.
Unemployment Rate and Nominal Compensation per
Employee, Greece
Graph 7. Growth in nominal compensation per
Source: European Commission, 2nd Adjustment Program, April 2014
forecast
% %
6
employee and unemployment
Graph 8. Monthly 6
4
2
0
-2
-4
-6
-8
-10
30
25
20
15
10
5
0
2005 2007 2009 2011 2013 2015 2017
Unemployment rate total (Eurostat Definition)
Nominal compensation per employee (total economy, growth rate) (rhs)
7
2005 2006 2007 y-6
5
4
3
2
1
0
-1
-2
-3
-4
o-y %
Source: European Commission Source: European Commission

7. What was the size of the liquid asset buffer?
The Composition of Household Net Wealth at the Start of the Crisis
Greece versus Germany
Source: Author Computations based on HFCS First Wave
600
550
500
450
400
350
300
250
200
150
100
50
0
Amount in 1000 Euros, GR
10 20 30 40 50 60 70 80 90 100
Percentile Position in Net Wealth Distribution
Financial Asset
Mortgage Debt
Total Asset
Total Real Asset
Total Debt
Non-mortgage Debt
Source: ECB
Household Finance and Consumption Survey, 1st Wave
7
1200
1000
800
600
400
200
0
Amount in 1000 Euros, DE
10 20 30 40 50 60 70 80 90 100
Percentile Position in Net Wealth Distribution
Source: ECB
Household Finance and Consumption Survey, 1st Wave

8. Lowering Wages: Did it boost competitiveness ?
Change in ECB Harmonized Competitiveness Index since 1999Q1
Eurozone Countries, Based on Unit Labor Costs
In 2009Q4, 2011Q4, 2012Q2 and 2013Q3. Source: ECB Statistical Data Warehouse
8

9. The Evolution of Macroeconomic Aggregates
Greece
following a sizeable drop in GDP over the period
Note: Newly revised data show that Greece contracted by 5.4% in 2010 (4.9% previously estimated), by 8.9% in 2011 (7.1%
previous figures). But for 2012 and 2013 the figures were revised upwards. For 2012, the new figures is -6.6% (-7%
previously), and for 2013 it was -3.3% (-3.9% previously).
9
2007$ 2008$ 2009$ 2010$ 2011$ 2012$
0.80$
0.70$
0.60$
0.50$
0.40$
0.30$
0.20$
0.10$
0.00$
Household$Consump4on$to$GDP$ 0.68$ 0.71$ 0.72$ 0.71$ 0.70$ 0.68$
Investment$to$GDP$ 0.27$ 0.24$ 0.19$ 0.18$ 0.16$ 0.14$
Exports$of$Goods$and$Services/GDP$ 0.24$ 0.24$ 0.20$ 0.22$ 0.24$ 0.25$
Imports$to$GDP$ 0.38$ 0.38$ 0.32$ 0.31$ 0.31$ 0.29$
Household$Consump4on$to$GDP$
Investment$to$GDP$
Exports$of$Goods$and$Services/GDP$
Imports$to$GDP$

10. exports of services are especially reliant, faced a severed oversupply due to the global economic slowdown following financial crisis of 2008. All these headwinds have progressively faded since 2012. In addition, tourism also experiencing significant boost last summer due to the political Export crisis performance in competitor destinations, across adjustment namely Turkey countries
and Egypt. This contributed to a nascent recovery of export growth.
Source: European Commission, Adjustment Program Report, 2014
3Graph 2.3. Exports of goods (volumes; 2008=100)
4Graph 2.4. Exports of services (volumes; 2008=100)
1.6
1.5
1.4
1.3
1.2
1.1
1
0.9
0.8
Graph 2.3 Exports of goods (volumes;
05 06 07 08 09 10 11 12 13 14
Source: European Commission
2008=100)
IE EL ES
LV PT EU28
1.4
1.3
1.2
1.1
1
0.9
0.8
0.7
0.6
Graph 2.4 Exports of services (volumes;
05 06 07 08 09 10 11 12 13 14
Source: European Commission
2008=100)
IE EL ES
LV PT EU28
10

11. Cost of Living
• Eurostat: Greece experienced the greatest drop in real per capita GDP between 2009-13: 21.5%.
• August 2014: 19th continuous month of negative inflation
- Primarily due to price drops in services and durable goods.
• Food, hygiene and household cleaning items: of the 54 items recorded for the CPI, 43 items
experienced price increases between Aug. 2009 and Aug. 2014, some > 30%.
• Why? (Kathimerini, 12.10.14):
- Increases in VAT and on special consumption taxes, especially on fuel that hurt businesses.
- Dependence on imports of final and intermediate goods
• 6.5% and 11.5% of GDP, respectively.
- Shaken relationship between wholesalers and retailers.
• Delays in payments during 2013 (average: 110 days) leads wholesalers to be very strict in
its dealings with super markets, in order to avoid exposure to credit risk.
- Poor distribution networks:
• Despite increased concentration in retail trade following the onset of the crisis, in 2013 the
number of food stores was 32576, and this raises the distribution costs, especially for
sensitive and highly perishable goods such as milk.
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12. The Dangerous Twist in the Political Debate
• Lack of trust in the Northern partners
- Northerners only care for taxes and impoverishment and not for growth
• Political dialog got misdirected:
- Instead of debating on the most promising reforms for productive potential and
growth, parties are debating whether
• the Northerners should interfere with our economy (Memorandum)
• Consequence of giving priority to budget surpluses and salary cuts ahead of
job creating reforms
- Every party now has to say it wants out of the Memorandum!
- Some parties want back to failed practices
- Other parties say they want reforms but have not yet made great progress
- The people are demoralized and disappointed: low confidence
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13. The Enormous Scope for Reforms and the
Exploitable Margins

14. Cutting the Gordian Knot:
The Southerners’ Best Response
• Productive potential
- Encourage Research and Development
• Identify and promote pockets of excellence
• Encourage interaction between research and industry
- Promote investment in dynamic, export-oriented firms
- Improve drastically ease of doing business
• Salaries
- German workers are not paid Chinese salaries:
• The “Made in Germany” principle
- Reward quality and initiative
• Avoid horizontal cuts without evaluation
• Promote high-quality education
- Introduce private universities with strict, international accreditation standards
• Keep promising young talent and senior experience in the South
• Promote interactions with universities abroad
• Utilize “export” potential
• Establish independent research centers for economic and
social policy
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15. Innovation and sophistication factors (30.0%) ...........81 ......3.5
Business sophistication ........................................... 83 ......3.8
Innovation ................................................................. 87 ......3.1
efficiency
Labor market efficiency
development
The most problematic factors for doing business:
The Southern Perspective
Global Competitiveness Report 2013-14
Captured the opinions of over 13,000 business leaders in 148 economies
between January and May 2013. Responses refer to Greece
Percent of responses
The most problematic factors for doing business
Access to financing ...........................................................22.4
Inefficient government bureaucracy ...................................21.2
Tax regulations ..................................................................14.5
Policy instability .................................................................12.0
Tax rates ..............................................................................9.8
Corruption ...........................................................................6.9
Restrictive labor regulations .................................................5.2
Inadequate supply of infrastructure ......................................2.8
Government instability/coups ..............................................2.2
Insufficient capacity to innovate ...........................................1.9
Poor public health ...............................................................0.4
Inadequately educated workforce ........................................0.3
Poor work ethic in national labor force ................................0.3
Foreign currency regulations ................................................0.1
Inflation ................................................................................0.1
Crime and theft ...................................................................0.0
Note: From the list of factors above, respondents were asked to select the five most problematic for doing business in their country and to rank them between
1 (most problematic) and 5. The bars in the figure show the responses weighted according to their rankings.
198 | The Global Competitiveness Report 2013–2014
Greece Innovation-driven economies
0 5 10 15 20 25 30
‹:RUOG(FRQRPLF)RUXP
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16. Investment barriers in EU crisis countries as perceived by German
How important are the following factors in case that a company in your industry, based in
Germany, would consider an investment in any of the southern European countries that are in
crisis?
16
Financial Industry
Source: CFS Index Survey, April 2014
Answers
Percentage of people who favored the following answers
Very important Important Less important Not important
Soundness of Public Finances 28,8 % 53,5 % 15,6 % 2,1 %
Attractive Tax System 20,7 % 57,5 % 19,6 % 2,2 %
Low wage level 9,4 % 27,1 % 56,2 % 7,3 %
Good eductional system / Human capital 62,3 % 33,5 % 2,6 % 1,6 %
Legal security 89,8 % 9,7 % - 0,5 %
Good infrastructure 29,2 % 59,8 % 8,3 % 2,7 %
Flexible Labor Market Structure (e.g. low power of labor
unions, little dismissal protection, etc.) 14,2 % 50,9 % 30,1 % 4,8 %
Differential regulation / Bureaucracy 28,6 % 52,7 % 16 % 2,7 %

17. Ease of Doing Business
Source: World Bank EDB 2014
17

18. Enforcing Contracts in Greece:
How long does it take?
Ease of Doing Business Report 2014
5/4/2014 about:blank
DB 2014 RANK 98 DB 2013 RANK*** 91 CHANGE IN RANK -7
DB 2014 DTF** (%
41.14 DB 2013 DTF** (%
45.52 IMPROVEMENT IN DTF**
-4.38
POINTS)
POINTS)
(% POINTS)
Ease of Doing Business in
Greece
Enforcing Contracts
Indicator Greece OECD
1,300 529
14.4 21.0
39 31
Indicator
Time (days)
Cost (% of claim)
Procedures (number)
Time
(days) 1,300
Filing and service 60
Trial and judgment 1,120
Enforcement of judgment 120
Cost
(%
of
claim) 14.4
Attorney cost (% of claim) 10
Court cost (% of claim) 2.7
Enforcement Cost (% of claim) 1.7
Procedures
(number) 39
* Not counted in the total number of procedures
** The distance to frontier (DTF) measure shows the distance of each economy to the frontier, which represents the
highest performance observed on each of the topics including Getting Electricity across all economies included in
Doing Business. An economy’s distance to frontier is indicated on a scale from 0 to 100, where 0 represents the
lowest performance and 100 the frontier. Read more...
***Last year's rankings are adjusted: they are based on 10 topics and reflect data corrections.
18

19. continues its goods, 17th, transparent (12th). same Global Competitiveness Index
2013-14
Captured the opinions 1.1: The Global Competitiveness of over 13,000 Index 2013–business 2014
leaders in 148 economies
between January and May 2013.
Global Competitiveness Index 2013–2014 rankings and 2012–2013 comparisons
GCI 2013–2014
Rank
(out of 148)
Score
(1–7)
Rank among
2012–2013
economies*
GCI
2012–2013
1 5.67 1 1
2 5.61 2 2
3 5.54 3 3
4 5.51 4 6
5 5.48 5 7
6 5.48 6 4
7 5.47 7 9
8 5.42 8 5
9 5.40 9 10
10 5.37 10 8
11 5.33 11 15
12 5.29 12 13
13 5.24 13 11
14 5.20 14 14
15 5.18 15 12
16 5.15 16 16
17 5.13 17 17
18 5.11 18 23
19 5.11 19 24
20 5.10 20 18
21 5.09 21 20
22 5.09 22 22
23 5.05 23 21
24 5.03 24 25
25 5.01 25 19
26 4.95 26 28
27 4.94 27 26
28 4.92 28 27
29 4.84 29 29
30 4.67 30 31
31 4.66 31 30
32 4.65 32 34
GCI 2013–2014
Country/Economy
Rank
(out of 148)
Score
(1–7)
Rank among
2012–2013
economies*
GCI
2012–2013
Croatia 75 4.13 75 81
Romania 76 4.13 76 78
Morocco 77 4.11 77 70
Slovak Republic 78 4.10 78 71
Armenia 79 4.10 79 82
Seychelles 80 4.10 80 76
Lao PDR 81 4.08 n/a n/a
Iran, Islamic Rep. 82 4.07 81 66
Tunisia 83 4.06 n/a n/a
Ukraine 84 4.05 82 73
Uruguay 85 4.05 83 74
Guatemala 86 4.04 84 83
Bosnia and Herzegovina 87 4.02 85 88
Cambodia 88 4.01 86 85
Moldova 89 3.94 87 87
Namibia 90 3.93 88 92
Greece 91 3.93 89 96
Trinidad and Tobago 92 3.91 90 84
Zambia 93 3.86 91 102
Jamaica 94 3.86 92 97
Albania 95 3.85 93 89
Kenya 96 3.85 94 106
El Salvador 97 3.84 95 101
Bolivia 98 3.84 96 104
Nicaragua 99 3.84 97 108
Algeria 100 3.79 98 110
Serbia 101 3.77 99 95
Guyana 102 3.77 100 109
Lebanon 103 3.77 101 91
Argentina 104 3.76 102 94
Dominican Republic 105 3.76 103 105
Suriname 106 3.75 104 114
above, six of them are among the top 10. In total, 10 are
among the top 20, as follows: Switzerland (1st), Finland
(3rd), Germany (4th), Sweden (6th), the Netherlands
(8th), the United Kingdom (10th), Norway (11th), Denmark
(15th), Austria (16th), and Belgium (17th). However,
Europe is also a region with significant disparities in
competitiveness, with several countries from the region
significantly lower in the rankings (with Spain at 35th,
Italy at 49th, Portugal at 51st, and Greece at 91st). As in
previous years, North American countries feature among
the most competitive economies worldwide, with the
United States occupying the 5th position and Canada
the 14th.
Norway rises by four places in the rankings to a
remarkable 11th this year, with progress in a number
of areas. Specifically, the country features a notable
improvement in the uptake of ICTs, particularly increasing
Internet bandwidth and greater penetration of mobile
broadband. Similar to the other Nordic countries,
Norway is further characterized by well-functioning and
transparent public institutions; private institutions also get
19
admirable the country ranked boosted an excellent up 10 Norway’s impressive year, several with Norway’s continuing greater and framework and structure of the 2010 edition. Data
for all the indicators mainly span the period between 2009
and 2011. As for the previous version, the index is based
on 11 pillars describing both inputs and outputs of territorial
competitiveness. Pillars are grouped into three sets describing
basic, efficiency, and innovative factors of competitiveness.
The pillar groups are weighted differently according to the
region’s development stage in terms of gross domestic
product per capita.
The basic pillars represent the basic drivers of all
economies. They include (1) Institutions, (2) Macroeconomic
2 3 ‹:RUOG(FRQRPLF)RUXP

20. Gross Expenditure on RD Relative to GDP 2012
20
2/27/2014 Eurostat - Tables, Graphs and Maps Interface (TGM) map print preview
Source of Data Eurostat
Copyright of administrative boundaries: ©EuroGeographics, commercial re-­distribution is not permitted
Last update: 24.02.2014
Date of extraction: 27 Feb 2014 19:19:00 CET
Hyperlink to the map: http://epp.eurostat.ec.europa.eu/tgm/mapToolClosed.do?
tab=mapinit=1plugin=1language=enpcode=t2020_20toolbox=types
Disclaimer: This map has been created automatically by Eurostat software according to external user specifications for which
Eurostat is not responsible. Footnotes have not been included.
General Disclaimer of the EC website: http://ec.europa.eu/geninfo/legal_notices_en.htm
Short Description: The indicator provided is GERD (Gross domestic expenditure on RD) as a percentage of GDP. Research and
experimental development (RD) comprise creative work undertaken on a systematic basis in order to increase the stock of

21. Private Universities as an Export Component?
The Abundance of Greek Human Capital Abroad
• John Ioannides (Stanford University, 2014):
- About 3% of highly cited scientists in the world are Greek, while
the population of Greece (of Greeks) is only 0.15% (0.20%) of the
world population.
- 85% of the highly cited Greek scientists live and work outside
Greece.
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22. Lack of Balance between Population Share of Scientists/ Engineers
and RD Share of GDP in 2011
Source: William H. Press, Presidential Address, Science 15.11.13,
reprinted from Battelle Memorial Institute and RD Magazine
22
Area of circle is proportional to total RD Spending

23. Target: Get Greek RD Spending to 1.5% of GDP by 2020
Proposal of National Council on Research and Technology
(ESET 2010-2013)
• Substantial but gradual rise in
expenditures
• Allocated to fields depending on
evidence of research activity
(Aristeia I)
• Backed by assessment regarding
promising research areas by the
relevant TES (Field Scientific
Council)
• A few weeks ago: Announcement
that all research programs will
be cut by a fixed percentage!
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24. Conclusions
• The adjustment program gave enormous priority to deficits, lowering wages and salaries, and
raising taxes and very little to reforms that would create good jobs with attractive terms and
boost productive potential
• This has led to demoralization and low consumer and investor confidence
• There are substantial margins for reform, allowing big improvements in limited time
• Danger that reforms to create productive potential and generate sustainability will not be made!
- The unpopular program is abandoned once its short-term fiscal targets are achieved without
reforms being implemented
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