For the past few years Greece, has been fighting its fiscal deficit with a harsh austerity programme. However, the limited success of this approach means that if the country is to make a sustainable recovery from its current economic crisis, its policies must focus more on instigating growth.

Since the onset of the global financial turmoil in 2007 and 2008, we have seen a gradual aggravation of the financial crisis mainly due to the strong links between banking systems, economies and governments’ fiscal position. This deteriorating economic environment has resulted in a widening of economic imbalances, social unrest and political instability.

Editor's choice 

The Economic and Monetary Union (EMU) has been severely hit by the crisis and still faces difficulty carrying on and finding its way 'out of the woods'. Without doubt, one of the major reasons for the EMU’s vulnerability is that it is an incomplete project, as the economic dimension of the union has remained mainly a national matter. As a result, the eurozone has not been able to cope with the severe asymmetric shocks while such structural imbalances remained. A clear image of these imbalances is depicted by the difference in the current accounts of countries in the European north and south.

Of course, in the case of Greece, no one can argue that its economic position is solely attributed to the participation in the EMU or in the EU, as over the past 38 years, since the restoration of democracy, targeting and achieving membership of these two organisations constituted our stable and clear strategic orientation. Since then, Greece’s convergence to western European economies and the economic policies that followed have been marked by some successes but also by major mistakes.

Fatal flaws

Among these mistakes is the fact that over the past 30 years, Greece has not been successful in achieving stable equilibrium in its public finances. These historic fiscal distortions, paired with structural weaknesses in the real economy and inefficient domestic productive processes, exacerbated the lack of competitiveness in the Greek economy, a situation clearly reflected by the twin peaks in deficits and debts. Unfortunately, the persistent problems and distortions of Greece’s economic model were not mitigated by its membership of the EMU. On the contrary, both public and private sector access to the lower financing costs of the single European currency resulted in strong domestic demand, which fuelled economic growth during the past decade but also increased indebtedness to unsustainable levels.

The aforementioned situation combined with the absence of an effective crisis management mechanism at EU level (that would enable the EU to cope with the spill-over effects of the global financial crisis in a timely fashion, effectively and as a whole) and the specific acts or major omissions of the Greek government elected in 2009 resulted in the Greek debt crisis and ultimately to the support mechanism of the European Commission, European Central Bank and International Monetary Fund announced in May 2010.

During the two years of fiscal adjustment efforts that followed the country’s pledge in return for support, Greece has made huge sacrifices involving particularly large across-the-board cuts in wages and pensions as well as enormous tax increases. It is a fact that the country's fiscal adjustment effort was the largest in the EU. At the same time, the country's unit labour cost has been significantly reduced in an effort to restore competitiveness to the economy, and according to recent forecasts the average annual increase in unit labour cost will be even lower than the eurozone average for the period between 1999 and 2013. However, the result of this Herculean effort to reduce the fiscal deficit has not been what had been hoped for. The prescription of the adjustment programme was mainly focused on austerity, with significant growth-enhancing measures largely missing from the agenda. Those few in place were poorly implemented.

New government, new direction

After the recent Greek elections and formation of the new government, the prime minister, Antonis Samaras, and ministerial cabinet have made significant efforts, first to stabilise the situation, and second to create the prerequisites to return to growth. The first step in this effort is to put back on track, in co-operation with our international partners, the adjustment programme. Greece’s historic inability to tackle deficits and to reduce debt to sustainable levels makes fiscal consolidation and discipline an imperative task. However, and taking into consideration the poor results of the past few years, we can clearly see that although fiscal consolidation is necessary, it is not a sufficient condition to achieve sustainable results, especially in a deteriorating domestic and global economic environment.

What is needed most, and is being promoted by the country's new government, is the pairing of fiscal adjustment with economic growth in order to enable the economy to escape from the vicious cycle of deficits and recession through the implementation of specific measures and policies that focus on reversing the recession and increasing liquidity in the economy and aim to end the cyclical dimension of the deficit. Within this framework, the two major priorities of the government are the enrichment of the pursued economic policy with measures and actions aimed at what we call 'restarting the economy', such as the acceleration of the absorbance of EU co-funded programmes, banks’ recapitalisation, European Investment Bank projects, etc – and the implementation of structural changes that will reduce barriers to investment, enhance competition in products and services markets, introduce a new, simplified and efficient tax law, and accelerate the privatisation process. 

On the other hand, the orientation of fiscal policy towards the rationalisation of public spending aims at coping in a sustainable way with the other dimension of fiscal deficit: the structural deficit. Within this framework, the ministry of finance's strategy is focused on promoting fiscal consolidation and discipline in order to achieve the sustainable retrenchment of the public sector according to the real needs of the Greek economy. In this regard, the underlying philosophy is to achieve a reduction in public sector economic intervention and a radical improvement of its effective function in order to increase the efficiency of public spending.

Back on track

During its first two months in office, the Ministry of Finance has already promoted and implemented specific measures, such as the reduction of the number of the public entities, the abolition of intermediate governance structures, the establishment of a tighter recruitment rule in the public sector, the reduction of state buildings' rent and the reduction of the salaries of all state high officials and employees. Also, a new law has recently been tabled concerning the establishment of new types of financial controls in all entities within general government. In particular, there are going to be corrective changes in the organisation of the financial control and auditing system.

Similarly, the ministry has started the monitoring process of the already agreed economic measures, amounting to €11.5bn. The potential measures are evaluated by the use of cost-benefit and cost-effectiveness methodologies in order to make the adjustment effort more economically efficient and socially fair.

The aforementioned initiatives are basic elements of the strategic plan of the government, which aims to make a fiscal adjustment and strengthen the country's structural competitiveness by rapidly shrinking the twin deficits, reduce public debt so that it will become sustainable, and return the economy into positive and sustainable rates of economic growth. It is a plan that incorporates the agreements with our partners, which should be reflected in a comprehensive economic policy programme.

The Greek government has already made clear its determination to accomplish the fiscal targets of the adjustment programme. However, the real economy faces a very difficult situation with a remarkably deep recession – the cumulative gross domestic product drop since 2008 exceeds 20% and stands at 6.2% in the second quarter of 2012 – and a historically high unemployment rate – as of May 2012 it stood at 23.1%, and a huge 54.9% among the country's youth. This is because the much-needed structural reforms were not previously implemented and the economic policy was not accompanied by growth-oriented policies that could trigger the developmental process.

These elements have been taken into account in the current effort to put the programme back on track and to create the prerequisites for an exit from the crisis. Nonetheless, this demand for growth-oriented policies and instruments comes not only from Greece but also from other European countries. If this policy switch finally occurs, Greece will get breathing space in order to more easily implement the needed reforms, and benefit from its competitive advantages. Until then, we have a lot of work to do in order to ready ourselves to take advantage of the new opportunities that may come up in the European environment. We are strongly committed to this effort and we are more than sure that with the support of our partners we will succeed.

Christos Staikouras is Greece's alternate minister of finance.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter