George Papaconstantinou, Greek finance minister

Things look very different for Greece compared to a year ago. A new government intent on change, and the help of the IMF, has brought the country back from the brink of bankruptcy - and served as a wake-up call for the rest of Europe in the process

The past year has been a crash course in crisis management - not just for Greece but for the whole of Europe. In October 2009, a new government took office in Greece, elected by a landslide and with a clear mandate for change. Greek people were fed up with chronic mismanagement, cronyism and corruption. They were tired of a country at a standstill and were convinced that they deserved and were capable of more.

The new government took office amid a wave of hope and high expectation - and soon discovered it faced a task infinitely harder than was previously thought. Within a few months it would have to take hard but necessary decisions to save the country from bankruptcy, and embark on a radical course of fiscal consolidation and much-delayed structural reforms. In essence, the government faced a double challenge: to regain control over public finances and to tackle long-standing impediments to growth, jobs and wealth creation.

The fiscal mess was monumental: a public deficit twice as large as previously reported and unsustainable debt levels of more than 100% of gross domestic product (GDP). Add to that a double-digit deficit in the external account - testament to a lack of competitiveness, itself the result of a dysfunctional state apparatus - and a growth model that had clearly run its course.

But perhaps the most important challenge was the credibility deficit. The well-known problems with Greek statistics combined with a complete lack of faith in any policy pronouncement to create an explosive effect in international markets, already jittery in the wake of the sovereign debt crisis. Financial markets soon closed on Greece completely. A sovereign default was averted only because of the €110bn combined EU-International Monetary Fund (IMF) package, based on strict conditionality criteria.

Fiscal shock

A year on from that initial staring point, and five months after the start of the EU-IMF programme, things look very different. Greece has exceeded expectations and managed to surprise everyone - including itself. On the fiscal front, a frontloaded adjustment programme means that the deficit is down by 40% and well on its way to meeting the 8.1% deficit-to-GDP target set for 2010 (5.5 percentage points lower than in 2009).

This improvement has been the result of a determined effort on both expenditures and revenues. It has included tough measures, such as a 15% salary cut in the public sector, a 10% cut in public and private sector pensions, a 30% cut in government operating expenditures, a 4% hike in value-added tax and a 30% increase in excise taxes. But one needs to look beyond these numbers to understand the sheer magnitude of reform and the speed at which Greece has moved to implement the policies agreed with the EU, the European Central Bank and the IMF.

In just a few months the government has overhauled the country's pension system, shaken up the labour market to increase competition and flexibility, revamped the tax-collection mechanism, cracked down on tax evasion, rationalised local administration, introduced a new rules-based framework for executing and monitoring the government budget, established an independent statistics authority and set up a 'backstop' fund for a banking system currently suffering from the sovereign crisis.

At the same time, it unveiled a wide-ranging privatisation programme designed to breathe life into Greece's under-utilised public resources. From outright sales to concession agreements and public-private partnerships, the aim is to incorporate the dynamism and know-how of the private sector into state-owned utilities, airports, ports, gaming and real-estate assets.

Needless to say, it has not been easy and Greek citizens have been asked to carry a heavy burden. Yet while perhaps no other European society in recent history has been subject to such drastic change in such a short period of time, reaction has been remarkably muted, testament to a solid understanding in Greek society that things could no longer continue as they were.

Legitimising the sacrifices demanded from the Greek population is no easy task - and a precondition for continued success in the reform effort. It means convincing citizens at every turn that sacrifices will not be in vain and that justice - in the broadest sense of the word - will be done. By sparing no effort in cracking down on tax evasion, and standing firm when special interests attempt to hold society hostage - as in the recent truckers' strike - the government has proved it intends to do just that.

It would be wrong, however, to track progress with a simple checklist, ticking off measures fulfilled before the disbursement of the next tranche of aid. Successful implementation of the programme will lay the foundation for Greece's growth potential to be realised- a potential held back by an inefficient and clientelistic public sector. This, after all, is what the reform programme is about: investment, growth and jobs as a result of sustainable and credible public finances, a competitive labour market, a favourable legal framework for investments, and a just and efficient tax system.

The government chose to push through the bulk of the reforms in the first few months so as to reap the results as soon as possible. And while the fiscal and structural shock of this approach has been severe, the economy is turning out more resilient than expected. As a result, the recession this year should be milder than initially projected.

Are the markets convinced?

It is clear that plenty of challenges remain. There are risks of potential overruns in parts of the budget - particularly in hospitals, public companies and pension funds - and the potential of reform fatigue.

Yet there is a clear shift in attitude from international observers. Utter dismissal has given way to recognition that progress has been made and even cautious optimism. What lingers is the misplaced belief that, despite its best efforts, Greece will need to restructure its debt in the end. Evidence that this will not happen is accumulating, but proving so beyond doubt will take time. It hinges on sustainable debt dynamics: consistently running primary surpluses and achieving higher growth rates. Evidence for the former is already there; as for the latter, this is the very aim of the reforms under way - to give the economy a supply shock and boost its growth potential.

The Greek crisis has served as a wake-up call for the whole of Europe. Reaction was initially hesitant but, in the end, European institutions have shown a remarkable capacity to adapt to fast-changing circumstances and challenge established beliefs. The crisis is by no means over. It has, however, opened up a discussion on filling in the missing pieces in the European puzzle with a view to completing and strengthening the entire European system of economic governance.

George Papaconstantinou is the Greek finance minister


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