Keynote speech of the Deputy Prime Minister and Finance Minister of Greece, Prof. Evangelos Venizelos, at the closing lunch of the Annual Membership Meeting of the International Institute of Finance Washington DC, September 25, 2011
Since 2008, we have been experiencing different phases of the international financial and fiscal crisis. In the case of the Euro Area it is now obvious that the crisis is more than a financial or a fiscal one.
It is a political and institutional crisis.
The point is whether the Euro Area, which has one of the world’s most powerful currencies, has those institutional structures and the political capacity that can provide swift and decisive responses, and make decisions that convince the markets.
In other words, the question is whether the common European monetary policy – as exercised by the ECB – can be efficient and effective without the necessary support from fiscal, tax and growth policies.
Within the current international and European context, the Greek problem is undoubtedly significant, most of all for us the Greeks. However, Greece is not the Euro Area’s central problem nor it can be the catalyst for a new phase of the global financial crisis. The size of the Greek economy does not allow for such a role.
The problem of sovereign debt in the Euro Area is of vital importance, and the fact that three of the 17 member-states have joined the support mechanisms, provided by the Euro Area itself and the IMF, shows that Europe has made very important steps towards dealing with the problem.
However, these three countries (Greece, Ireland, and Portugal) account for merely 6% of the Euro Area’s total debt. Greece alone accounts for about 3% of the Euro Area’s total public debt. While such a debt is very high for Greece, it may not still be capable of causing a domino effect of pan-European dimensions.
Those who do know Greece not just as macro-economic and fiscal figures, know that Greece is charming not only because of its history but also because of its contradictions. Despite the crisis and the three successive years of recession, Greece remains one of the 30 largest global economies with a population of only 11 million. Greek tourism and its shipping sector are always two strong brand names. This year, while in full recession, we saw a fast increase in exports albeit starting from a relatively small basis.
However, Greece at the same time has a large-scale grey economy, extended tax-evasion, a large current account deficit and a similarly large deficit in competitiveness.
Greece joined the original support mechanism provided by the Euro Area’s member states and the IMF in May 2010. That was before the European institutions such as the EFSF were created. A basic assumption of the original program was that a very steep fiscal adjustment effort until mid-2013 would be possible and that could make Greece return to the markets already from mid-2012.
Almost a year later, in March 2011, there was a realization that the programme parameters were too strict and the European Council decided that the original terms of the loan to Greece had to be significantly improved both in terms of the repayment period and in terms of the interest rate. The IMF is also expected to extend the maturities of the Greek loan to allow for a longer time for the reforms being implemented to have an impact on competitiveness. Ireland and Portugal also benefited from these changes and had a smoother start in their programmes.
It is already questionable whether the original program could provide for a credible answer to Greece’s sovereign debt sustainability. With the exception of the first programme review, in all subsequent reviews the question was constantly arising of whether Greece has the national capacity to implement such a fast radical reform and steep fiscal adjustment program that would change the country’s basic structures and practices.
We did many difficult things in these last 15 months of the programme implementation. First, a fast decline in the fiscal deficit by 5 percentage points of GDP in the first year of the programme application. Very significant reforms like the pension reform that reduced the actuarial deficit by about ten percentage points of GDP, a labour market reform that increased significantly allowed dismissals, reduced severance payments to half, increased three times the probation period for new recruitments, made plant level agreements to prevail over those at sectoral level. A large number of closed professions opened. Many other important changes took place.
More than anyone else, we believe that these changes are absolutely necessary for our nation’s future.
Greece also agreed to promote a very ambitious privatizations program, aiming at collecting 28 billion euro in revenues before the end of 2014 at a time that the capitalization of the Greek stock exchange has been greatly reduced.
The June/July 2011 review was not an easy task, as this was linked to the decision of our institutional partners to double their support, by adding another additional 109 billion euro and extend the duration of the program to 2014.
But the most important element of the July 21 decision was the participation of the private sector. This was a result of a comprehensive and complex negotiation between the Euro Working Group and the IIF, with the important contribution of IIF’s Chairman, Mr. Joseph Ackermann and its Managing Director, Mr. Charles Dallara, both of whom I wish to thank personally for their truly decisive, contribution.
The PSI became an important pillar of the July 21 decisions, equally important to that of the official sector participation.
However, the July decisions provided also for an expanded role for the EFSF, a prelude to the permanent ESM mechanism from 2013. This is a fundamental decision of the Euro Area, not only for the protection and facilitation of Greece, but also for the decongestion of the pressure applied on the Euro’s hard core.
From July 21 to the start of the fifth revision of the program that started at the end of August there was a time gap of less than thirty days during which Greece was trying, with its existing structural problems and weak public administration to articulate and implement the Medium Term Fiscal Adjustment programme that had been decided. Therefore, there were no new problems. What we had here were the already known difficulties including the peculiarities of the Greek political system, the absence of wider political consensus towards the need for a full and rapid implementation of the program, contrary to what takes place in Portugal and Ireland.
But despite all that some positive signs of political consensus do exist in the case of privatisations and the EFSF’s new institutional framework, which were voted with a majority of more than two thirds by the Greek Parliament.
In the meantime, during a limited timeframe following the July 21 decisions, the PSI was set up in close cooperation with the Euro Working Group and the private sector. The framework that is being described in the Letter of Inquiry was shaped, and all indications point towards the direction that we can achieve the targets set in July, thus completing a major international financial scheme with many innovative elements. It is a scheme that supports the viability of Greek sovereign debt, according to the study that was made public on September 22nd by the IIF.
The deficiencies of the public administration mechanism, combined with the much deeper recession in 2011 and the tight liquidity conditions in the economy, made additional measures a necessity in order to meet the fiscal target for 2011 and to formulate the State Budget of 2012 in a way that produces primary surpluses in the first half of 2012.
In less than 2 years, we decrease the primary deficits from 24 billion euro to approximately 2 billion euro, when we meet the 2011 fiscal targets. The primary balance adjustment from 2009 to 2011 is 10% of GDP when at the same time there is cumulative recession that exceeds 12% of GDP.
I do not think you can find many examples at the international level of such a huge and rapid fiscal adjustment effort. But you have to know this comes with a political and social price.
What is important for us is to bring the vicious circle we are trapped in to an end. The harsh fiscal adjustment measures reduce the available income and demand. Rumors and the international mood are fed by internal insecurity and vice versa. All these make recession deeper and liquidity tighter. We try to meet the fiscal targets while recession keeps pushing them away. We respond by introducing additional measures. The political and social cost of the programme rises.
Greece feels the international uncertainty and knows that our partners must answer to their respective parliaments and societies, as far as the course and the outcome of the support mechanisms are concerned.
But Greece is not the scapegoat of the Euro Area or the international economy. Greece is a historical and proud country, with citizens who are doing many sacrifices to save it and see it recover.
It is Greece’s final and irrevocable decision to do whatever it takes to fulfill its obligations towards its partners, towards the Euro Area, towards the IMF.
There is so much that has transpired over the past 15 months. It’s not everything, but it is a lot. But light always falls on the delays and the deviations and not on the large picture of accomplishments.
Over the past few days we had to make some very difficult and tough decisions and we did so without calculating political costs, despite the need for a solid national front and a single-voiced support of those decisions.
During the last two weeks, a number of actions have been taken to meet the 2011 and 2012 fiscal targets against a background of deep recession, poor liquidity conditions, uncertainty and anxiety.
Three months after taking the additional measures in June 2011, further additional measures of another 3 percent of GDP were adopted by the Council of Ministers this week.
The new measures include:
o A further reduction by 20% in the public sector salaries (additional to the 15% already implemented for the civil service and the 25% cuts in the public enterprises). These wage cuts are combined with a structural change in the public sector wage grid that ensures long term savings and public sector productivity improvements.
o A further 4%, on average, cut in pensions (additional to the 10% already implemented). These cuts are complemented by a completion of the pension reform (via reforming also the supplementary pension funds) that ensures long term viability of the Greek pension system.
o The creation of a labour reserve to which 30 thousand public sector employees will move by the end of 2011.
o The application of the rule of one recruitment for every ten retirements for the duration of the Medium Term Fiscal Strategy.
o Significant tax expenditure cuts of 0.6 percent of GDP implemented retroactively from January 2011.
o The introduction of a property tax to be collected via the electricity bills mechanism with an annual yield of 1.1 percent of GDP for the duration of the Medium Term Fiscal Strategy.
On the privatizations front, the September 2011 target is 1.7 billion euro. This target will be reached within October with the 1.4 billion to be reached within September. By the end of 2011 we expect to have collected from privatisations 4 billion euro. All privatization programmes for the period up to 2014 mature in order to move more swiftly, now that the Privatizations Fund is up and running within a framework of total transparency and consensus.
Two weeks ago, a special Council of Ministers meeting was devoted to the acceleration of the structural reforms.
We took once more difficult political decisions because it is our wish and our determination to fully implement the Medium-Term Fiscal Strategy and meet its targets.
The Greek banks take part in the PSI in full acceptance of the relevant losses. The same is true for the participation of Greek social security funds. Greek institutions are a very important part of the entire effort.
The replies to the LOI are very encouraging. The targets can be met, provided that it is understood that there is a mutually beneficial situation under way between Greece, its institutional partners and the private sector.
Greece wants to make it and will make it. The July 21 decisions provide a clear and secure institutional framework. They are a meeting point of a creative balance between the official and the private sectors.
Greece is and will always be an EU and a Euro Area member-state. Greece always respects and implements the decisions of the European Council and the Eurogroup in matters of high importance not only for itself but also for the Euro Area protection mechanisms.
Thus, I repeat that we must break the vicious circle, we must get rid of the uncertainty and ambiguity, we must give answers to profiteering aspirations and verify the wish and capacity of the Euro Area to secure the euro.
The implementation of Greece’s new program is an important step that will remove uncertainties, increase liquidity and convince the markets that the Euro Area can indeed protect itself and its member states. Combined with our own persistence towards our goals, this can change the mood.
Greece is asked to prove its willingness and commitment. We do it without hesitating to take the necessary measures whenever it is required. Disregarding for the political cost.
But it is only logical and fair that we receive an institutional and political shield in return, not just for Greece but for the Euro Area as a whole and in the end for the international economy itself. It is also important for the Greek people, who are suffering in this difficult adjustment process.
