Interview with Maria Caetano on Jornal de Negócios, Portugal, (Friday 19 August 2022).
Q. How will the end of the enhanced surveillance regime impact the course of reforms in Greece? Will this new relative freedom given to economic policy change anything?
A. It all depends on what one means by ‘reforms’. The bailout programmes from which Greece has now fully exited were relentlessly focused on fiscal savings, and that was also the case with most of the ‘structural reforms’ listed in those programmes. The savings were sometimes inevitable, or even necessary, but were so harsh that pushed the Greek economy to a lower growth path: lower-skilled / lower-pay / lower-value added.
The reforms the country now needs (shift to a less energy-intensive production model, modernise public administration, help firms respond to the digital transition, and upgrade workers’ skills), and which government policy at least partly addresses, aim to revive the economy, by raising exports and shifting the country’s growth model to a higher path. The end of enhanced surveillance is not going to slow down, and may even accelerate, the necessary reforms.
Exiting enhanced surveillance will also signal foreign investors that Greece is safe. This is crucial: according to Eurostat data, public investment in Greece was cut back in 2010-2014 by a staggering 47% in real terms. ‘Next Generation EU’ will also help bridge the investment gap, perhaps more than is the case in other EU member states also battered by the twin (Euro and pandemic) crises.
Q. Does Greece still have significant vulnerabilities? Which ones?
A. Of course it has. Debt is nearly 200% of GDP. Inflation is in double digits. The unemployment rate, although sharply reduced from the depths of the recession, remains twice as high as the EU average. The economy is too dependent on tourism, accounting for over 20% of GDP and over 25% of all jobs in 2019 (according to World Travel and Tourism Council estimates). The investment gap is yawning. Skills are dismally low, acting as a constraint on the bid to improve export performance – and so on. Nevertheless, the country has strengths, too: Greeks have proved to be resilient in the face of adversity. The key question therefore is not whether the country has vulnerabilities but if it can address them by building on its strengths. I think one can reasonably hope that it can.
Q. Greece has been able to reduce its debt burden significantly. Do you feel it is likely that Greece's sovereign bonds will be rated as investment grade next year?
A. Debt is still an issue: Greece today has the highest debt-to-GDP ratio in the EU (193% in 2021). However, debt servicing is not a real issue for the next few years, since the country’s debt is held mostly by institutional investors, and carries a low interest rate. The key challenge is boosting growth: if that is brought off, then debt will be less of a burden.
Q. The ECB has announced a new anti-fragmentation mechanism, while it prepares to speed up interest rate hikes. Do you feel it will be a good enough safety net for Greece and other Southern European countries?
A. This is what Greeks, and other Europeans, fervently hope. Next winter will be difficult, that’s for sure. Let us pray that the war in Ukraine will end soon, and that policy makers in Frankfurt and in Brussels (and in all European capitals) will handle the economic consequences as well as possible.
