Sign Up

The Way Out of Greece’s Insolvency — And Into Europe’s Future

How will building up Greece’s capital base provide a long-term solution to the country’s fiscal woes?

July 12, 2011

How will building up Greece's capital base provide a long-term solution to the country's fiscal woes?

Greece’s fiscal crisis is not only affecting the entire eurozone and threatening the fragile global financial equilibrium, it is also casting doubt on the future of the euro as a single currency.

The numerous credit rating downgrades and the jitteriness in the market require quick action and convincing responses.

But no matter how many austerity measures Greece implements and how many eurozone summits and meetings are scheduled, the markets remain skeptical.

Investors are nervous. They realize the crisis has been misdiagnosed as a problem of illiquidity.

It is not just a problem of illiquidity. Greece is also facing a solvency crisis caused by an inadequate capital base. Yet, current fiscal measures have largely only targeted the symptoms of these structural problems.

The government, for example, has worked hard to overhaul the tax system. However, the government’s failure to raise tax revenues signals a more serious problem than a broken tax code.

Informality is to blame for Greece’s structural economic problems. It’s the result of excessive red tape and overlapping regulations, an uninviting investment climate, as well as the absence of any well-defined and secure property rights.

The findings of the World Bank’s latest Doing Business survey of 183 economies are quite alarming. Greece’s not-so-friendly business environment is 109th overall. The World Bank ranked Greece 149th for starting a business, 153rd when it comes to registering property and 154th in protecting investors.

But while Greece’s rankings may be low, the country is not unique in terms of the challenges it faces. Many other developed countries, like fellow EU member Spain, also rank near the bottom. Spain is at 147th for starting a business, and France ranks 142nd for registering property.

As regards ease of doing business, Italy ranks 80th and China 79th. Russia places 123rd — only slightly better than Brazil (127th) and India (134rd). While Europe’s trading powerhouse, Germany, ranks 22nd overall, it drops to 88th for paying taxes. This is actually slightly worse than Greece (74th).

What’s more, despite the current crisis and the country’s low rankings in important business indicators, Greece is an advanced economy. The country does not face the same problems developing economies face. These include widespread poverty, malnourishment and illiteracy, as well as low levels of human capital, which reduce the ability to develop high levels of capital adequacy.

In terms of individual wealth, last year Greece ranked 47th in the world, with a GDP per capita of $29,600. Germany ranked in 33rd place with a per capita GDP of $35,700.

And while Greece’s debt/GDP ratios are entirely unsustainable, they are not too far off from those of other advanced economies. According to the Organization for Economic Cooperation and Development (OECD), Greece’s debt/GDP ratio for 2011 (January to May) stands at 157%. Japan’s ratio is at 212%; Italy, Iceland and Ireland are all above 120%; and Portugal, the United States, Belgium and France are around 100%. Germany and the United Kingdom are not too far behind, with both at 88%.

The problems facing Greece are illustrative of those afflicting other mature economies, including those in Western Europe and North America. The fundamental difference between Greece and most advanced economies is in degree — and not in kind.

Nonetheless, the impediments to economic growth in Greece are quite real. The country’s over-regulated economy is one example of how doing business can be hindered. It’s a situation that stems from the creation of new regulations before the existing ones can be tidied up and harmonized. The costs are financial and economic, direct and indirect, and they serve to hamper investment and economic growth.

What’s clear now is that it is necessary to undertake urgent and immediate measures to manage the problem of illiquidity in the near term. But it would be wrong to presume that this will also provide a viable exit from the crisis. This is because the real problem is not one of liquidity, but one of capital adequacy.

The solution hinges on successfully reforming the Greek state. We need to simplify judicial services and enforcement of rules and laws, apply quality control on goods and services, eliminate organizations with overlapping mandates and rationalize the public sector.

We must also streamline the process of creating, running and dissolving a business, while encouraging foreign investment.

The purpose of reforms should be to boost our capital base, generate growth and make Greece an attractive place for investment. These reforms should focus on Greece’s comparative advantage.

Greece’s main asset is its human capital. The country is also blessed with significant natural resources and boundless potential, especially in the tourism, shipping and renewable energy sectors. Their exploitation, however, also requires a kind of investment and entrepreneurship that can only flourish in a healthy business environment.

Consequently, the country’s central strategy should be to capitalize on our bright, capable and creative individuals — all those who do so well when they are outside of the country.

Any effective long-term plan must involve far-reaching and comprehensive reforms that are necessary to guarantee the long-term growth prospects and economic health of the country. In turn, a robust economy will improve the sustainability of the public debt, sending a positive message to creditors.

In addition, such measures will improve public opinion of the government’s response to the crisis. Unsurprisingly, the majority of Greek citizens are fully aware of how difficult it is to boost investment and do business in Greece. They are also very much aware of the wider structural problems plaguing the country.

This internal public discontent mirrors the poor image of Greece abroad. Greece suffers from a reputation deficit due to a series of statistical revisions of government debt and deficit figures, as well as the failure to honor past promises of reform. All this has undermined Greece’s credibility, especially that of the political parties and politicians.

And, perhaps because Greece is a popular summer destination, there is also a prevalent, enduring and damaging image of Greeks as lazy and ungracious recipients of excessive government benefits.

This could not be further from the truth. According to the OECD, Greeks in 2009 worked on average 2,119 hours — much longer than the OECD average of 1,739 hours. Specifically, Greeks worked on average 20% longer than Americans, 36% longer than workers in France and 52% more than the average German worker. Moreover, according to the Center for European Policy Studies, government expenditures on public wages as a percentage of GDP were lower in Greece than in Portugal and France.

Yet Greece has undertaken a stability program to dramatically reduce its public expenditures. It is proceeding with an internal wage reduction. Salaries and pensions have been reduced, and taxes have increased. The unemployment rate has soared to 14.5%, while 7% of full-time workers are getting paid below minimum wage.

With these figures in mind, is it any surprise thousands of Greeks have demonstrated in protest against the new austerity measures? Pushing through such reforms would be unthinkable in any other European country. Let’s not forget what happened in France, where the mere mention of lengthening the 35-hour workweek has caused widespread public unrest, forcing policymakers to backpedal.

Amidst these extremely difficult economic conditions and growing public discontent, Greece will continue to push through tough reform measures. Sadly, the international public underestimates the difficulty of such a Herculean endeavor.

Due to past policies and a lack of credibility, Greece’s reputation abroad has been tarnished. If this were not the case, the results of these critical and unprecedented measures would probably be a lot more positive.

Evidently, Greece must wage a war on three fronts. The first is to take immediate action to ensure adequate liquidity over the next few years. The second requires us to implement ambitious structural and institutional reforms that will establish capital adequacy and solvency in the longer term. The third is to highlight the enormity of the changes, the painfulness of the adjustment process in the short term and the potential for positive reform that can benefit the country in the long term.

This message must reach the Greek and the international public, as well as important partners such as the eurozone and IMF.
There is a clear need for courageous, ambitious and timely actions on the part of the government.

The impetus for necessary changes must come from within the country itself — both from the Greek government and from the Greek people.
The crisis is a wake-up call. It can provide an opportunity for a complete reversal of the country’s current economic course, fostering sustainable economic growth that is based on productive investments and on taking advantage of the country’s human and natural resources.


The fundamental difference between Greece and most advanced economies is in degree — and not in kind.

The solution hinges on successfully reforming the Greek state. We need to eliminate organizations with overlapping mandates and rationalize the public sector.

Greece is also facing a solvency crisis caused by an inadequate capital base.

The country's central strategy should be to capitalize on our bright, capable and creative individuals — all those who do so well when they are outside of the country.