gikas a. hardouvelis - university of california, berkeley · 2019. 12. 18. · ies, u. c. berkeley,...
TRANSCRIPT
IES, U. C. Berkeley, 180 Doe Library Wednesday, April 29, 2015, 6:30 p.m.
Gikas A. Hardouvelis
CURRENT DEVELOPMENTS IN GREECE: Can economic policy change
with a new government?
I. Introduction and summary
II. The state of play at the end of 2014
III. An enigmatic policy strategy following the January 2015 elections
IV. Will the Review of the 2nd Economic Adjustment Program close on time?
V. Conclusion
C U R R E N T D E V E LO P M E N T S I N G R E E C E :
C a n e c o n o m i c p o l i c y c h a n g e w i t h a n e w g o v e r n m e n t ?
IES - UC Berkeley - Hardouvelis
FUTURE GROWTH MODEL, REQUIREMENT #1: NEED TO CORRECT THE DISEQULIBRIA
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I. Introduction and Summary Greece is again at the epicenter of world media attention; an aberration
to the positive growth in the rest of Europe
Greek economy on a dive, as possibility of default has negative effects on: business prospects, exports, FDI, privatizations, investment, economic sentiment, bond yields, stock prices, bank deposits
Yet, only a few months ago the country was close to a major take off! Reforms were on a roll and 2015 growth was forecasted at 2.9%
Current disarray is self induced, entirely due to domestic politics
New government lacks practical experience, is full of ideological illusions, and faces severe cash constraints
New government adopted wrong strategy in dealing with lenders, creating long delays for the receipt of €7.2bn (4% of GDP)
A policy of reforms is necessary for the country to escape its current predicament: ECONOMIC POLICY CANNOT CHANGE WITH A NEW GOVERNMENT.
My baseline scenario: No default, but Muddle Through until new point of take off – perhaps with intervening elections
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II. A Bird’s Eye View on Greece 2012 Greece EA17 World Population (mil.) 11.3 333.5 7,056.7
Geographical Area (thousand km2) 132.0 2,624.0 148,940
GDP per capita (€) 17,146 28,460 9,729.1
Human Development Index (2011 UN ranking among 194 countries) 29
Life expectancy (years) 80.0 79.8 71.2
Motor vehicles per 1000 inhabitants (2010) 624 593 175
Suicides / 100 thousand inhabitants (2010) 2.9 9.1
Primary Sector (% GDP) 3.4 1.8 4.3
Secondary Sector (% GDP) 16.4 25.2 29.3
Tertiary Sector (% GDP) 80.2 73.1 66.4
Tourism (Total contribution, % GDP) 16.4 8.3 9.2
Construction (% GDP) 2.1 5.9
Public Sector (Prim. Gen. Gov. Exp. % GDP) 45.4 46.7
Exports (% GDP) 27.2 45.8
Imports (% GDP) 32.1 43.1
Private Consumption (% GDP) 74.6 57.5
Gen. Gov. Debt (% GDP) 161.6 93.1
(EU-27)
(EU-27)
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FUTURE GROWTH MODEL, REQUIREMENT #1: NEED TO CORRECT THE DISEQULIBRIA
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II. State of Play prior to January elections
80.0
100.0
120.0
140.0
160.0
180.0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
0.0%
1.5%
3.0% Assumption of
average GDP
growth at 2.3% for
2014-2030
Sensitivity of Debt/GDP to Primary Surplus
117.0 Baseline
Gen. Gov. Balance Enormous fiscal
consolidation since 2009 when Gen. govern-
ment expenses were €128.2 bn and Gen. government
revenues €91.9 bn. In the
budget of 2015, the corres-ponding expenses and revenues were both
projected at ≈€80bn.
Debt sustainability on track, Average Maturity
from 6 years to 17 years, interest rates low
Soon out of the MoU, into ECCL with Euro Area, and a pre-cautionary agreement with the IMF
22.6 20.722.6
26.8
23.0
20.518.3
15.813.7 13.4 14.015.2
0
5
10
15
20
25
30
0
2
4
6
8
10
12
14
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Dwellings (lhs)
Other Buildings and Structures (lhs)
Transport + Other Machinery Equip. (lhs)
GFCF (rhs)
% Real GDP % Real GDP
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II. State of Play at the End of 2014 Foundations of an extrovert and
competitive economy via reforms:
Evidenced by country rankings in competitiveness
Current account in surplus after years of deficits
2014 growth of 0.7%, after a cumulative drop of ca 26%
-16-14-12-10-8-6-4-2024
-40-35-30-25-20-15-10-505
10
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
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20
14
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15
20
16
Current account, lhs CA as % of GDP, rhs
€ billion % of GDP
FDI in 2013 and 2014 exceeded 2007 level
Privatizations picked up momentum
Investment in machine-ry & equipment up
A new Growth strategy based on 3 pillars: institutions, education, competitiveness
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Investment
Current Account
7
Possibility of early elections in the news
II. Decoupling since early October 2014 Spreads of 10-yr government bond yields
over Bunds
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Prospective presi-dential elections in 2015 Q1 gave power to the opposition parties to force governmental elections a year & a half early
Since October, markets worried about it, with bond yields de-coupling from the rest of European yields
And correctly so, judging from the post-election inaction & stalemate
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III. An enigmatic Strategy New government’s top priority at end -January 2015 was to reduce the
size of public debt, instead of worrying about the foundations on which the economy is built - Yet debt is not of immediate concern
Other enigmas:
1) Disregard of the need to bring cash into the economy; “we do not need it” was the original statement of MinFin
2) Slow response in decision making and lots of cheap talk. The lack of cash caused the creation of arrears and a crowding out of the private sector. Hence economic stagnation
3) Overall strategy unclear and confused. Did not behave cooperatively, but rather insulting to the other Europeans
4) Brushed away issues of moral hazard. Should have tried to gain perks without appearing of having broken any major rules or signatures
5) Treated the European side as if Europeans worry about CONTAGION, which they do not. Yet GREXIT may be caused by accident even if other European countries think that a Greek departure is not beneficial to the long-run stability of EMU
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IV. Will the Review close on Time?
On February 24, 2015 the new Greek government requested a 4-month extension of the 2nd Adjustment Program (the earlier MoU) & promised explicit actions on a number of policy areas:
I. Fiscal structural policies (taxation, revenue administration, public
spending, social security reform, public administration) II. Financial Stability (installment schemes, Non-Performing loans)
III. Policies that Promote Growth (Privatizations, Labor market reforms, product market reforms, better business environment, reform of the judiciary, statistics)
IV. Humanitarian Crisis (Guaranteed Minimum Income Scheme, policies to deal with absolute poverty that have no negative fiscal impact)
A stalemate followed, with a jump-start occurring after PM visit to Brussels & Berlin, and with Lenders getting impatient about Greek stalling on pension reform, VAT reform, privatizations, etc.
Budget execution difficult, with onerous liquidity squeeze: Even T-bill issuance difficult as foreigners abstain from rolling-over their past T-bills. Expected inability to pay lenders in full in July & August or even earlier.
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IV. Will the Review close on Time? Economy badly affected
Huge challenges ahead before the Review can close:
1) The fall in growth makes primary surplus target extremely difficult to attain even if it comes down to 1.5% of GDP from 3%. Recall that in November 2014, lenders already had claimed there was a €2.6bn fiscal gap in 2015 under the assumption of 2.9% growth.
2) Banking sector fragile
as fear of GREXIT led to massive exodus of bank deposits and disappearance of interbank market, with costly borrowing from ELA and no access to QE. Half of bank lending financed by the Eurosystem
NPLs have not stabilized and Government lost control of EFSF €11.4bn
3) Exports are difficult to materialize as demand shrinks and obstacles rise
4) Private sector companies are on the verge of collapse, with a weak banking sector unable to help
5) Economic sentiment declines drastically
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V. Conclusion
Lower oil prices, a weakening euro and QE are pushing Europe into strong growth trajectory in 2015. Also, prudent policies have helped Ireland, Portugal and soon Cyprus to get out of the strict EU surveillance.
Yet, only one country follows its own lonely negative trajectory because of its inability to face reality: Greece. It took just 3 months of contradictory statements, ambiguity, bravado statements, domestic media manipulation, ideological stereotypes, and lack of action, to almost destroy the efforts and pain of the previous five years.
There is a pessimistic and an optimistic reading of the future:
A. The pessimistic envisages capital controls, a further drop in economic activity and even a possible separation from the EU
B. The optimistic is my baseline scenario. It envisages a muddle through and economic stagnation for a while, yet a subsequent new beginning free of illusions and ideology. It assumes a new maturity among the full spectrum of Greek political parties, which is enforced on the politicians by the citizens, who are more rational than is assumed.
IES - UC Berkeley - Hardouvelis
FUTURE GROWTH MODEL, REQUIREMENT #1: NEED TO CORRECT THE DISEQULIBRIA
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THANK YOU FOR YOUR ATTENTION
A N S W E R : E c o n o m i c p o l i c y C A N N OT c h a n g e w i t h a n e w g o v e r n m e n t
C U R R E N T D E V E L O P M E N T S I N G R E E C E : C a n e c o n o m i c p o l i c y c h a n g e
w i t h a n e w g o v e r n m e n t ?
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