Shaping the Future: Economic Reforms, Competitiveness and Growth in Greece

PROFESSOR GEORGE MERGOSSecretary General, Ministry of Finance

14th Annual Capital Link Forum- Positioning for the Rebound- Greece

New York City, 29th November 2012

Structure of the presentation

1. The results of the adjustment process2. The reform program: objectives and

priorities3. The impact on competitiveness4. A strategy for growth

2

1. The adjustment results

An enormous fiscal adjustment has been achieved

General government deficit shrank by 6.5 p.p of GDPGeneral government primary deficit shrank by 8.2 p.p of GDP

4Source: IMF, 3/2012

-15.8

-10.8-9.3

-7.3

-4.60

-10.6

-5.0

-2.4-1.0

1.8

-18.0

-16.0

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.02009 2010 2011 2012 2013

General Government Fiscal Accounts 2009-2013 (% of GDP)

General Government Balance General Government Primary Balance

Greece has achieved the fastest fiscal consolidation

5

Greece achieved an annual rate of fiscal consolidation of 4.1 percentage points of GDP on average, the highest in the developed world over the last few decades

Source: AMECO

* Fiscal consolidation episodes as defined in OECD Economic Outlook 81, May 2007

4.10

3.55

2.95 2.85

2.13 2.06 1.84 1.80 1.801.60

1.56 1.371.03

0.77 0.75 0.66 0.60

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Fastest fiscal consolidation* Average annual primary balance improvement

(percentage points of GDP per year)

Strong macroeconomic adjustment with about 25% cumulative decline in GDP since 2007

6

Fall on demand and disposable income... but close to achieving primary balance

7

Lowest Real Unit Labor Costs within EU-member states in 2012

8

75

80

85

90

95

100

105

110

115

Real Unit Labor Costs  ‐ 2012 levels (Total Economy: 2005=1000)

But monthly minimum wages still high

9

0.00

200.00

400.00

600.00

800.00

1,000.00

1,200.00

1,400.00

1,600.00

Monthly minimum wages in PPS (bi‐annual data for S2_2012)

2. The reform program

10

11

Major reform program: objectives and priorities

The objective of the reform program: to address fiscal imbalances,

achieve structural change of the economy and

restore competitiveness

Reform priorities:Macroeconomic stability and fiscal sustainability

Lean, efficient and responsive public sector

Efficient product, service and labour markets

Better business environment

Efforts for fiscal sustainability continue

Rationalization and control of public expenditure Strong reduction in wages Automatic control mechanism for SOEs and LGs Reduction in operational expenditure

Tax reform and tax administration to broaden the tax base Repeal of the Code of Books and Records A new Tax Code will be voted before the end of the year Merger and centralization of tax offices in process Clearance of the backlog of tax cases

Achieving a sustainable social security system Strong reduction in pensions and social benefits Automatic control mechanism for expenditures on health Separate pension from health to control cost, unify collection of tax

and social security contributions, address swiftly problems of fraud 12

Public sector reforms proceed with significant efficiencies despite strong resistance

A reduction of public employment by 150,000 (about 20%) between end 2010 and end-2015 is under way

A functional review of all Ministries is completed soon

State Owned Enterprises and Local Governments and other entities of the general government are under a fiscal compact

An e-procurement in the public sector is expected to be ready by the end of the year

Major reforms take place in the organization of the health sector

A major introduction of ICT technologies in the public sector is planned and is to start being implemented soon under the coordination of the Ministry of Public Administration

13

Reforms make the labor market more flexible and efficient

Reforms making the labor market more flexible in working arrangements & wage bargaining

Part-time working arrangements are allowed, possibility to opt for short-term (intermittent) is allowed; working on daily, weekly or other basis

Sub-minimum wages established to facilitate youth employment

Wage floors are adjusted downwards

22% reduction in the minimum wage

32% reduction in minimum wage for employees under 25

A new framework for the minimum wage has been established

20% cut in overtime premia

14

Reforms are making product and service markets more price flexible

Retail market reforms Fuel market reforms Transport sector Regulated professions

Companies of temporary employment Stevedores for land operations and ports Kiosks and cantinas in public buildings Accountants and tax consultants Tourist offices and tourist guides Customs brokers and Real estate brokers

15

The business environment is improving

The administrative burden on firms is contained Public sector reform

Product and service market reforms

New Export Law reduces the red-tape in export activity

Doing business gets simpler: “One-stop-shop" - targeting at setting up a business in 1 day

General Commercial Registry (GEMI) established

Points of Single Contact (PSC) provide information on all procedures

Licensing becomes simpler (environments, etc)

Promoting investment is encouraged Fast track for FDi

New Investment Law

16

Privatization stimulates investment

17

The Hellenic Republic Asset Development Fund (HRADF), established in July 2011 Aims to maximize value from development and/or sale of assets

Privatization is taking momentum Privatization of IBC has been concluded with more under way

Launching of landmark asset sales: OPAP, DEPA/DESFA, HELPE, EYDAP, EYATH,

tenders for the ports, airports and Egnatia Odos motorway

Privatization, efficiency and attraction of FDI Privatization is not a fiscal measure…

….it is an instrument for increasing efficiency,

….attracting investment and FDI, promoting growth,

….while redeeming debt

3. Competitiveness

Current Account Deficit is declining Current Account Deficit fell from 14.9% GDP in 2008 to 9.8% GDP in 2011Current Account Deficit (excl. Oil and Gen. Govnt Net Interest) in 2011 was around 0% GDP, down from 6% GDP in 2008

19 Source: Bank of Greece

-6.5

-5.8

-7.6

-11.4

-14.6 -14.9

-11.1

-10.1

-9.8

-4.2

-3.3

-4.2

-7.2

-10.5

-9.7

-7.9

-6.3

-4.6

-2.0

-0.6-1.2

-4.1

-7.1

-6.0

-4.0

-2.3

0.0

-16

-14

-12

-10

-8

-6

-4

-2

0

2003 2004 2005 2006 2007 2008 2009 2010 2011

Current Account Current Account (excl. Oil) Current Account (excl. Oil & GG Net Interest)

% GDP

Substantial gains in domestic competitiveness in terms of Real Unit Labor Cost.

20

Source: AMECO (23/11/2012)

75

85

95

105

115

2006 2007 2008 2009 2010 2011 2012e 2013f 2014f

Real Unit Labor Costs: Total Economy (2005=100)

Greece

Eurozone

Ireland

Portugal

Spain

forecasts

Competitiveness is regained in terms of Real Effective Exchange Rate

21

Despite deep recession ……signs of recovery are already present

22

Source: OECD.StatExtracts

Formation of positive expectations to lead to actual results in the real economy

95

96

97

98

99

100

101

102

103

104

Graph 1: Composite Leading Indicator

Greece

Germany

Italy

Euro area (17 countries)

OECD - Europe

Business confidence is increasing

Negative expectations in major industrialized EMU member-states

Negative expectations within developed EU countries

Expectations regarding Greece are positive

Domestic trend expected to assist consumer’s confidence

23

Source: OECD.StatExtracts

92

94

96

98

100

102

104

Nov

-201

0Ja

n-20

11M

ar-2

011

May

-201

1Ju

l-201

1S

ep-2

011

Nov

-201

1Ja

n-20

12M

ar-2

012

May

-201

2Ju

l-201

2S

ep-2

012

Graph 2: OECD standardised Business Confidence Index

Greece

Germany

Italy

Euro area (17countries)OECD - Europe

Competitiveness is restored in terms of costs

• Consumers face lower prices • Producers face lower costs

24Source: AMECO

99

100

101

102

103

104

105

106

107

108

109

Q1_

09Q

2_09

Q3_

09Q

4_09

Q1_

10Q

2_10

Q3_

10Q

4_10

Q1_

11Q

2_11

Q3_

11Q

4_11

Q1_

12Q

2_12

Graph 2: Quarterly REER based on GDP deflator

EA17

EU27

IC36

• Greece’s real effective exchange rates to stress that Greece regains its relativecompetitiveness, thus converging towards EMU (EA17=100); EU (EU27=100); 36 majorIndustrialized Countries (IC36=100)

Greek products become more competitive• Greek products to become competitive

in international markets • Boost in exports• Current account balance improvement

• Fall on labor costs to be one of the major factors to currently assist economy’s relative competitiveness

25

Source: AMECO

100

102

104

106

108

110

112

Q1_

09Q

2_09

Q3_

09Q

4_09

Q1_

10Q

2_10

Q3_

10Q

4_10

Q1_

11Q

2_11

Q3_

11Q

4_11

Q1_

12Q

2_12

Graph 3: Quarterly REER based on export prices of goods and services

EA17

EU27

IC36

80

85

90

95

100

105

110

Q1_

09Q

2_09

Q3_

09Q

4_09

Q1_

10Q

2_10

Q3_

10Q

4_10

Q1_

11Q

2_11

Q3_

11Q

4_11

Q1_

12Q

2_12

Graph 4: Quarterly REER, based on ULC in total economy

EA17

EU27

IC36

• Efforts in promoting an environment that assists start-ups have paid-off

• Ease-of-doing-business increased, as bureaucracy regarding start-ups is restrained

• Greece’s relative position to other competing economies is advanced

26

0

5

10

15

20

25

30

35

40

45

50

2007 2008 2009 2010 2011

Graph 1: Time required to start a business (days)

Greece Bulgaria Germany Spain

Business environment is improving

Source: OECD.StatExtracts

27

2032 1980 1937 19241774 1774 1793 1711 1684 1662 1692 1625 1644 1601 1599 1573 1577 1543 1527 1475 1427 1411 1379

562 445 435 430 507756

547 538813

595798 778 856

1308

853 844 981 1101882 957

1351

916 992

0

500

1000

1500

2000

2500

Graph 1: Annual total hours worked per person and productivity per hour (2011)

Average hours worked per person Productivity per hour (USA = 1000)

Source: OECD.StatExtracts

There is high potential for increasing efficiency and for productivity gains

• Greek labor workforce is the hardest working in Europe

4. A growth strategy

28

Economic Growth Strategy

Outward orientation is a must -Internal demand is dwindling and large primary surpluses are absolutely necessary

A market based model that will enhance strengths and restrain existing weaknesses

Competitiveness should be enhanced – market efficiency

Institutions – reform of the public sector, education, justice

29

Economic Growth

Enhance Competitiveness

Advance Economic Reforms

Policy agenda for economic growth

30

Economic Reforms

Product Market

EfficiencyLabor Market

Efficiency Innovation Business environment

Technology Gap

Confinement

Institutional reforms: Public administration, education & human capital,

efficient state, decentralization in operational & decision-making levels; judicial reform

Potential for knowledge and technology based economy exists

Strengths:Competitive advantages:

1. Quality of air-transport and fixed telecommunication infrastructures

2. Healthy workforce3. High percentage of students

entering tertiary education4. Quality of math and science

education5. Availability of scientists and

engineers6. Domestic market size7. Number of patents under the

Patent Co-operation Treaty

31

Source: The Global Competitiveness Report 2012-2013, World Economic Forum

The very large output gap, much larger than any other OECD country, offers a strong

growth potential

32

‐16

‐14

‐12

‐10

‐8

‐6

‐4

‐2

0

2

4

6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013f 2014f

Greece's Output Gap % of potential GDP (2005=100) 

Greece

forecastsSource: AMECO (24/11/2012) 

Huge potential for improving FDI economic impact

• Recent low FDI flows signify huge potential • Cross-country comparisons suggest the existence of great

capacity in forming an FDI-friendly economic environment

33Source: OECD.StatExtracts

Creating a healthy banking sector is underway

Recapitalisation needs are nearly solely sovereign related (PSI+ losses: c.€24bn for the systemic banks);

Before the PSI+ banks were adequately capitalised and managed.

The recapitalisation is not a “gift” to banks. Recapitalisationwill signify a return to normality and will provide liquidity for the economy

Banks will be given the opportunity to retain their independence if the participation by private investors exceeds 10%. The Hellenic Financial Stability Fund (HFSF) will provide the remaining recapitalisation amount.

The HFSF will act as a “temporary” investor, through instruments that can be redeemed if certain conditions apply.

In parallel, a significant consolidation and restructuring is taking place leading to the creation of healthy banking groups

Greece’s economic revival will depend upon:

Creation of a New Economic (market friendly) Paradigm through the: Completion of economic reforms Achievement of fiscal sustainability Existence of an efficient public administration Liberalized product, service and labour markets Creation of a friendly business environment that fosters growth Remaking of a healthy banking sector Attraction of FDI that provides links to the international economy,

End-result: An environment of healthy competition, increased efficiency, productivity and competitiveness, revival of economic growth, for the benefit of society as a whole

35

Thank you for your attention

36