This quick note (written as an email to a German friend) highlights issues beyond debt and fiscal targets, that should be considered in shaping the third Greek bailout.
1. There are many SMEs in Greece that had adapted to the crisis by lowering costs to serve a poorer domestic consumer, or who had started having international clients; in my view (which I cannot prove) they would have done well in 2015, which would mean growth in exports, GDP and employment. This prospect was interrupted by the new uncertainty before and after the January elections.
2. Capital controls in banks, plus the real possibility of Grexit, have been the most threatening developments that Greek businesses have witnessed since 2010. Up to now, businesses were hurt by austerity, but at least most reforms were meant to create a more business-friendly environment. But now some of the most resilient entrepreneurs are saying they are thinking of emigrating.
3. The new agreement contains taxes that will hurt businesses directly. Such is the requirement to advance 100% of taxes on next years’ estimated profits; and the big increase in personal income tax which is called “solidarity levy” (this hurts both business owners, and middle income managers).
4. Export sectors will be especially hurt by tax increases: VAT on hotels will increase from 6% to 13% (tourism is the one export industry where the client pays VAT of the country of the provider); shipping is targeted to pay much higher taxes than up to now, and higher than in most EU countries on a tonnage basis; therefore, many firms will probably leave Greece, since this is a footloose industry. Hurting shipping and tourism contradicts the core rationale of the adjustment programme, which was to increase the share of exports in GDP.
5. Points 1 and 2 above are faults of the Greek government, but 3 and 4 are faults in the design of the new programme. In combination, they make it very hard to have a supply-side recovery.
6. On the positive side, the majority of SYRIZA will now support an austerity plus reform package, so most people in Greece will realize that there is no better alternative. In addition, Tsipras himself has repeatedly said that the way to counteract the recessionary effect of more austerity is to attract investment. So, there is hope that the political system will focus more on providing a stable environment for production than on denouncing or demanding. This is not certain, of course.
7. Also on the positive side, following from point 1, there are many business plans by SMEs that are waiting for the right environment to be implemented.
8. For a supply-side strategy to work, priority number one is to restore normal banking operations, and if possible to increase liquidity for working capital, investment and acquisitions. Beyond ECB support, there may be ways to involve global banks or investors in bank recapitalization.
9. EU funds for investment projects should be channeled, if possible, by fast track to infrastructure investment to Greece. Technical support for this may be useful.
10. Across the board liberalization of product markets is not a high priority, and too hard to do. Focus on what hinders investment directly or what adds unnecessary cost to tradable sectors.
11. More important than further reforms will be to reverse the tax increases under points 3 and 4 above, as soon as possible. If that means that the creditors should accepting a lower primary surplus target, so be it.
12. Foreign direct investment would be very important, on many levels: demand stimulus, building productive capacity, sign of confidence for businesses, sign on international cooperation after a period of conflict. An Institution for Growth involving KfW funds (and others) was planned under the previous government. This should be revived and expanded.