The obvious question is how the Greek government and the EU can stop this development and return to a running economy and fiscal health. There are several steps, not mutually exclusive, that could be taken.
An official sovereign default would be one way: Greece to go through an orderly process of declaring bankruptcy. The obvious caveat is that Greece would then have a hard time borrowing from global credit markets for years to come.
Secondly, the Institutions (ECB, IMF and EU-Commission) could roll out a Marshall Plan-style investment programme to strengthen the Greek economy. Sure, this option would not be cost-effective – Greece has been a net recipient of EU structural funds transfers for decades, and it has failed to transform the economy – and it would intensify the resentment from the net contributor countries. But it is a theoretical possibility.
The third option would be devaluation of the currency as done before. This option is obviously not on the table as long as Greece is a member of the Eurozone. As a result, the Greek government cannot depress the value of its currency to help its exports, a common strategy for economic recovery. The solution might be a return to the drachma because that would place the tools of monetary policy back into Greek hands. It would almost definitely have to be coupled with option one, default, because printing drachma notes would not help the government with repaying its euro-denominated debts.
Lastly, raising tax rates and improving tax collection combined with austerity could increase the government’s revenue and eventually balance the budget. In the medium run the Greek government could reduce its debt but this will result in more social problems and higher unemployment.
Thus far, steps taken by the Greek government and international creditors have not improved the financial situation, and none of the policy measures discussed above are particularly likely to happen. But there is an alternative which could turn out to be much less painful than the options discussed above: privatisation, deregulation and shrinking the public sector.
As part of the current third bailout deal, Greece needs to transfer €50bn of state assets such as airports and marinas to an independent fund. This first step towards privatisation seems to be the first epiphany by Europe’s political class that the Greek dilemma cannot be resolved with bailouts and austerity only. Privatisation combined by deregulation can lead to GDP growth, productivity improvements and increased tax revenue (if former loss-makers are turned around under private management), as evidenced during the Thatcher era in the UK.
A comparison between the Greek economy today and the British economy in the 1970s is not too far-fetched. In both cases, the public sector had overextended itself, becoming far too involved in far too many sectors of the economy, whilst at the same time failing at its core functions. Yes, of course the details are very different. But the point is that there are a number of low-hanging fruits in Greece. A combined programme of privatisation and deregulation could have the following effects:
· Increased efficiency and competition
In general, private companies have a greater incentive to cut costs and improve efficiency than state-owned enterprises. The breakup of state monopolies and deregulation will create free competition. Furthermore shareholders can participate and increase their wealth.
· Economic decisions instead of political pressure
Managers can base their decisions on economic and business data as opposed to political mandates. For example, due to political pressure, state owned enterprises often employ too many workers. This holds especially for companies of the transportation, energy or communication sector which are mostly monopolists and in a few cases oligopolists.
· Greater social participation
Increased competition leads prices to fall and give consumers greater choice and variety. Politicians tend to be more concerned about projects that produce short-term benefits towards the end of their term in parliament for the next election. A stronger private sector may reduce this short-term mentality.
· Increased government revenue from the sales
With this additional income the Greek government will be able to pay back some of its debts and restore investor and consumer confidence, even if these are one-off windfall gains.
Since 2009 politicians and the Institutions have been trying to find a proper solution for the Greek dilemma. Yet, the Greek government is still highly dependent on financial aid. Government debt remains high whilst the economic outlook is worse. Greece needs its own version of Thatcherism to get back into shape, like the UK did in the 1980s and 1990s. Instigating the deregulation and privatisation of the public sector will undoubtedly result in more competition, higher efficiency and long-term benefits for the Greek society.