After months of meandering negotiations, a deal between Greece, the European Union and the International Monetary Fund now seems likely but far from certain. Greece is running out of cash quickly, and should accept practically any deal to avoid bankruptcy and possible Grexit. However, with all the attention to the drama of the erratic negotiation and the controversial positions of several government officials, not enough attention has been paid to the essential elements that will make an agreement lead to growth and competitiveness in Greece.
The three previous agreements with the lenders, while leading toward a balanced budget and solving fiscal deficits, implemented very few of the microeconomic reforms that would guarantee Greece becoming competitive and eventually not needing any more loan help. At the signing of its fourth loan agreement, it is high time to learn from the mistakes of the previous three and stress the micro rather than the macro part of the program.
Greece has a huge and highly inefficient public sector that weighs down on the private sector. It needs to be reduced significantly through evaluations and reductions of its labor force to become more efficient. The pension system is in disarray with some pensioners reaping huge benefits while others get very little compared to their contributions. The pension system needs to be rationalized so that pensions correspond to contributions. This may involve severe cuts for some, but also significant increases for others.
Corrupt government procurement in various sectors, including defense and health care, needs to be revamped through competitive auction processes. The "closed sectors" of the economy (such as pharmacies and trucking) have to be opened to entry and competition. Greece should proceed with privatization of trains, airports, ports, and energy. These sectors have been starved of investment for years and private parties would provide investment as well as run them more efficiently.
Labor-market liberalization is essential. To improve the efficiency of the Greek economy, it is crucial that bureaucratic procedures and business taxes be reduced. This will attract new investment as well as lure back Greek companies that have relocated abroad in the last few years seeking lower taxes and a more business-friendly environment.
Finally, the public debt burden has to be dealt with so that its servicing does not absorb money that can be used in public investment and grow the economy. The optimal way to do that is to first shift the maturities of the debt to the European Union to 75 years, second reduce its interest rates and change them from variable to fixed, and third, postpone (recapitalize) interest payments for a decade. These adjustments will allow the economy to grow while reducing the net present value of the Greek debt by at least 50 percent. Growth is the only guarantee that Greece will eventually pay its debt.
These are the main elements of a successful program for Greece that will allow the country to grow, be prosperous in the European Union as well as pay its debts. Many of these elements are highly unpopular in Greece. The present government came to power with a platform that contained elements opposite to these structural reforms; further it promised never to implement some of them. But reality should push the Greek government to accept a deal. The lenders could retreat away from the micro issues and deal mainly with the basic fiscal parameters. That would be a major error, repeated for the fourth time. Unless the micro issues are addressed and fixed, Greece will be asking for a loan again and again over the years.
Dealing effectively with the micro issues of the Greek economy will almost guarantee that this is the last loan program for Greece.
Commentary by Nicholas Economides, a professor of economics at the NYU Stern School of Business. . He also has advised the Greek government and Bank of Greece.