GIG: Greece has had a difficult decade, with the financial crisis followed by the pandemic, but in your work with the Pissarides Committee you also pointed to long-term structural weaknesses in the Greek economy. What do you consider as the key challenges currently facing Greece on the path to growth?
Vettas: Greece has been hit by two major crises within the last decade or so, which led to significant output loss and price adjustment. The global financial crisis triggered a deep sovereign debt crisis, while the pandemic crisis has been an unprecedented global external shock. Overall, during four decades of EU membership and two decades of euro area membership, the economy has been growing at a modest average pace, with productivity and the business environment improving – but only modestly.
In our Growth Plan report by the Pissarides Committee we highlight that the Greek economy has yet to fully adopt an entirely extroverted and innovative production model, that would allow it to enjoy the full benefits of being a member of the European single market and its strong comparative advantages.
Among the specific key challenges that the Greek economy is facing, one may highlight the low labour force participation rate and low level of physical capital, particularly related to businesses’ fixed investments. These are areas where further reforms can yield significant benefits in upcoming years.
GIG: Where do you think Greece could (or should) be in the next 10 years?
Vettas: In the immediate few years after the pandemic, Greece can benefit from the global recovery, low financing costs, as well as an underlying dynamic to bridge the production gap, lowering unemployment and attracting investments. Furthermore, being a member of one of the largest currency zones and free trade areas of today’s world, Greece faces a unique opportunity to become a fully extroverted economy and globally attractive destination for investments.
According to our analysis undertaken with the Pissarides Committee, on the basis of a systematic policy reform scenario, a feasible target for Greece would be to reduce its unemployment rate by 10 percentage points, increase its investment-to-GDP ratio by 13 percentage points and more than double its exports of goods during the course of the next 10 years. This would position Greece on par with other small open economies of the Euro Area.
GIG: What do you think the priorities should be, from a policy perspective, in kicking off Greece’s post-pandemic recovery? Which do you consider to be the most important first steps?
Vettas: A key policy priority would be to foster investments in both physical and human capital. This would act as a basis for higher productivity, and more and better paying jobs. Given the legacy of Greece’s high debt burden, fiscal policy should systematically inspire consistency and credibility in the medium and longer term, relying gradually upon a more growth friendly mix.
Indicatively, priorities across various policy areas include: tax and social security reforms broadening the base; enhancing formal labour participation through a lower tax burden on wage earners; stronger incentives for savings; public administration reforms aiming to improve governance and digitisation; judicial reforms aiming to shorten litigation timelines; financial system reforms enhancing the development of capital markets; and education system reforms aiming to modernise the system, including promoting vocational training and upskilling programmes.
Having said that, the sequencing of reforms is crucial. Interventions in the labour market are more effective if preceded by a reduction of entry barriers in product markets. In turn, the reduction of entry barriers in product markets is more effective if preceded by improvements in capital markets. The bottom line is that improving the environment for new businesses and investments is a top priority.
GIG: Greece is in line to receive close to €72 billion in EU funding over the next 6 years to help its recovery. Where does private sector investment fit in this picture?
Vettas: The size of potential EU funding for Greece over the next 6 years is unprecedented. Still, the amount that will ultimately be invested in the economy will much depend on the mobilisation of complementary private funds. That is, besides the grants component, a large share of this envelope relates to subsidised loans, which will require co-financing by private debt as well as private equity stakeholders. Hence, the role of private investment will be key.
GIG: What do you see as the role of foreign investors, and particularly investors from beyond the EU in building Greece’s recovery?
Vettas: The role of foreign investors, both from within and beyond the EU, has traditionally been and will continue to be key. The “success story” of the Piraeus Port’s transformation into one of the largest ports in Europe, following the strategic investment by COSCO is an example of a win-win partnership between international investors and the local economy. Such partnerships are likely to increase in number and frequency as Greece continues to transform its economic model into one that is more extroverted and business friendly.
GIG: What are the reform priorities that would make Greece a more attractive investment destination?
Vettas: An attractive investment destination is characterised by a business-friendly environment, governed by rules of simplicity, transparency, and with some minimum stability. To this effect, Greece should accelerate policy initiatives in three indicative areas: Judicial processes must become faster, while aiming to enhance investor protection and property rights. Public administration has to simplify its licensing procedures, accelerating setting up the cadastre and minimising red tape. Finally, the taxation system needs to become simpler and more stable.
GIG: Which sectors do you think would benefit from more investment? We know that the green economy and the digital sector are the pan-European priorities, but are there more areas of economic activity with untapped potential for growth?
Vettas: Green and digital investments are, indeed, prioritised in the context of EU co-funding. In both areas the opportunities in Greece are significant, as is revealed by the country’s low starting point in terms of environmental performance, circular economy indicators, as well as digital performance and innovation scoreboard indicators.
The country’s rich endowment of renewable resources, large share of STEM graduates, and recently growing tech sector give rise to positive prospects for return-on-investment in these areas.
Besides the natural environment and qualified human capital, other comparative advantages such as the geographical location and cultural heritage offer investment opportunities in a series of additional economic sectors. Among services, tourism has untapped potential for further development despite its remarkable growth in the last decade, while the same applies to logistics, transportation, ICT, real estate, but also education, health, and culture. In relation to goods, opportunities appear in the agri-food, energy, pharmaceuticals, bio-tech, alongside other manufacturing sub-sectors with a significant R&D component.