GIG: You were directly involved with Greece at a very difficult time for the country. How did that affect you, and what do you think are the key lessons learned for Greece and for Europe? How does Greece differ today, from a structural perspective, from the Greece of 2009?
Costello: I was involved in the Greek Financial Assistance Programme back in 2010, when it commenced, after which I was appointed Mission Chief Negotiator of the European Commission team in 2014. And while this was a very challenging and stressful period, both personally and professionally, it was nothing compared to the situation faced by Greece and the Greek people, who went through a very deep and traumatic economic shock where real incomes fell by 25 percentage points. Greece emerged from the financial assistance programme in 2018 and experienced positive economic growth until the onset of COVID at the beginning of 2020.
Many lessons were learned; sometimes, rather painfully.
From the Greek perspective, a key lesson was the need for prosperity and economic development to be based upon solid and sustainable foundations. Prior to the Financial Assistance Programme in 2010, growth was essentially based upon unsustainable borrowing, by the public sector – leading to a very high level of public indebtedness – but also excessive rates of credit growth on the banking system supporting private sector activities.
I believe Greece did successfully confront very deeply rooted underlying structural problems. The country faced issues in terms of a fundamental lack of competitiveness, the ability to compete on global markets, but also problems in the form of a very inefficient public administration, and significant shortcomings in the justice system. But these issues were tackled. And I think what was also critical in allowing Greece to emerge from the financial assistance was the recognition that the country had to take ownership of these reforms; they needed to be owned by Greek governments and Greek administrations. Greece worked very closely and – eventually –very well with its European partners.
On the European side, I think the Greek crisis was a stark reminder that we had a lot of unfinished business with our monetary union, and we were not adequately prepared for the global financial crisis. So important steps were taken to strengthen our banking system, and to put in place the beginnings of a Banking Union. We also developed financial support instruments to help euro area countries up hand themselves in times of economic difficulties. And this ultimately proved to be successful.
I believe Europe has learned important lessons from the Greek crisis. And you can see this if you compare the speed of the reaction to COVID to the reaction to the financial crisis back in 2008 and 2009. Europe has reacted quickly in response to COVID with financial support. We’re putting in place a new Recovery and Resilience Facility, which should provide significant financial support to countries like Greece, which have been badly affected by the crisis.
GIG: How prepared do you believe the country is to overcome the effects of the current crisis based on the lessons derived from the bailout era?
Costello: Greece has been badly affected by COVID with its economy somewhat more affected than the EU average due to the structure of the economy, which is heavily tilted towards the tourism and services sectors, which require face-to-face interaction. I think Greece has coped relatively well with the crisis, with its response in controlling the spread of the virus – particularly at the beginning – being particularly noteworthy.
But if I take a look at the economy, and while I don’t want to play down the challenges, I do think Greece is in a relatively stronger state to meet the effects of the crisis thanks to its previous reform efforts.
Firstly, Greece entered the crisis with its public finances in very good order. Greece was one of the few countries that was running a small government surplus. So it did have the room, and the confidence of markets, to borrow money to undertake the additional essential public spending, to support the health care system, households, corporates and industry during this very difficult time.
Although Greece’s public debt is high and is growing, it’s important to bear in mind that Greece’s public debt was heavily restructured back in 2018 by European partners so it is structured around very long term maturities. Greece also benefits from concession rates from its European partners which means that the interest Greece pays on its debt is significantly lower than that paid by many other European countries with lower levels of public debt.
Secondly, Greece made significant progress in tackling deeply rooted structural reforms during the programme period. A lot of this entailed targeting unnecessary impediments to doing business and investments: there was important progress made in privatisations and opening up network industries, whether the airports or the energy sector; and the basis for the modernisation of the public administration and justice system were also advanced.
And while it’s important not to minimise the size of the impact of COVID, or the fact that Greece faces legacy issues associated with the financial crisis – notably in terms of the banking system and non-performing loans – what’s important is that Greece has been able to respond. And the fact that it had the capacity to respond is precisely because of the progress made in earlier years.
Additionally, Greece recovered the credibility of financial markets. It’s been quite remarkable in recent months how Greece has been able to issue long dated bond issuances at historically low interest rates. And it can do so because there is credibility in financial markets on the commitment to sustainable public finances. And I think the good cooperation with the European institutions is also a central part of that.
GIG: Greece’s National Recovery Plan has been described as one of the strongest among Member States by European Commission officials. What are the reform priorities that in your view would be game changers for the country, particularly in deepening private sector involvement?
Costello: We are still discussing the design of the plans with the Greek government and indeed with other countries. But, a draft of this was presented to finance ministers some weeks ago and it was very well received. I am involved in the negotiations on this plan and I can confirm it is genuinely a good plan for several reasons: One is that there’s a clear strategy to renew the growth model of Greece, which it very much focused upon ensuring that growth is export-led and that Greece will seek to develop its footprint on markets around the world, while becoming a better place to do business and investment.
This growth strategy is based upon a report prepared by Nobel Prize winning economist Christopher Pissarides, focused on the right issues. There’s a strong dimension to strengthening the business environment, and from the perspective of investors that includes measures to facilitate exports, to update and modernise the framework for strategic investments in Greece, as well as a whole host of other steps to eliminate unnecessary impediments that impose costs upon businesses.
There are two other elements that are worth mentioning: Firstly, a very strong component of the draft plan concerns efforts to continue to modernise the public administration and the justice system. The key to this is digitisation; by developing e-public services, using the digital transition to fast forward the delivery of public goods and services, and modernising the justice system. When it comes to foreign investors, that’s very important not only in terms of the cost of doing business, but also in terms of just the predictability of interacting with the Greeks authorities.
The final point to stress here is that there’s also a heavy focus on supporting the green transition. This presents considerable opportunities in Greece to take advantage of areas like renewable energies, while there’s clearly a possibility that Greece could have a comparative advantage taking advantage of its natural resources.
GIG: As Greece looks to reverse chronic underinvestment, there is a risk of old mistakes being repeated. What would you caution investors against?
Costello: I would be cautiously optimistic that the mistakes of the past can be avoided. There is a genuine commitment to ensure that public finances remain on a sustainable footing. A critical difficulty in Greece in recent years is the shortfall of investments. On the public investment side that has been clearly linked to a real problem which is the delivery of an efficient pipeline of public investment projects. What’s encouraging is that there’s a very good central lead centred around the prime minister and the minister of finance to ensure that there is a delivery of projects, and that those bottlenecks which have been impeding the roll out of the actual implementation of investment decisions are overcome.
For investors It is important – especially for those investments where there is a strong sense of linkages and interaction with the public sector – to establish clear lines of communication as soon as possible.
In the past, there was a lack of predictability in some of the large investments that went into Greece. But I think that situation has progressively improved. And I think we’ve seen some very successful, large inward investment projects in recent years, ranging from COSCO’s investment in the Piraeus Port to significant investments in areas such as the airports.
So, there is considerable scope to have successful investments in Greece. However, the reassurance should really be that, first of all, Greece is in a much stronger place in terms of macroeconomic stability, and it also helps that Greece has a very considerable support from its European partners to continue with its recovery.
GIG: The EU recently concluded negotiations for a Comprehensive Agreement on Investment with China, yet challenges remain. How would you like to see this relationship evolve going forward? What are the key issues to watch?
Costello: The negotiations on the Comprehensive Agreement on Investment concluded in December 2020, and it is an agreement in principle. So there are further steps to be taken, while there has been progress recently in terms of technical work to try to set out some of the specifics when it comes to market access. It is a complicated and multifaceted strategy. From the European side, key issues relate to the creation of a level playing field, including matters concerning the governance of state owned enterprises, for example.
There still is some way to go for the final entry into force of the agreement. And indeed, the negotiations on investment protection will continue for some time and obviously remain a very important component. But I think it is nonetheless a very interesting and exciting time for trade and investment relations with China as the agreement provides a framework for a sustained and balanced economic relationship between the EU and China going forward. An area where I think there is considerable scope for collaboration is sustainable development, where the European Union and China are working towards having shared objectives when it comes to the climate transition and moving towards carbon neutrality.
It’s important to note that there are good examples of very successful investments from China in Greece. And while I’ve already mentioned COSCO’s investment in the Piraeus Port, it’s worth recalling that the investment agreement was reached at a very difficult period in Greece. And yet, despite all the challenges, it has turned out to be of considerable benefit, both to the Chinese investors and, of course, the Greek economy.
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