Bank of Greece’s Ten Commandments for economic recovery

Bank of Greece Governor Yannis Stournaras today submitted to Parliament Speaker Nikos Voutsis the Bank’s Interim Report on Monetary Policy, iwhich welcomed Greece’s completion of its bailout memorandum but also stressed that severe challenges remain and that specific steps must be taken in order

In particular, the report states that bond yields remain high – as does the cost of borrowing for businesses – that the economy is affected by turbulence in financial markets, and that there are lingering concerns about the reversal of key reforms.

The report also includes a crucial warning against squandering the cash buffer that permits Greece to delay its return to the markets until such time as conditions are more favourable.

“It is of the utmost importance to regain the confidence of markets as soon as possible and well before the available cash buffer is depleted. This would enable the Greek State to use the remainder of the cash buffer to buy back debt. Furthermore, it would allow the private business sector and banks to access the international markets on sustainable terms,” the report stresses.

“To this end and taking into account the global economic slowdown and the major challenges faced by the Greek economy, the reform effort must continue with unwavering resolve.”

The report also includes a Decalogue of crucial reform policies that are necessary for the economy to take off and for creating sustainable growth.

The reform policies enumerated by the Bank of Greece Interim Report are as follows:

1st Reducing the high stock of non-performing loans. The high stock of non-performing loans has a negative impact on the supply of credit by tying up bank funds and resources in non-productive assets. Moreover, creditless recoveries tend to be weaker, mainly because the shortage of bank credit affects investment. In order to speed up the reduction of non-performing exposures, apart from the actions taken by banks, other systemic solutions will need to be considered. In this context, the Bank of Greece recently presented a plan for setting up a Special Purpose Vehicle to manage non-performing loans, with the use of part of deferred tax assets.

2nd Changing the fiscal policy mix. The excessive reliance of fiscal consolidation on taxation creates disincentives for work and investment, while also leading to a growing informal economy. In addition, the under-execution of the Public Investment Programme over the past two years has affected the level of investment in infrastructure and medium-term growth dynamics. Instead, emphasis must be placed on implementing those reforms that allow a rebalancing of the current fiscal policy mix towards lower tax rates and a reallocation of public spending in favour of those categories that have a permanent growth-enhancing impact.

3rd Implementation of structural reforms, so as to safeguard the fiscal achievements made so far and to enhance policy credibility as reflected in Greece’s international credit ratings. Furthermore, the enhanced post-programme surveillance framework calls for the timely completion of the agreed reforms-commitments, in order to restore the transfers to the Greek State of profits from holdings of Greek government bonds by the Eurosystem (SMP and ANFA). This would have a positive impact on Greece’s attempt to access the markets. Any reversal of agreed policies would act in exactly the opposite direction.

4th Speeding up the privatisation programme, especially with privatisations that have a strong signalling effect and growth impact (such as the development of the former airport of Hellinikon). This would have a positive impact on total investment expenditure.

5th Attracting foreign direct investment, as domestic savings are insufficient to meet the investment needs of the Greek economy. Thus, emphasis should be placed on policies aimed to make Greece more attractive to investors. More specifically, such policies involve reducing the tax burden, improving the efficiency of public administration and reducing red tape.

6th A speedier delivery of justice, legal certainty, a clear and stable legal framework are essential conditions for strengthening the public sense of fairness and justice, for improving the investment climate and for accelerating economic growth.

7th Enhancing the “knowledge triangle” (education, research, innovation) and fostering a closer link between businesses and research centres. The systematic use of innovative technologies and proper utilisation of the human capital stock in tradeable sectors could support the shift of the Greek economy to a new model of knowledge- and export-led growth.

8th Improving structural competitiveness, which requires continuing the reform effort, particularly in the goods and services markets. There are strong indications that the increased extroversion of certain sectors of the economy over the past three years is closely associated with an increase in total factor productivity (TFP) and the structural reforms that took place in recent years.

9th Maintaining labour market flexibility. The economy is currently at a stage where recovery has started but has yet to gain traction in the form of robust growth and higher employment rates. Therefore, any regulatory intervention for the protection of workers must preserve labour market flexibility, as well as the gains from the broader painstaking reform effort of the period 2010-2017.

10th The proposal under consultation to raise the minimum wage must be consistent with labour productivity growth, so as to preserve the competitiveness gains made so far by Greek businesses and the Greek economy in general. An increase in the minimum wage would also need to be accompanied by targeted measures in support of those workers, businesses and sectors that are likely to be affected the most, including targeted active employment policies or a reduction of non-wage labour costs, as well as by more effective labour market supervision so as to minimise the scope for abuse of the flexibility provided by the current regulatory framework and to avert an increase in the informal economy.