While markets in Europe and the United States breathed a collective sigh of relief with the victory of the sober Antonis Samaras and his New Democracy Party in last Sunday’s Greek parliamentary elections, the absence of a substantial market rally immediately thereafter reflected the seriousness of the work that lies ahead. Greece may have dodged the suicidal bullet of the Syriza party’s transparent proposal to blackmail the EU into dropping its austerity demands, but Greek voters have made clear they will never accept the EU bailout Memorandum in its current form. And, these sentiments will be supported in the streets by the same violent anarchists who make the University of Athens a no-go zone for the Athens police. Even the responsible Samaras felt compelled to promise voters that a government led by him would seek to soften the austerity terms.
As the mantra grows louder on both sides of the Atlantic (and to Berlin’s understandable chagrin) that Greece’s bailout package must adjust to facilitate growth, the policy debate risks getting lost in the knotted issues of restructuring the half of Greek debt that was not restructured in 2010. Certainly, European policymakers must find a way to keep the Greek economy solvent in the coming months. But, any such measures will only buy Greece a little more time before its next credit crunch, and will not in themselves catalyze the economic growth that is the only means for ending Greece’s economic crisis.
Sustained growth will never return to Greece’s economy without breakup of the rigid structures that stifle entrepreneurship. For decades, the government and companies of Greece have distorted the concept of “public-private partnership” into a corporate welfare system with barriers that block new workers from entering professions and new companies from breaking into markets. Private companies have grown accustomed to relying on state contracts rather than their own competitive edge against domestic rivals, and are therefore largely unable to compete in global markets.
Greece’s pharmaceutical sector provides a case in point. In 2008 and 2009, while overseeing US relations with Greece and a number of other countries at the State Department, I spearheaded an attempt to recoup millions of dollars owed to US pharmaceutical manufacturers from Greek entities. Though we had the full support of the Greek Foreign Minister, who assigned her talented top economic advisor as my counterpart, it became clear after several months of joint slogging that the rigidities of Greece’s pharmaceutical sector doomed our effort. While few Greek citizens care much about US pharmaceutical companies, they do now worry each month whether they will receive their prescriptions on time or at all. Greece’s largest state health insurance program reportedly owes Greek pharmaceutical distributors over $180 million. To stay afloat, Greek pharmacists increasingly demand upfront payments from customers who now simply lack the money to pay, and who have historically received their medicines free of charge, courtesy of the state.
This is just one example of the rigid structures spanning the entire Greek economy that suffocate economic dynamism. The growth that Greece’s Samaras, France’s Hollande, and America’s Obama are all calling for will never occur in Greece without deep and unprecedented structural reforms, no matter how deeply Greece’s debt is restructured–or even forgiven.
These problems are not a secret to anyone in Greece. In principle, Greek voters would hail a leader who would break the mutual dependence of the country’s politicians, bureaucrats, and businesspeople. But, in reality, meaningful structural reform remains politically infeasible in Greece. As Poland’s brilliant economic reformer, Leszek Balcerowicz, demonstrated in 1989, the radical reforms required to fix this sort of economy cannot be piecemeal; nor can they avoid being politically devastating for whomever leads their implementation.
No Greek political leader, not even one as talented and determined as Samaras, will have the requisite political strength on his or her own to break enough rice bowls of those who benefit most from Greece’s rigid and sclerotic economic structures. The EU, together with the IMF, must be Greece’s Deus Ex Machina. These organizations’ leaders must refocus policy debate away from a simplistic tradeoff of austerity versus growth, which devolves into a calculation of how long to postpone Greece’s debt repayments. Instead, European leaders must use their precious political leverage, which may never be greater, to compel the deep restructuring of Greece’s economy that promises the only way for Greece to grow its way out of the dauntingly deep whole it has dug for itself.
Of course, were such reforms to begin to bite, they would face serious opposition from all Greeks, not just the political and economic elites who benefit most from the current system. But, at least by focusing on the only remedy that might save the Greek patient, European leaders would help define a cure for some of its other recovering charges.