Greek Austerity Cuts; Missing the Point

The World

Greek Bail-Out

Greek parliament will be voting this week for further austerity cuts in an attempt to prevent the country from sinking into its debt. The European Union (EU) and the International Monetary Fund (IMF) will be closely monitoring the process; without these cuts Greece cannot receive the 5th instalment of its loan/ bail-out. To be fair, the first “batch” of measures did not get implemented, hence the need for a second one. Greeks that will fairly or unfairly be bearing these “additional” cuts have taken it, once again, to the streets. Greece’s finances are most definitely in a bad state, a member of the EU since 1981 it never really managed to push the necessary reforms in order to advance its development closer it’s potential. Imaginative accounting kept Greece in the Eurozone (some argue it even let it in), allowed increased liquidity and finally induced the country's crash following the 2008 financial crisis. Austerity measures are a logical way to go, and to be quite frank there is no other option for Greece; Mr Barroso is right.

Both the IMF and the EU Commission have proposed a series of cuts which largely entail the privatisation or shut down of numerous public services, as well as opening up “closed” professions. An all time classic recipe of the IMF, (for more look at Argentina, and the South East Asian Crisis) which though it has been judged as a "one-plan-fits-all" does get the job done; it limits losses on the balance sheet. Implementation of the austerity measures is very likely to put Greece’s economy back to normal around 2015.

However, going just for cuts misses the point; Greece must do more than offer cuts, it needs to offer opportunities for development. Reducing costs without increasing investments will lead Greece back to the same place.  A way to go about this is to allow for an increase in Foreign Direct Investment which has dropped dramatically; net FDI in 2009 was approximately 2.5 billion dollars. The main reason behind this has been Greece's business environment; it ranked 83 in the 2011-2011 Global Competitiveness rankings behind El Salvador and Rwanda ). This makes it an unfriendly environment even for domestic business.

What to do? For a start I am not advocating that by focusing on increasing competitiveness FDI flows will go up by 30 billion saving the country’s finances overnight (Greeks need to start paying their taxes for that to happen, but that’s a completely different story). Nonetheless, creating a more business friendly environment could soften the blow of the cuts, bring the economy quicker back on the positive growth path and keep it there. For example a simple way to go would be reducing the paperwork/ time required to start a business; dealing with corruption; creating a more competitive environment for its universities (some of which are good on a European level); training part of its personnel in innovation/ business policy related fields; supporting innovative SME’s; streamlining funds from the EU; reducing dependency on the Common Agriculture Policy (CAP) subsidies; making investments in Green energy easier. These are just a few of the measures that could boost Greece’s competitiveness.

The current austerity measures are necessary; however they largely treat the symptoms of the Greek crisis but not its source. The Greek public, interest groups and politicians should bear this in mind before they have to face a repeat of such painful cuts in the future.

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