The Greek economy needs much more than just a debt deal

Greece still owe us this much. EPA/Michael Kappeler

One of the main issues dominating the G7 was the Greek bailout. For the seven leaders attending the Bavarian summit, resolving the debt crisis in a way that is acceptable to Greece and its international creditors remains at an impasse. Both Barack Obama and Angela Merkel called on the Greek government to implement economic reforms.

While securing a new deal is important, much of the focus has been on how to deal with Greece’s debt. Ultimately, however, Greek debt will not be tackled by cutting government spending alone.

The Greek economy needs economic reforms to embark on a wider programme of structural change if it is to become competitive again. This demands reconfiguring its institutions to support competitiveness and business growth if Greece is to become economically and socially productive – and again open for business.

Political grandstanding

In many ways there is a political battle at play. The election of the Syriza party in January 2015 reflected the frustrations of the Greek electorate, and there is now a need for their prime minister, Alexis Tsipras to prove his party’s mettle in office.

Meanwhile Greece’s creditors, led by Germany in the eurozone, have their own electorates to speak to. As a result, they appear resolute that even a Grexit is preferable to a default as they do not wish to encourage other anti-austerity parties which are on the rise in, for example, Spain and France. Indeed, Angela Merkel has spoken of time running out for a deal to be reached.

Through the G7 meeting this week, political leaders outside of Greece have emphasised that Greece must stick to its path of austerity and its commitment to repayment of debts. Yet this ignores the need for an increased emphasis on creating a competitive Greece. Though very much a long-term aim, without it, the country will never climb out of its current problems and paying off debts will continue to be the (sole) emphasis for years to come.

Competitive roots

In re-examining the roots to the crisis, our research shows that Greece’s competitiveness was in decline before 2008 as the business base shrunk. As a result, the Greek government needs to enact reforms that are now long overdue to revitalise entrepreneurial activity that will add to the economy and society more broadly.

But wider-ranging reforms are ultimately necessary. From the ineffective system of taxation to the burgeoning public sector, the country’s major institutions are in need of an overhaul to support increased competitiveness and improve productivity. Without this, the tax base will not grow meaning that Greece has no route out of its economic problems.

Likewise, there is a need for the IMF, EU and Greek government to harness the existing cultural commitment to the European project of solidarity, and leverage this for the benefit of both the Greek and eurozone economy.

The goal of creating a Greek economy characterised by sustainable jobs and growth, and reinstating a sense of fiscal responsibility is viable, but only with commitment. It requires root and branch reform – there is no quick fix. As time passes and repayments are postponed, Greece cannot navigate the debt crisis with political grandstanding.

Breaking the downward spiral

The Greek business base is in what might be described as an existential crisis as competitiveness declines. Yet at its roots Greece is an enterprising and entrepreneurial society, given the relatively high historical rate of entrepreneurial activity among the general population.

There is a need for a collective commitment, both within and beyond Greek borders, to break what has become a downward spiral. Whereas debt restructuring was once thought to provide the solution, it cannot now succeed in isolation. The inability of Greece to recover and establish firm economic foundations might be considered an economic miscalculation at best. Now there is a need for institutional reform to improve the business environment over time.

Rebuilding relationships with political partners and lenders is important, but the need to rejuvenate the business base from entrepreneurs to large corporations is commonly overlooked. More than managing debt, overcoming the Greek crisis is about reestablishing economic confidence.

While regaining the confidence of its creditors might be achieved by meeting repayments, regaining the confidence of people and businesses around the world will be harder. Rebuilding the Greek economy is, and arguably always was, about more than debt.