"Post-MoU Greece: Five proposals"
Speech by Professor John (Iannis) Mourmouras
Bank of Greece Deputy Governor
Former Deputy Finance Minister
at the 2nd International Conference organised by the Economic Chamber
of Greece at the Stavros Niarchos Foundation Cultural Center
Athens, 31 May 2018
Your Excellency, Mr. President of the Hellenic Republic,
Ladies and Gentlemen,
Introduction
After 8 years of hardship and thanks, on the one hand, to the big sacrifices of
the Greek people and, on the other hand, to the solidarity of our European
partners as this is manifested by the unprecedented amount of loans given to
our country on truly concessional terms (very low rates and long maturities),
Greece is finally coming out of the tunnel with optimism. Although the
international economic environment and indeed the situation in our
neighbourhood is pretty unstable right now, I believe the Greek case is
manageable for an exit from the MoUs in late August without a precautionary
-
credit line which would be effectively a mini-fourth MoU. Such an exit, after all,
would be similar to the cases of Portugal, Ireland and Cyprus. I will seize the
opportunity of this conference organised by the Economic Chamber of Greece,
thriving under the leadership of Konstantinos Kollias, taking place in this
magnificent masterpiece of world architecture named after a global business
leader, Stavros Niarchos, to make 4 new proposals, and repeat an old one,
towards achieving this sort of exit and beyond, and the emphasis is on the
"beyond". Then I will briefly ask what went wrong in the case of Greece. I have
written extensively on this subject during the period 2010-2014 with my previous
hats, including the professorial one. The important thing is to look forward, but
history matters and the lessons drawn with regard to member countries of
monetary unions are of paramount importance. And finally I will look at the
significant role that the ECB played in the adjustment programmes in the four
countries and, more generally, in the South of Europe (including Spain and
Italy), among other things in providing liquidity and effectively saving the euro,
because, as you know, that was at stake in the end.
Before coming to the main topic of my speech, five proposals on post-MoU
Greece, a digression may be in order on Italy.
Italy
What's happening in Italy right now is not a surprise for some. For
a lot of
analysts it has the potential to trigger the next global financial crisis after 2008,
markets' first reaction was really
dramatic, although the following days they
seem to be calming down a bit. US and European equity markets fell by around
2% on the very first day, the Italian 2-year government bond rose by 230 basis
points, the Italian 10-year government bond rose by 70 basis points, a trend not
seen since the euro area crisis in 2012 and dragging down all other
europeriphery government bonds. The unstable political situation caused by
populists, which has left the country without a government since March, goes
back to two major root causes. First of all, it may be attributed to the failure of
globalisation to reach some segments of the population, which have been left
behind in terms of its economic benefits, for instance through chronic
unemployment of around 11%, with youth unemployment at a devastating 35%.
Italy's per capita income is lower today than on the eve of the country's euro
adoption in 1999 and over the past decade, the country has experienced a
It is expected to be at the bottom of the euro area's growth
triple-dip recession.
league this year. It is no wonder that the 5 Star movement won more than 50%
of votes in the troubled south, where poverty rates have increased by half since
the crisis.Secondly, increased migration flows in the last three years, triggered a
strong anti-European sentiment and broader support for populist forces.
Italy is too big to ignore. Its GDP is 10 times bigger than the Greek one. Italy is
the eurozone's third-largest economy and it has systemic importance to the
world economy. Italy has the world's third largest sovereign debt market, after
the US and Japan, with total public debt of more than €2.3 trillion, of which more
than 36% is held by foreigners, so contagion is really an issue here. It also has
the worst public debt-to-GDP ratio (133%) in the eurozone after Greece and a
weak banking system, poorly capitalised, troubled also by the high level of
(more than €250 billion,
nonperforming loans 15% of the total). No matter what
happens with the current political and constitutional crisis in Italy, the problem
with Italy was there: life after QE, namely what happens with the end of QE this
year when the ECB will stop its large-scale purchases of Italian government
don't want to
bonds. I think what would be happening if political developments
were to lead Italy to lose its investment grade (currently at BBB).
A. Greece today and beyond
A.1 The real economy: positive short and medium-term outlook
Greece's economic recovery is finally gaining
traction after an unprecedented
depression. Real GDP in 2017 increased by 1.4% with positive contributions
from exports of goods and services (2 percentage points contribution) and gross
fixed capital formation (1.2 percentage points contribution) (see Chart 1). This
positive outcome creates a strong carryover effect of +0.5% for GDP growth in
2018, which supports the outlook for a GDP growth rate of around 2% and 2.5%
in 2018 and 2019, respectively.
Figure 1 Growth has resumed
Positive developments are not only reflected in economic activity indicators, but
also in soft data such as the manufacturing PMI which has been in
expansionary territory for the last ten months, by far the longest period since
2007. Economic sentiment has been on an upward trend since mid-2015,
reached a 3-year high in 2017 and further improved in the first quarter of 2018.
Industrial production has been expanding at healthy rates since mid-2015 and
performed exceptionally well in 2017.
The unemployment rate dropped to 21% in 2017, falling by around 6
percentage points from its peak in 2013. This trend continued in the first four
months of 2018, which supports the outlook for an unemployment rate of
around 19% and 18% in 2018 and 2019 respectively. Employment increased by
2.2% in 2017, and the number of unemployed declined by 9.2%, while the youth
unemployment rate (in the 20-29 age category) declined to 35% in 2017 from
38% in 2016, and long-term unemployment also dropped by 3 percentage
points (see Figure 2).
Figure 2 Total, youth unemployment rate and share of the long-term
unemployed (in percentages)
Source: ELSTAT, Labour Force Survey.
The Greek banking sector is strengthening
Turning now to the Greek banking sector, first allow me to make some
comments in the wake of the stress test results. All four systemic banks
successfully concluded the 2018 stress test conducted by the ECB, pointing to
no capital shortfall. Therefore, for the first time since 2010 and after three
rounds of capital injections in the last five years, the Greek banks will not need
additional capital in the near future. More analytically, the tests revealed a 9
percentage point impact on banks CET1 ratio under the adverse scenario,
to €15.5 but left all banks' CET1 higher than the
equivalent billion, 5.5% implicit
hurdle (although one bank is relatively close and is expected to continue its
current capital plan).
Moreover, the continued improvement in the banking sector can also be seen
on their reduced reliance on the central bank funding, which is diminishing
steadily and is now below the levels of end-2014 (see Figure 3).
Figure 3 Bank deposits and reliance on central bank funding (Q1 2008 to
end-February 2018)
Banks' dependence
on the ELA emergency lifeline has declined significantly to
around €70 billion at the
€8.6 billion during this month, from end of 2015 and is
expected to be terminated before the end of the year. Another visible
improvement in the Greek banking sector was the increase of the total deposits
2015 and March 2018 by €13 (or 8.0%) to €143
between end-June billion
billion.
Last but not least, a major pending issue is the tackling of the problem posed by
the 'Achilles heel' of the Greek banking
the high stock of non-performing loans,
system.
On a positive note, for the first time since 2014, net NPEs follow a downward
trend. However, the NPE ratio of 42% in Greece remains the highest across
euro area countries, against 14% in Portugal and 10% in Italy and Ireland (see
Figure 4), while before the crisis the NPL ratio in Greece was 4.5% (in 2007),
against 3% for the euro area average.
Figure 4 Ratio of non-performing exposures (NPE ratio) in the euro area
(December 2017)
"Risk Dashboard, as of Q4 2017".
Source: European Banking Authority (2018), data
A.2 Post-MoU Greece: the way forward
-
First of all, as shown in the following table, Greece has outperformed with the
exception of NPEs and public debt, in terms of all other macroeconomic indices
-
i.e. in terms of growth, primary and fiscal surplus, current account surplus, the
-
spread of Greek bonds vs. the German Bund the other 3 countries during the
corresponding exit periods. This is obviously comforting to both our lenders and
the markets for the future of Greece after the MoUs.
Table 1
Macroeconomic and Financial Data during the exit period
General General
General
Government Government 10-Year Government
Real GDP Government Current Account NPLs Amount
Country Primary Fiscal Bond Yield & Spread
(% change) Debt (% of balance (% of GDP) (% of Total Loans)
Surplus/Defic Surplus/Deficit vs 10-year Bund
GDP)
it (% of GDP) (% of GDP)
46,6% Feb 2018: 4,11%
Greece 2,5 3,9 0,9 178,0 0,4
(as of Q3 2017) 336 bps
25,7% Jun 2013: 4,13%
Ireland 1,6 -1,8 -6,1 119,4 2,1
(as of Q4 2013) 240 bps
11,6% Dec 2013: 6,04%
Portugal 0,9 -2,3 -7,2 130,6 -0,3
(as of Q2 2014) 410 bps
48,5% Nov 2015: 4,02%
Cyprus 3,0 3,0 0,5 107,1 -4,9
(as of Q1 2016) 345 bps
Source: Bank of Greece.
I intend to skip here the latest heated debate on cash buffers vs. a
precautionary credit line, for 2 reasons. Firstly, they are both short-term
solutions, maximum one plus one year, but the real question remains what
comes next after the first post MoU-year. This is the question I propose to focus
on, namely: what needs to be done in order for the country to achieve a
permanent sustainable return to the capital markets, like the pre-2008 status. It
will be the sequel question to either cash buffer or precautionary credit line the
country will inevitably have to face in a year or so. I want to open this debate
from here today by making a number of proposals that will make such a return
feasible in the foreseeable future. Secondly, this economic debate has turned
it's
into a saga, a politically controversial issue, as it is quite often the case in
- and I don't want to go into that
Greece, some have called it 'sour grapes'
territory. The truth of the matter is that we have in our hands a Eurogroup
decision of 15 June 2017, which is an agreement between the government and
our lenders in view of the ending of the current programme in August 2018 and I
"Europe commits to Greece's return to the market ..."
quote: provide support for
and "to further to support investors' confidence and
build up cash buffers
facilitate market access".
Right now we have this agreement. If this changes, we are here to discuss it.
Before coming to my proposals, let me list a number of undeniable facts about
post-MoU Greece:
1. The fourth and final programme review has been concluded successfully
last week. So the last disbursement from the ESM is only a matter of time
and, as of today, there will be no extension of the third adjustment
programme, which ends on 20 August later this year.
2. Any prior actions left will be dealt with during the post-MoU period, known
as the Post-Programme Surveillance (PPS). We know the name, but not
what it will entail. This is the big known-unknown today, be patient and we
will know all about it in a few weeks'
time.
3. What is clear, however, have no doubt about it, is that Greece will be
exiting the 3rd MoU, but will be entering something new, not a 4th MoU, but
something hybrid with conditionality since debt relief, according to all
evidence, will be given in tranches.
4. Finally, it seems that austerity will stay with us at least for another 4 years
as primary surpluses of 3.5% are required until 2022.
Before turning to my own proposals for Greece, one word about the IMF. It is
not clear yet what role the IMF holds for itself. Any IMF decision about its future
role will be fully respected. There is a proposal already, which I endorse, that
Greece's
remaining loan obligation to the IMF of €10 billion which comes at a
gross interest rate of 3.8%, much higher than European loans interest rate of
about 1%, should be repaid immediately (the money can be found). Such an
early repayment of the IMF loan would contribute to an improvement of the
sustainability of public debt, making also possible a more balanced
management of payments.
Figure 5 Greece public sector outstanding debt (in billion euro)
Sources: HSBC and Greek Public Debt Management Authority (PDMA), January 2018.
Then all past grave mistakes by the IMF (e.g. on the value of fiscal multipliers,
assumed at 0.5, when the correct value was 1.5), the over-optimistic forecasts
about growth and fiscal surpluses under the 1st MoU, turned into
overpessimistic forecasts under the 3rd MoU, etc. and the most recent ones, like e.g.
that the Greek banks will need at least €10 billion capital injection as a result of
the 2018 stress tests, will be "all forgiven and forgotten", as they say.
Of course, a key prerequisite for a permanent return to the capital markets is
the sustainable recovery of the Greek economy with growth levels of above 2%.
On top of that and from my point of view, the following four proposals are also
required:
Proposal #1: Further increasing the cash buffer
The government's strategy
- agreed with our lenders - makes sense: to fully
cover the country's financing needs for the first
post-MoU period. This is after all
what all the other three countries did. For instance, in the case of Ireland, it was
of €25 billion, in Portugal it was around €20 billion, in both cases
a cash buffer
around 13% of their GDP. Greece's gross financing needs for the next two
years amount to €45 billion, of which €18 billion will be covered by the primary
surplus and the privatisation agenda, and there is an existing cash buffer
already from the 2018 debt issues and from repos.
My personal view is that due to:
a) adverse capital market conditions globally, the return of volatility and higher
oil prices, inverted US yield curves as a result of monetary policy tightening, the
widening Libor-OIS spreads, which exert pressure on the US dollar money
market, the recent US dollar strength vis-à-vis other main currencies. All the
above might have a greater impact on vulnerable countries with low credit
ratings and weaker economies.
Name it, Italy as described above or Trump's trade war with China and other
major economies, the fog of uncertainty has thickened.
b) Also due to political developments in Greece as next year will be the year of
European elections and also national and regional elections. Plus there are also
geopolitical risks in our neighbourhood (our unpredictable eastern neighbour in
connection with the drilling of gas in the Aegean and Cyprus).
All the above make a strong case for increasing the buffer as much as possible
for shielding the economy. Large cash buffers boosted investor confidence and
have aided market re-entry in Ireland, Portugal and Cyprus. The extra money
could come from either the bank recapitalisation amount remaining from the 3rd
programme, or from new issues in the markets over the next 3 months,
provided that the dust in capital markets settles down.
If things turn nasty in Italy and the europeriphery, in the next few weeks, there is
plenty of time for the Greek government to negotiate with our European
partners, a negotiation which I would suggest to be made at the highest level, at
Prime Minister level, for Greece to exhaust all the remaining amount, which is
more than €25 billion, from the €86 billion
of the 3rd programme, leaving not
even a single euro in the account. This amount has already been approved by
the national parliaments in eurozone countries, if we face an extraordinary
situation due to external factors, it is only prudent for Greece and our lenders to
secure the maximum reserve amount for a rainy day in order to shield the
country. There is still plenty of time for the government to look at this. Just keep
a cool head!
to obtaining the investment
Proposal #2: From debt sustainability...
grade for Greek public debt
We have every confidence that our lenders will keep their word on providing
pacta sunt servanda
Greece with further debt relief - applies to both lenders and
borrowers - and deliver on what they promised since November 2012. The debt
relief measures described in the Eurogroup statement of 15 June 2017 need to
be clarified and specified with a clear timetable to be considered credible by
investors. It will be along the lines of the 1st package of short-run measures, i.e.
extending maturities and lowering interest rates which, given the new debt
metric "gross financing needs below 15% of GDP for the medium term and
below 20% of GDP thereafter" would make sure that
the Greek public debt is
sustainable. The new debt metric that focuses on gross financing needs
- -
(GFNS) rather than the old one of nominal debt-to-GDP ratio captures
adequately the concessional terms of loans to Greece by the EFSF and the
ESM (more than €180 billion with maturities up to 32.5 years and a fixed rate
close to 2% directly or indirectly taking as a basis a near-zero borrowing rate
from the markets by the ESM). Reducing public debt in present value terms
puts the profile of Greek debt in an advantageous position among two thirds of
eurozone countries and four fifths of EU countries.
With the end of the programme in August and the specification of debt relief
-
measures in June or July Eurogroup meetings, and a positive DSA report I
that one who pays the piper calls the tune",
open brackets here (recalling "the
from which we borrowed more than €180 billion
the ESM as of today naturally
prepares a debt sustainability analysis (DSA), which will most likely be signed
by Dr. Strauch, Chief Economist of the ESM, whom we have the pleasure to
-
have with us today close brackets) one should normally expect at least a
twonotch improvement in the country's credit ratings by the relevant agencies. This
would still be far from the investment grade of BBB-, but, here is my proposal: a
new advisory Task Force with senior figures from the Public Debt Management
Agency (PDMA), the General Accounting Office and the Bank of Greece,
headed by an established figure with an international reputation, would join
forces to help obtain the investment grade asap by lobbying the analysts,
making roadshows abroad to investors, etc. Clearly, with the permanent
removal of the capital controls (I'll say more on this in a minute) and the
elimination of ELA at the end of the year for our commercial banks, that would
give another notch up in ratings, plus perhaps an overshooting of the target
primary surplus - first evidence from Q1 suggest that this may reach 5% of GDP
this year (from a target of 3.5%) and/or a better-than-expected growth
performance due say to another record of tourist arrivals, etc. Then, the
investment grade may be within reach during the next 12 months or so. I dare
say this: For the country to move forward and avoid setbacks in the future, the
importance of getting the investment grade in a reasonable time ahead is as
important as meeting the Maastricht nominal criteria was in the 1990s, prior to
Greece's entry in
the eurozone. We managed to do so then with a delay of two
years. It may sound a bit optimistic today, but my motivation is to open up the
discussion on this and make it a central part of the policy debate in post-MoU
Greece. I believe it is feasible, and it is only fair for the country.
Greece's participation in the ECB's QE
Proposal #3: programme during
the re-investment period
With 3-4 notches up in the next 8 to 12 months and the investment grade for
Greece within reach, the ECB may potentially examine the purchase of Greek
government bonds under its public sector purchase programme during the
reinvestment period, which will last for at least two years (end-2020).
today (around
Even though the potential purchase volumes of Greek debt €3-4
under the ECB's asset purchase programme cannot
billion) be compared with
those of Portugal, currently around €33 billion or Ireland's €27
billion, yet,
Greece's inclusion in the ECB's QE
programme would yield a major boost in
terms of confidence and send a positive signal to investors that Greece is not
anymore an outlier, it is included in President Draghi's umbrella with clear
benefits in terms of the cost of borrowing of both sovereign and bank and
corporate debt, as it was the case for post-MoU Ireland and Portugal. Note that
if, as part of the upcoming debt relief measures, there will be a buy-out of
€13
ANFAs and SMP bonds by the ESM, releasing a total amount of billion,
then the volume potentially to be purchased under the QE programme could
to €16 billion,
increase which is more than one third of marketable debt,
triggering a drop of even 150 basis points in the secondary market. We bought
more than €50 billion
at the Bank of Greece - - as part of QE, mainly
supranational, hopefully the time of buying also GGBs is also near.
Proposal #4: Towards a permanent lifting of capital controls
No return to the markets can be permanent and hence credible with capital
controls still imposed on the economy. The government, in cooperation with the
Bank of Greece would have sooner than later, and definitely close to the end of
the programme, publish a roadmap detailing the specific measures and set
dates for the full lifting of capital controls, signalling also the end-date. This
would be the catalyst for the full recovery of trust of depositors and the return of
around €20 billion hoarded in mattresses and safety deposits,
but also boost
investor confidence in the prospects of the economy.
B. What went wrong in Greece?
Let me now turn briefly to the four adjustment programmes that took place in
by focusing on the question "what went wrong in
the eurozone, Greece". The
distinguished panellists of the previous session have debated at length and
elaborated on the very significant question of their countries' experiences with
adjustment programmes. The Table below summarises a number of
characteristics of these programmes in the europeriphery (see Table 2).
Table 2 Overview of the Financial Assistance Programmes in Greece,
Ireland, Portugal and Cyprus
Overview of the Financial Assistance Programmes in Greece, Ireland, Portugal and Cyprus
EFSF/ESM
Date of Date of Amount in LoansWeighted Review Average Number of Capital
Country Type of Crisis Type of Exit
approval expiration € (bn) Average Duration governments Controls
maturity
110
(52,9+20,7)+
Sovereign
Greece May 2010 August 2018 172,6 30,2 6,7 5 From June 2015
Debt/Competitiveness
(141,8+11,6)
+86(40,2)
"Clean" (Post-programme
Banking/Real Estate
Ireland December 2010 December 2013 67,5 20,8 3,0 2 No surveillance without
Bubble
precautionary credit line)
"Clean" (Post-programme
Sovereign 78
Portugal May 2011 June 2014 20,8 3,4 2 No surveillance without
Debt/Competitiveness (50,3+26,5)
precautionary credit line)
From April "Clean" (Post-programme
Cyprus Banking April 2013 March 2016 10 (6,3+1) 14,9 4,9 1 2013 to April surveillance without
2015 precautionary credit line)
Source: Bank of Greece.
With a naked eye, one can see in the following table that Greece has received
about €240 billion from all three programmes up to now, while the other
countries have received much lower amounts, Ireland €67.5 billion, Portugal
€76.8 billion and Cyprus
€7.3 billion. While it is widely believed that the euro
area crisis started from Greece, incidentally the first sign of crisis within the euro
area appeared in Ireland after Bear Sterns was rescued in March 2008,
whereby Irish sovereign spreads started to diverge noticeably. Nine months
later, in December 2009, there was heightened pressure on GGBs. Greece was
the first country though within the euro area to sign a financial assistance
programme, and unfortunately the last one to exit from such a programme.
Figure 6 Ten-year government bond yields in euro area crisis countries
vis-à-vis German Bund yields (September 2008-December 2014, in
percentage points)
Source: Haver Analytics.
During this period, Greece experienced a dramatic fall in output (more than
25%), the unemployment ratio almost tripled from 9% in 208 to 26% in 2015, a
huge fall in the standards of living and valuations of assets (real and financial)
(around €220 billion in 7
and another mountain of private debt had been built up
years). So, what went wrong in Greece? There are several reasons for this, let
me name just a few: the starting-point argument (a huge deficit that required a
bold adjustment effort); errors in the design of the programme that include the
mix of adjustment measures (a greater reliance on tax increases than public
spending cuts), the value of fiscal multipliers that we show above, etc., the slow
pace of implementation of structural reforms (due to a lack of programme
ownership on behalf of Greek authorities); the fact that Greece is a relatively
closed economy and, hence, internal devaluation may contribute negatively, in
net terms, to economic activity, the fact that debt restructuring in 2012 should
have occurred much sooner, i.e. at the beginning of the first MoU in 2010, a
directionless economic governance in the first half of 2015 and the ensuing
huge cost of the economy's
backtracking, we lost valuable time then, which led
to the imposition of capital controls, a severe distortion upon the economy; the
wrong sequencing of reforms: product market reforms should come first,
followed by labour market reforms, the exact opposite took place in Greece
(Hardouvelis).
On top of the above reasons which are more or less commonly accepted, I
would add a couple of other - rather technical and more subtle - reasons and
this is my contribution to the relevant debate. Firstly, as we know, fiscal
consolidation took place through the targeting of a nominal variable, i.e. the
overall fiscal deficit which is cyclical. Taking permanent austerity measures to
reduce the cyclical deficit only deepens and prolongs a recession, it results in
excessive austerity and overtaxation which is self-defeating (it raises less
government revenues). Instead, the structural deficit should be the appropriate
target variable, and the cyclical deficit would correct itself through the
economy's
automatic fiscal stabilisers, provided that growth-enhancing
measures supplement fiscal consolidation (Mourmouras, FT, 2012). Secondly,
there is a certain misperception in the MoUs about how reforms would work in
the economy. I identify two grey areas here: (i) reforms take time to unlock their
growth potential and their results are also country-specific. A recent study by
the OECD (2014) indicates that the above time period may extend to five years
or more; (ii) structural reforms work better and quicker when there is investment
to capitalise on them and, more generally, demand in the economy because the
more the recession lingers on, the harder it is to achieve positive results by
implementing structural reforms. Such a demand element can be incorporated
into an adjustment programme in monetary unions through the adoption of a
broader concept of conditionality, namely that of investment conditionality, along
with fiscal and structural conditionalities (Mourmouras, WSJ, 2012).
These are important lessons to be drawn from the Greek experience, and
hopefully this will be taken into account in the design and implementation of
future adjustment programmes in monetary unions.
Truly, in the last year or so, we have witnessed a revival of the Greek economy
through the stabilisation of expectations and the gradual restoration of
confidence. Looking forward now, we all agree that given the prolonged fiscal
consolidation and private disinvestment that took place (2007: investment was
27% of GDP, today it is 11% of GDP, the lowest level since 1960), the country
needs an investment shock. Reviving domestic and foreign investment is crucial
to supporting the economic recovery. That is why it is important for the
government to speed up the privatisation agenda, not so much as a revenue
exercise, but as a great opportunity to attract FDI in key sectors of the
economy, such as transport, energy, logistics and tourism.
In this respect, let me come back to an old proposal of mine, as my fifth
proposal today, made back in the summer of 2014, before joining the Central
-
The Double Crisis Volume
Bank (see Mourmouras, 2, Chapter 18: first of all,
we should all agree on the limits of overtaxation. For instance, with regard to
corporate taxation in Greece, 29% corporate tax (plus a 10% tax on dividends),
tax competition from other countries is very intense, e.g. from the Iberian
peninsula with an average tax rate of 20% (Spain and Portugal), the Baltic
countries with an average tax rate of 15% (Lithuania, Latvia, Estonia) and the
Balkans with an average of 10% (Turkey 20%, Romania 20%, Albania 15%,
Cyprus 12.5%, Bulgaria 10% and FYROM 10%). Hence, there is a strong case
to be made in Greece in favour of a drastic gradual reduction of corporate tax
rates starting in 2020, but to be announced fairly soon, ultimately reaching a flat
tax rate of 15% and remain locked at the same level for another five years. The
drastic reduction in corporate tax rates and the commitment to leave them
unchanged for a period of five years will be the best signal to Greek and foreign
investors that the Greek authorities are now seeking to change the country's
growth paradigm and move towards a dynamic economy based on private
investment and exports.
This drop in taxes could be financed by the fiscal space achieved through a
decrease in primary surpluses, say, to 2.5% from 2020 onwards, bringing
effectively forward a year or two the agreed-with-our-lenders lower primary
surpluses, or from a persistent overshooting of agreed surplus targets of 3.5%
of GDP until 2022.
Much to my delight, the above proposal that links lower corporate taxes to lower
primary surpluses has been adopted by the Bank of Greece in May 2016 and by
the main opposition leader at DETH in Thessaloniki in September 2016.
C. The role of the ECB in countries under adjustment programmes
As the euro area crisis was triggered by either a weak fiscal position in some
it led to the "negative feedback loop"
cases or a weak banking system in others,
between banks and sovereigns, which the ECB emerged as the institution best
equipped to tackle. It has used all the appropriate instruments at its disposal in
order to ensure its primary priorities: price and financial stability across the euro
area.
C.1 The role of the ECB on price stability
1. Reducing base rates
First of all, and since the emerging of the financial crisis in 2008, the ECB has
reduced its main refinancing rate from 4.25% to 0%, the largest cut ever
decided over such a short period in Europe, and also brought the interest rate
paid on banks' deposits
of excess reserves with the Eurosystem to negative
territory, -0.40% today.
2. SMP programme
Furthermore, as sovereign bond markets in some euro area jurisdictions were
becoming increasingly dysfunctional, in May 2010 the ECB approved the
Securities Market Programme (SMP) worth €210 billion.
Its main effect was to
cut refinancing costs for countries whose bonds were sold at unsustainable
interest rates on international markets, leaving at the same time the money
supply unchanged through sterilisation.
3. LTROs and TLTROs
In December 2011, the ECB revived the longer-term refinancing instrument
making the central bank liquidity available to banks for up to three years at a
fixed annual interest rate of about 1%. The total allotted amount to the euro
area banks was €1 trillion.
In 2014, the ECB announced two more series of
targeted long-term refinancing operations with a maturity of up to four years with
practically zero interest rate, amounting to more than €700 billion, affecting
directly borrowing conditions of enterprises in the euro area.
4. Outright Monet