Jörg Asmussen: Exchange of views on the economic and social crisis in
Greece
Introductory statement by Mr Jörg Asmussen, Member of the Executive Board of the
European Central Bank, to the Committee on Economic and Monetary Affairs of the
European Parliament, Brussels, 27 March 2012.
* * *
Responses to written questions on the economic and social crisis in Greece by several political groups within the
European Parliament can be found on the ECB's website.
Dear Chairwomen,
Honourable Members of the European Parliament,
The organisation of this hearing once again illustrates to what extent the launch of the euro
has brought about economic interconnectedness: in view of the strong implications for the
stability of the euro area as a whole, putting Greece back on its feet is in the very interest of
all of us. Political interconnectedness could also hardly be better demonstrated than today.
Domestic policies have become European - which fully justifies to discuss them at European
level, both in executive and parliamentary fora.
Why the Greek adjustment programme is unavoidable
The Greek economic adjustment and its social implications are painful: there is no doubt
about this. The question, however, is: how did Greece get in such a situation and does it
have any alternative? The major effort of adjustment reflects the severity of the
macroeconomic imbalances that have accumulated over years in Greece. Misguided
economic and fiscal policies, lack of structural reforms: all these policies undermined the
sustainability of public debt and created a very large competitiveness gap. It is not the
adjustment programme which is causing the recent decline in GDP. The current economic
depression is an unavoidable correction of the substantial positive output gap that has built
up until 2009.
Is there any alternative to the current adjustment? We do not help Greece by creating false
expectations. Calls for loosening the fiscal stance are illusory. Greece could hardly face
larger financial constraints than at the moment: it has lost market access and can only draw
on a fixed envelope for official support. There is only one way forward: restoring fiscal
sustainability and competitiveness, which will, in turn, bring back sustained growth. This
requires perseverance: perseverance in carrying out fiscal consolidation; perseverance in
implementing comprehensive structural reforms; and perseverance in addressing the
weaknesses of the Greek banking sector.
The efforts undertaken by the Greek government and the sacrifices the Greek public endured
so far have been substantial. But there is still a long way to go.
It is no secret that the programme is subject to exceptionally high implementation risks. The
debt exchange operation has been successful, official financing has been scaled up. This
has improved debt sustainability prospects: the estimated debt-to-GDP ratio could be
brought to about 1161⁄2% in 2020. But this all depends on one key condition, namely that
Greece fully implements the programme. Debt dynamics are extremely sensitive to
implementation slippages. Delayed fiscal consolidation, lower privatisation proceeds or
slower structural reforms: such scenarios would translate into weaker economic growth and
worsen again debt sustainability. Without a regime-change in policy implementation and a
much broader political consensus in favour of painful, but necessary reforms, there is a high
risk that the programme derails. Therefore, political courage is more needed than ever.
Let me now comment in some more detail on three key areas: fiscal adjustment,
competitiveness gains and financial sector issues.
Fiscal adjustment
The Greek authorities and the Greek people deserve recognition for the significant fiscal
adjustment they have achieved over the last two years: despite the deep recession, the
general government deficit was reduced by around 61⁄2% of GDP since 2009 (from 153⁄4% to
91⁄4%). This broadly corresponds to the deficit reduction that was initially envisaged under the
programme, i.e. before the 2009 deficit outcome was revised upwards (by 2.2% of GDP).
This is a remarkable achievement.
Nevertheless, the size of the government is still too large compared to Greece's capacity to
generate and collect fiscal revenues.
Moreover, the quality of the fiscal adjustment was mixed. On the one hand, important
reforms have started to address Greece's high level of public wages and employment and
the previously unsustainable pension system. On the other hand, fiscal adjustment has so far
excessively relied on an increase in tax rates and across-the-board expenditure cuts.
Looking ahead, further progress in fiscal consolidation requires the implementation of difficult
structural fiscal reforms. Closing the large fiscal gap for 2013-14 (51⁄2% of GDP) will be a
litmus test for the government's commitment to the programme: without the government's
willingness and ability to design and implement the difficult structural fiscal reforms, such a
large adjustment cannot be achieved.
I call on Greece's political class to push through these difficult reforms by confronting vested
interests. Otherwise the critical mass of structural fiscal reforms necessary to close the
medium-term fiscal gap may not be reached.
Finally, how can we make sure that the economic adjustment burden is being fairly
distributed? I know that this is an important concern of the European Parliament. One
essential avenue is the tax administration reform. Progress in this regard has been rather
disappointing so far: in many cases, wealthy Greeks still contribute less than possible to the
overall adjustment effort, partly on account of tax evasion. Strengthening revenue
administration and fighting tax evasion are crucial. Not only are they needed to increase
revenue; they could also improve the social acceptability of the adjustment programme.
Competitiveness
There has been some improvement in competitiveness under the first programme, but it fell
short of what is needed: Greece still faces a substantial competitiveness gap. This largely
reflects delays in the implementation of labour market and other structural reforms. Closing
this gap, while remaining in the euro area, will require a more pronounced internal
devaluation. How can it be achieved? How can we reverse the dramatic increase in
unemployment? Reducing minimum wages in the private sector, removing rigidities in the
wage-setting system: these are key elements of the strategy for accelerating the internal
devaluation. They may not be popular, but there is no way around it if we want to create the
basis for renewed competitiveness and employment growth.
This is not the only area where decisive action is needed. Labour market reforms must be
complemented by a liberalisation of product and services markets, for example in closed
professions. Political willingness is a key ingredient to overcome the resistance of vested
interests in these areas.
Bank recapitalisation
Last but not least, Greece needs to address the situation of its banking sector. As a
consequence of the debt exchange, most Greek banks are heavily undercapitalised. The
programme envisages that banks deemed viable by the Bank of Greece will be recapitalised.
Banks that are unable to raise capital in the market will be recapitalised with programme
resources through the Hellenic Financial Stability Fund (HFSF). In contrast, banks that are
deemed non-viable will be resolved. It is crucial that the €25 billion earmarked for these
purpose as part of the first disbursement be used for the swift injection of capital into Greek
banks (the overall envelope for bank recapitalisation and resolution amounts to €50 billion).
The recapitalisation strategy was designed to maximise private sector participation, while
preserving the State's interests. The banks' shares acquired by the State in the
recapitalisation process will have limited voting rights, but may still allow for upside returns to
be shared between the State and private shareholders. Whenever possible, the private
management of banks will be safeguarded.
The governance structure of the recapitalisation and resolution processes will be significantly
enhanced. This became necessary owing to the very substantial amount of official financing
that will be channelled through the existing Greek institutions, in particular the
Hellenic Financial Stability Fund.
Conclusion
Let me conclude with a message of hope. Yes, the medicine is bitter, but the patient can and
will recover if he follows the prescription. Looking at successful past experiences of fiscal
adjustment in other European countries shows that this is not a lost battle. However, an
absolute prerequisite for the adjustment to succeed is strong political ownership. The Greek
people are not reforming their economy and their state to please the troika; they are not
carrying out sacrifices to please country X or Y in the euro area. They are going through this
adjustment process for their own good. Maximum political ownership should therefore be
expected and is key.