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27 February 2014

Governor Provopoulos on Bank of Greece's 2013 annual report: "Indications are that 2013 was the last year of recession"


Provopoulos cautioned that if this forecast was to become a reality, not only must the conditions contributing to the improved outlook remain unchanged, but they must also be taken further.

The prerequisites for this to happen are: 

  • Resolve and consistency in implementing the stabilisation programme. The positive outcomes so far leave no room for complacency. On the contrary, they call for a continuation of fiscal adjustment for maintaining a sustainable and increasing primary surplus so as to ensure debt sustainability and consolidate the climate of confidence. 
  • Elimination or at least minimisation of the risks and uncertainties that might be triggered by a deterioration in the social and political climate, as a result of growing confrontation in the run-up to the European and local government elections.

Today, as we are near the end of a protracted recession, a comprehensive national policy that will lead us safely out of the crisis and onto a path of sustainable growth is required. To be effective, such a policy requires consensus building and compromise. Both, however, are difficult to achieve in a polarised climate, which acts only to amplify differences and thwarts the convergence of views. 

A prerequisite for growth is the continuation of fiscal adjustment. In this regard, top priority must be given to: 

  • ensuring consistency in the execution of the 2014 Budget, thereby providing a strong signal that the fiscal adjustment is sustainable; 
  • markedly upgrading the tax administration and the tax collection mechanism; 
  • speeding up the resolution of tax cases pending before the courts; 
  • cutting red-tape and the administrative burden on the private sector; 
  • enhancing the quality of public services; 
  • evaluating the performance of public services and civil servants according to transparent and objective criteria; and 
  • further strengthening the institutional framework for budget preparation, execution and monitoring.

Policy to speed up the restructuring of the economy and move quickly to sustainable growth

The main objective of policy today is the strengthening of the productive capacity of the economy so that the emerging recovery can be the start of sustainable growth in the years ahead. The economy is in a process of transition from a growth model that has exhausted its limits to a new model, capable of ensuring robust, sustainable growth in the future. As the Bank of Greece has repeatedly stressed, this new growth model must be based on a shift: 

  • from production of non-tradables to production of tradables; 
  • from consumption to savings and investment.

Admittedly, while the old growth model was discredited suddenly and violently, the new model has yet to emerge clearly into sight. Transformation is, by its very nature, slow and painful, as it entails a shift of capital and human resources across sectors and activities. It presupposes the emergence of new poles of attraction for capital, innovative investment and cutting-edge entrepreneurship. It can be facilitated by a reorientation of the banking system and policies to enhance labour mobility. The restructuring of the economy towards tradables production has already begun, but remains weak, against the backdrop of recession and heightened uncertainty. Restructuring can, however, be accelerated if economic policy assigns top priority to generating the necessary conditions conducive to the desired transformation. 

Such a policy objective requires:

  • Well-functioning markets for products, labour and capital. 
  • A business environment in line with best international practices, with a low administrative burden for businesses, an efficient public sector and a stable and favourable tax framework. 
  • A steady commitment to reducing the tax burden, especially on businesses. Declining taxation would both increase the incentive to invest and make more funds available for investment. 
  • Accelerated implementation of the privatisation programme and strengthening of the legal framework for investor protection to attract foreign investment. 
  • A shift on the part of companies to market-based financing. 
  • The productive use of programmes for the co-financing of loans and guarantees with resources from EU Structural Funds and the European Investment Bank. 
  • The active role of the banking system in the restructuring of businesses and sectors, with specific actions to support truly viable businesses and to encourage initiatives that promote bold sectoral restructuring. By adopting such a stance, banks could speed up the transition to the new growth model that Greece so urgently needs. 

More reforms now in order to turn stabilisation into dynamic growth

The Greek economy, after years of complacency, during which the twin deficits and debts rose to unsustainable levels, ultimately culminating in a crisis of unprecedented scale and depth, is now stabilising. The country has come a long way in terms of adjustment. However, the effort has not yet been completed. Now that we have succeeded in overturning the twin deficits into twin surpluses -- a primary fiscal surplus and an external surplus -- we must focus our attention on structural reforms and speed up their pace. It is in this area that our actions have not been broad and deep enough to ensure that structural changes can steadily feed through into sustainable growth. Regrettably, attempts at structural reform so far have been timid, characterised by wavering and delays. We all know of reforms that have been announced repeatedly over the past four years and yet have still not been implemented. If we want to move forward, we have to overcome these weaknesses. The anticipated recovery will prove hesitant and fragile, undermining the country’s growth prospects, if we fail to implement reforms, aimed to ensure: 

  • a fundamental reorganisation of the state; 
  • modernisation of the institutions of education, health care and justice; 
  • the creation of competitive markets, including the opening-up of closed professions; and 
  • the design of a stable tax system, friendly to entrepreneurship and labour, but strict with tax evaders.

Only through such reforms can an environment conducive to sustained and healthy growth, as well as to economic and social progress, be created. 

Full speech



© Bank of Greece


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