What can Greece do to get its economy on track?

Greece’s prime minister, Alexis Tsipras, who led his leftwing Syriza party to victory in last Sunday’s snap poll, faces formidable short-term and long-term challenges in reversing an economic decline that began in 2008. By year-end, Greece needs to demonstrate to an international review committee that it has the requisite political stability to continue receiving aid money. Greece in July struck a deal with creditors to enact budget cuts and economic reforms in exchange for aid of 86 billion euros ($97 billion) from eurozone members. The longer-term challenges include not just policy fixes, but also cultural shifts, such as tax compliance.

In the long run, Greece needs to recapitalize its banks, which have been hurting from large withdrawals (about 40 billion euros, or $45 billion, since last December). Up to 25 billion euros in the aid package is allocated for bank recapitalization. In addition to implementing tough and painful austerity measures, it also needs to boost exports, revive job growth, lift capital controls, fix its taxation system and attract foreign investments. Experts from Wharton and elsewhere say that the top priority is to revive economic growth, and that Tsipras faces an uphill battle on several fronts.

According to Mauro Guillen, Wharton professor of management and director of the Lauder Institute, economic growth is what Greece needs most. “The biggest question is to what extent can Greece revive itself soon enough so that it can continue servicing its debt and reduce unemployment, so that the austerity measures are not a big burden on the people,” he said. Between 2008 and 2014, the Greek economy contracted more than 25% and employment fell by a fifth, according to research firm Trading Economics. Its economy has showed some minimal growth in the past five quarters, but that is a far cry from its peak growth rate of 7.5% in the fourth quarter of 2003.
The three most immediate issues Tsipras must address are recapitalization of banks, evaluation of the new program agreed to with the EU and lifting capital controls, according to Stavros Panageas, finance professor at the University of Chicago Booth School of Business. Attracting foreign direct investments that will create jobs, and securing economic support for the refugee crisis also demand attention, said Evi Pappa, macroeconomics professor at the European University Institute in Florence, Italy.

“What absolutely needs to happen in the next two years is that the Greek economy starts to grow again.” – Mauro Guillen

“Running the country” should be the top priority for Tsipras Twitter , according to Michael Jacobides, professor of strategy, entrepreneurship and innovation at London Business School. “It hasn’t been run in the last seven months.” Tsipras must also implement the EU agreement with respect to fiscal adjustments that are based on extra taxes, he said. However, he saw that as problematic. “Changing how the system works will be political anathema to the government.”

Political Capital

Tsipras has won the mandate for the reforms he needs to implement, and that is a big plus, said Guillen. The difference between now and the situation in January 2015 when Tsipras was first elected is “there is no gap between his promises and what he has to do,” he noted.

Back in January, Tsipras promised a different set of economic policies. Syriza then opposed the austerity program that came as strings attached with an economic bailout by the troika of the European Commission, the International Monetary Fund and the European Central Bank. In subsequent months leading up to last week’s elections, Tsipras had to “un-fulfill his promises” and agreed to implement the agreement with the European Union, said Guillen.

Panageas read the political success of Tsipras differently. “It seems the Greeks weren’t voting for policy change; they were voting for a change in the political class,” he said. “They saw [Tsipras] as embodying that. I’m skeptical if that is a true change that people are hoping for — changes in the practices of corruption and cronyism.” At the same time, he saw Tsipras as unassailable in the political arena, at least for the next six months. “Those who challenge him in the foreseeable future will see their political death,” he added.

One big source of instability for Tsipras is the fact that he does not enjoy a majority. “You have stability when one party has more than half of the seats,” said Guillen. “A coalition is always less stable.” Syriza on Sunday won 35.5% of the popular vote and 145 of the 300 sets in the Hellenic Parliament, four seats less than its tally in January. Syriza has renewed its coalition agreement with the right-wing Independent Greeks party that won 10 seats, taking the partnership’s strength to 155 seats, giving it a slender majority in Parliament of four seats.

“Changing how the system works will be political anathema to the government.”– Michael Jacobides

‘Florida of Europe’

Pappa was optimistic for Greece. “The elections could be seen as a result that would bring political stability,” she said. She did not think Tsipras would trip again and cause another election any time soon. With the momentum he now has, Tsipras should focus on attracting FDI, because that will bring jobs, she continued. Those investments could go into tourism in the short run, and later on into energy sources like solar power, she added. “We could make Greece a Florida of Europe and attract investments like retirement homes, etc.” That would create many jobs across the skills spectrum, including for doctors and nurses, she said.

Another potential source of instability is the agreement with the EU itself, said Guillen. “A lot of people are going to be suffering [because of the austerity measures] and they may rebel,” he noted. “Austerity measures are always very difficult to implement. I am not sure it will produce stability. The only improvement is now … Tsipras has a popular mandate to implement the agreement with the EU.” Austerity measures would mean pension cuts, higher taxes and cutbacks in social programs and allowances, among others.

‘Horrific Textbook’ on Entrepreneurship

Jacobides pointed out that Greece has more to offer the rest of the world. “We have more than land, sand and sea,” he said. Priority areas that a study by consulting firm McKinsey identified some years ago have not received the necessary investments, from both foreign and domestic investors, he noted.

“We could make Greece a Florida of Europe and attract investments like retirement homes, etc.” – Evi Pappa

“A lot of emphasis is on the redistribution of wealth as opposed to creation of wealth,” said Jacobides. “We have created a structure that is so inefficient in terms of red tape. Greece reads like a horrific textbook on how not to create an environment for entrepreneurship.” He said it makes room for mom-and-pop entities that can evade taxes, and for business activity that creates non-tradable products.

But Jacobides saw hope. “We can change it,” he said. “The public sector has to stop feeling that it is the ruler; they have to see themselves as the service provider for the citizens or the business. [However,] this is not likely to happen because of the coalition of left-wing and right-wing [parties].”

Critics of Greece do not fail to point out that the country suffers from a deeply entrenched culture of corruption, cronyism and tax evasion. “Long-term problems are not very easy to change immediately; we are talking about habits developed over a very long time,” said Guillen. “People don’t like to pay their taxes anywhere in the world. But in Greece, the government doesn’t have the mechanisms to enforce tax regulations.

“What absolutely needs to happen in the next two years is that the Greek economy starts to grow again,” Guillen continued. “If it doesn’t show signs of revival, we are back to square one. People will rebel, and this government will fail.” Much of that depends on international developments, he noted. For example, low oil prices help the Greek economy, which has to import most of its energy needs.

Greece must also export more, and the only way that could happen is if more people go back to work and productivity increases, said Guillen. The refugee crisis could also put pressure on the country, and that could cause its coalition partners to withdraw support, he added. “Hopefully none of those reasons will materialize and the Greek economy will start to grow again,” said Guillen. “The economic crisis is seven years old, and [the Greek] people will say they cannot go on like this for ever.”

“I’m skeptical if [Tsipras’s victory] is a true change that people are hoping for — changes in the practices of corruption and cronyism.” –Stavros Panageas

Strong Tailwinds

Panageas was also optimistic. For one, many political risks Greece faced are now behind it, he said. He also saw opportunity for Greece to attract investments. “We live in an investment environment internationally where any country that can promise the level of yields that the Greek stock markets or the Greek bonds can promise within the euro is a very rare find,” he said.

“There would be very good tailwinds if the country were to get rid of the huge amount of political uncertainty,” said Panageas. Positive signals would include the recapitalization of Greece’s banks, a lifting of capital controls and a resumption of governance. “If you build it, [investments] will come – a stable business environment, a stable tax system and confidence that everything is going to be business as usual.”

This article is published in collaboration with Wharton. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Mauro Guillen is Professor at the University of Pennsylvania. Stavros Panageas is a finance professor at the University of Chicago Booth School of Business. Michael Jacobides is a professor of strategy, entrepreneurship and innovation at London Business School.

Image: A man walks by the headquarters of the Bank of Greece. REUTERS/Yannis Behrakis.