Developing Growth Potential for the Greek Economy

Abstract

The initial Greek adjustment programs failed because they provided too much “stick” and hardly any “carrot” to the Greek people. Sticks included public expenditure, salary, and pension cuts, coupled with layoffs and higher tax revenues. The programs sought to improve competitiveness through internal deflation, minimum-wage reductions, easier layoffs, and weaker bargaining. Product market measures focused on opening up professions, which caused costly confrontation. The “carrots” of ease of running a business, investor protection, judicial efficiency, linking research to innovation, promotion of universities as an investment in human capital and a potential export, and the prospect of higher wages linked to quality were never presented to the Greek people. Yet, the key problem is that the country lacks a broad productive base that could allow export-led growth and import substitution. Greece is not the laggard to be removed from the Eurozone but a country with huge margins to be exploited.