Emerging Hope in Greece

The Greek economy continues to shrink. With the wider European debt crisis and slump hampering Greek recovery, the recession may persist through 2013.   Amid the grim news, however, there is a small sign that austerity measures are starting to work.

This evidence is not widely known or reported.  I heard about it from Nick Kounis, head of macro research at ABN Amro.

He pointed out, at a Capital Link Forum in New York last week, that Greek exports are growing, albeit from a low level. In the past couple of quarters Greek export growth rates outpaced German export growth. The reason, Mr. Kounis said, is that Greek wages declined while German wages increased. This improved Greek competitiveness.

If strong export growth continues, international trade will make up for the fall in domestic consumption as the industrial structure shifts to selling more to the rest of the world. By 2013 greater exports could bring back growth, Mr. Kounis says.

Of course if Greece still had its own currency, lower exchange rates for the drachma could have achieved the same result. That would have been less painful and certainly less politically disruptive. Given the fact that the country remains in the euro zone, wages and prices are the forces restoring competitiveness. Export growth indicates that the market process is working despite ongoing domestic turmoil and wider European crisis.

Meanwhile, the government’s spending and deficit continue to shrink, though the deficit reduction target has not been met. Another fundamental change is the reform of state-owned enterprises, from port operators and railroads to a gaming business. These have been in the red for years.

George Kyriakos, Special Secretary for Public Enterprises and Entities, says government enterprises were over-staffed and personnel costs were higher than revenues. The first step toward reducing costs was to appoint external auditors. Certain enterprises are being merged and some of the assets are to be privatized.

Having watched the US experience with mortgage financers Fannie Mae and Freddie Mac, I have come to realize that not all privatization is real. Fannie and Freddie in effect retained the backing of the federal government and came right back to the taxpayer for support once losses piled up. Clearly, successful privatization is not just a matter of selling a public asset but requires a change in how it is managed and a commitment on the part of the government to letting it be.

In the Greek case, the danger is that the pressure to add personnel – a source of political patronage – will continue to bloat costs. The process Mr. Kyriakos described has a chance of working. The assets to be sold include game and cell phone licenses but the big items are real estate and infrastructure such as water supply and energy operations, which could attract foreign capital.

Real estate can be developed for myriad purposes – the legal changes to allow this are still in the works – that make it reasonably independent from the government. So the sale of real estate may break it free from political influence, though it sounds like local governments are already angling to get a piece of the pie.

Legal hurdles remain but new laws allow more flexibility, for instance in labor contracts, according to Anthony Papadimitriou, a lawyer who spoke at the same conference.

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