Excerpt
Table of Contents
Introduction – The sovereign debt crisis in Greece, the bailout programmes and structural reforms
Foreign Direct Investment – A driver for economic stability, growth and jobs
The Greek paradox – profound structural reforms and more budget discipline but less FDI
Political and economic reasons for regressive FDI in Greece
Political and economic implications for the future of Greece
Bibliography
Introduction – The sovereign debt crisis in Greece, the bailout programmes and structural reforms
After having experienced a mere economic boom at the beginning of the 2000s subsequent to the admission to the Eurozone, which had been however mainly driven by low interests on financial loans to the private and the public sector, Greece became de facto insolvent in 2010.[1] In the aftermath of a global financial, banking and economic crisis, the country’s public finances became problematic to an extent at which private investors were only willing to lend money to Greece at interest rates which it could no longer afford to pay.[2] In 2009, the budget deficit amounted to -15,6% in comparison to the country’s Gross Domestic Product (GDP), and to -10,7% in 2010.[3] Its absolute debt grew from 263 billion Euros in 2008 to 329 billion Euros in 2010.[4] Greece’s government debt/GDP ratio (an important indicator for the sustainability of the public debt[5] ) soared in just two years from around 113% in 2008 to almost 150% in 2010.[6]
An official bankruptcy could only be prevented by a financial rescue programme granted by the other Eurozone members and the International Monetary Fund in May 2010, giving bilateral credits summing up to 110 billion Euros in order to service existing debt.[7] After that, two more massive bailout programmes were necessary in 2011 and 2015 to avoid a default of the Greek state.[8]
These bailout programmes were granted on the condition of a “cash for reform approach”.[9] This is to say that the public creditors were ready to give credits to the Greek government only if the latter was willing and capable to implement profound structural reforms on numerous levels.[10] Those should especially tackle its macroeconomic imbalances, the low competitivity of its labour market as well as its budget deficit and public debt.[11]
Another objective was to create economic growth and new jobs in the country afflicted by high unemployment rates for decades, especially among young people.[12] The theoretical base for this was the assumption that structural reforms would create confidence among domestic and foreign investors whose investments then could in turn boost growth.[13] Indeed, many economists stated that Greece could only sustainably overcome its economic and public debt crisis if the country was to become more attractive for Foreign Direct Investment (FDI).[14]
Foreign Direct Investment – A driver for economic stability, growth and jobs
Foreign Direct Investment can be defined as “the category of international investment that reflects the objective of a resident entity in one economy obtaining a lasting interest in an enterprise resident in another economy”.[15] In other words, a foreign investor makes an investment in another country’s economy with a long-term perspective. Thanks to the combination of an increased economic activity induced from abroad and the long-term perspective of the investments, the host country itself benefits, in theory, via more economic growth and jobs.[16]
There is numerous empirical research – yet not uncontested[17] – confirming this theoretical assumption. One example is the evolution of the new member states of the European Union (EU) in Central and Eastern Europe, where FDI contributed considerably to their economic rise after the end of the Cold War.[18] However, these FDI started only flowing into the countries after the latter had implemented severe structural reforms and stabilised their economic and fiscal situation.[19]
This is a clear indication that FDI require a stable and reliable economic and political environment.[20] In other words, attracting FDI is a matter of confidence in the future development of a country. However, given the situation in Greece from 2010 on, conditions to attract FDI have been everything but favourable in this country. On the other hand, considering the implementation of profound structural reforms this should have actually changed for the better.
The Greek paradox – profound structural reforms and more budget discipline but less FDI
In the context of the first bailout programme, Greece has begun a profound reform process. The Greek government expenditure diminished from almost 125 billion Euros in 2009 to a bit more than 97 billion Euros in 2015.[21]
Going along was the reduction of the government deficit from a record high of 36 billion Euros in 2009 (15,6% of the GDP) to 13 billion Euros in 2015 (7,5% of the GDP).[22] Greece’s general government debt went from an all-time high of in total 355 billion Euros in 2011 down to 311 billion Euros four years later.[23]
Spending has been especially cut in the pension system by up to 50%.[24] Health expenditures dropped by almost one third between 2009 and 2013.[25] Furthermore, Greece reduced the number of its civil servants by 100,000 (almost 20%) and government wage expenditures per year fell by almost one third in the same period of time.[26]
Greece also tried to augment its revenues. The value-added tax was gradually increased from 19% to 24% and many exemptions were abolished.[27] Duties on consumption goods and services as well as on property were hiked.[28] Furthermore, corporate taxes haven been elevated, which is yet considered to have had a negative effect on the economic environment in Greece.[29]
Another major measure of the reform process was the attempt to increase the country’s competitiveness, especially on the labour market. The average monthly salary diminished from more than 1400 Euros in 2010 to around 1100 Euros in 2016.[30] The minimum wage fell by more than 10% between 2008 and 2017.[31] Hourly labour costs dropped from almost 17 Euros in 2008 to 14,5 Euros in 2015.[32] Going along with that were plummeting unit labour costs (which are an important indicator for international competitiveness[33] ), lowering by around 15% in the period between 2010 and 2016.[34] In addition to that, the restricted Greek labour market was opened, more competition was introduced and laws protecting against dismissal were loosened to promote the creation of new jobs.[35]
In combination with other factors, this lead to a considerable improvement on the World Bank’s ‘Ease of doing business ranking’ from number 109 (of 183) – then between Lebanon and Guatemala – to number 61 in the 2017 report.[36] Hence, the overall business climate had highly enhanced in a very short period of time.
Yet, despite all the efforts improvements made, the figures concerning FDI in Greece have not ameliorated. The FDI inflows, took a nosedive in 2010 (two billion US Dollars less than the year before) and in 2015 they were even negative – in sharp contrast to the global and European trend.[37]
Even lass satisfactory has been the evolution of the FDI stock[38]. From more than 40 billion US Dollars in 2009 it has shrunken gradually but dramatically to only circa 17 billion US Dollars in 2015.[39] Furthermore, both the number and the value of announced greenfield FDI projects with Greece as destination has been regressive.[40]
In other words, expectations that a combination of fiscal discipline, structural reforms and a better competitiveness would increase FDI in Greece have not been met. Therefore, the question arises what are the reasons for this erroneous trend.
Political and economic reasons for regressive FDI in Greece
One major obstacle for investors is both economic and political insecurity.[41] Even though Greece has considerably reduced its total debt and budget deficit, the ratio of its sovereign debt in comparison to its GDP has actually worsened.[42] This means that the debt burden of the Greek state is less bearable than before the implementation of the reform programme. Some experts even call it “unsustainable” and call for a debt reduction granted by public creditors.[43] This however lets doubts rise again whether Greece will actually stay in the Eurozone (with politicians from other Euro states claiming for a ‘Grexit’ stirring up this debate) and whether a Greek state default is still pending.[44] In other words, if an investor made an investment now, no one could predict if the host country will still be part of the Eurozone or even the EU in the near future.
Another aspect is that considering the current situation in Greece as well as measures taken in the past, new cuts in public expenses and new tax hikes (also for corporations) obviously cannot be excluded. Therefore, foreign companies cannot be sure if their business activities will be taxed higher or regulated differently than originally expected. Yet, a stable and predictable regulatory framework are key factors to attract foreign investors.[45]
Thirdly, despite improvements in the regulatory framework, business in Greece is still being hindered by overly complex regulations, too much bureaucracy and too little transparency which in turn prevents foreign companies from investing in Greece.[46]
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[1] H. Gibson, S. Hall & G. Tavlas, “The Greek financial crisis: growing imbalances and sovereign spreads”, Athens, Bank of Greece, 2011, p. 7.
[2] Ibid., pp. 9-10.
[3] Hellenic Statistical Authority, “Fiscal data for the years 2008‐2011”, Athens, 2012, p. 2 & Hellenic Statistical Authority, “Fiscal data for the years 2012‐2015”, Athens, 2016, p. 2.
[4] Ibid.
[5] Organisation for Economic Co-operation and Development, “General government debt”, unknown date.
[6] Hellenic Statistical Authority, 2012, op. cit. & Hellenic Statistical Authority, 2016, op. cit.
[7] International Monetary Fund, “IMF Survey: Europe and IMF Agree €110 Billion Financing Plan With Greece”, 2 May 2010.
[8] European Stability Mechanism, “Bringing Greece back to growth”, unkown date.
[9] Ibid.
[10] Ibid.
[11] International Monetary Fund, 2010, op. cit.
[12] International Monetary Fund, 2010, op. cit. & European Stability Mechanism, op. cit.
[13] A. Banerji, “Building a Better Union in the Euro Area”, INTERECONOMICS, vol. 50, No. 5, September/October 2015, p. 241 & International Monetary Fund, “Structural reforms and macroeconomic performance: initial considerations for the Fund”, Washington D.C., 2015, p. 10.
[14] A. Doxiadis, “What Greece Needs”, The New York Times, 25 February 2015 & “Greece needs a narrative for investors”, Kathimerini English Edition, 29 November 2015.
[15] International Monetary Fund, “Balance of Payments Manual”, Washington D.C., International Monetary Fund, 2005, p. 86.
[16] L. Colen, M. Maertens & J. Swinnen, “Foreign Direct Investment as an engine for economic growth and human development: a review of the arguments and empirical evidence”, Leuven, Leuven Centre for Global Governance Studies, 2008, p. 1.
[17] Ibid., p. 16.
[18] G. Popescu, “FDI and Economic Growth in Central and Eastern Europe”, Multidisciplinary Digital Publishing Institute, 17 November 2014, pp. 8153-8154 & J. Roaf et al., “25 Years of Transition Post-Communist Europe and the IMF”, Washington D.C., International Monetary Fund, 2014, pp. 27-28.
[19] Popescu, op. cit., pp. 8151-8152 & Roaf et al., op. cit.
[20] Organisation for Economic Co-operation and Development, “Checklist for Foreign Direct Investment Incentive Policies”, Paris, 2003, pp. 7, 12-13.
[21] Hellenic Statistical Authority, 2012 op. cit. & Hellenic Statistical Authority, 2016, op. cit.
[22] Ibid.
[23] Ibid.
[24] A. Nardelli, “Unsustainable futures? The Greek pensions dilemma explained”, The Guardian, 15 June 2015.
[25] P. Tinios, “Employment and social developments in Greece”, Brussels, Committee on Employment and Social Affairs of the European Parliament, 2015, p. 78.
[26] P. Georgiadou, “Greece: Reducing the number of public servants – latest developments”, European Foundation for the Improvement of Living and Working Conditions, 23 June 2016.
[27] G. Georgiopoulos, “Greece's VAT tax hike is counterproductive – trade association”, Reuters, 24 May 2016 & Organisation for Economic Co-operation and Development, “Consumption Tax Trends 2014 – Greece”, Paris, Organisation for Economic Co-operation and Development, 2014, p. 2.
[28] “Higher tax burden for Greeks in 2017”, Deutsche Welle, 2 January 2017.
[29] The World Bank, “Doing Business 2017: Equal Opportunity for All”, Washington D.C., 2016, p. 175.
[30] “Greece Average Monthly Salary 2002-2017”, Trading Economics, unknown date.
[31] Eurostat, “Minimum wages, January 2008 and 2017”, 8 February 2017.
[32] Eurostat, “Hourly labour costs ranged from €4.1 to €41.3 across the EU Member States in 2015”, 1 April 2016.
[33] Organisation for Economic Co-operation and Development, “Unit labor costs”, unknown date.
[34] Organisation for Economic Co-operation and Development, “Unit labour costs and labour productivity (employment based), Total economy”, 7 March 2017.
[35] European Commission, “Market Reforms at Work in Italy, Spain, Portugal and Greece”, Brussels, 2014, pp. 11, 35-36 & Z. Lanara-Tzotze, “The impact of anti-crisis measures, and the social and employment situation: Greece”, Brussels, European Economic and Social Committee Workers’ Group, 2014, p. 6.
[36] The World Bank, “Doing Business 2010: Reforming through Difficult Times”, Washington D.C., 2009, p. 4 & The World Bank, 2016, op. cit. pp. 7, 43.
[37] United Nations Conference on Trade and Development, “Annex table 01. FDI inflows, by region and economy, 1990-2015”, 21 June 2016.
[38] An accurate definition of FDI Flows and FDI Stock can be found on the UNCTAD website: http://unctad.org/en/Pages/DIAE/FDI%20Statistics/Sources-and-Definitions.aspx (retrieved 9 March 2017).
[39] United Nations Conference on Trade and Development, “Annex table 03. FDI inward stock, by region and economy, 1990-2015”, 21 June 2016.
[40] United Nations Conference on Trade and Development, “Annex table 19. Value of announced greenfield FDI projects, by destination, 2003-2015”, 21 June 2016 & United Nations Conference on Trade and Development, “Annex table 22. Number of announced greenfield FDI projects, by destination, 2003-2015”, 21 June 2016.
[41] Organisation for Economic Co-operation and Development, 2003, op. cit., p. 7.
[42] Hellenic Statistical Authority, 2016, op. cit.
[43] International Monetary Fund, “2016 Article IV – Consultation – Press release; Staff Report; and Statement by the Executive Director for Greece”, Washington D.C., IMF Country Report No. 17/40, 2017, pp. 26-27.
[44] S. Marks, „Whispers of ‘Grexit’ start again”, Politico, 31 January 2017 & “‘Grexit’ reemerges as IMF and eurozone continue Greek debt squabble”, Euractiv, 9 February 2017.
[45] Organisation for Economic Co-operation and Development, 2003, op. cit., p. 7.
[46] “Greece: Foreign investment”, Santander Trade Portal, 1 February 2017 & Organisation for Economic Co-operation and Development, “OECD Economic Surveys Greece”, Paris, 2016, pp. 70, 75-77.