How to put the Greek economy on the path of recovery

The flags of the European Union and Greece flutter at the Greece consulate in New York June 30, 2015.
Image by: REUTERS/Eduardo Munoz / REUTERS

No matter the solution found for Greece's debt crisis, fixing problems in Greek tax structures, foreign investment flows and export activity must take place for the economy to start growing aga

Athens had been able to balance its finances with austerity policies imposed by creditors as part of its bailout programme, but economists say the Greek economy remains plagued with structural weaknesses and disparities.

Sustainable growth will only happen once those problems are corrected in priority areas after the current crisis abates.

Defuse pension bomb

According to Olivier Passet, director of economic analysis at Xerfi, resolving Greece's pension "time bomb... is priority number one."

"If nothing is done, the pension system may be running a deficit of seven to eight percent of GDP by 2030. Greece can't avoid this reform," Passet says of the huge demographic shift into retirement that most developed countries are also facing.

Batle tax evasion

To balance its finances, Greece must also muscle up its tax services.

"There are clearly tax collection insufficiencies, and problems of tax evasion. Athens is going to have to find solutions," says Xavier Timbeau, research director at the French Economic Observatory in Paris.

In 2012 Nikos Lekkas, director of Greece's tax auditing service, estimated the income lost to evasion at 40 to 45 billion euros ($44 to $50 billion) annually, representing 12 to 15 percent of Greek gross domestic product (GDP).

"There's an undeniable governance problem (with) established cases of cronyism and corruption" that the Greek government must put an end to, Timbeau notes.

Attract foreign investors

Restoration of growth will also depend on Greece attracting a larger influx of foreign investment. To encourage that Athens must simplify its suffocating administrative regime.

Experts say more transparency, reliability and accountability in rules pertaining to business investment would go far towards luring greater volumes of investments "in future sectors like greenfield", says Passet, as foreigners feel more secure putting down job-creating roots in the country.

"Without stability you cannot attract capital," Timbeau says.

DIVERSIFY THE ECONOMY

According to Gabriel Colletis, a University of Toulouse professor close to the ruling Syriza party, Greece's main problem is the under-development of higher value economic activity -- one consequence of an insufficiently diversified economy.

Greece does boast some competitive economic sectors, including tourism, agriculture and port operations. But many companies within those activities went bankrupt during Greece's brutal recession. Meantime, the country has struggled to generate added value from its stronger sectors, especially tourism, due to their middle-market positioning.

Passet argues economic recovery will require Greece to identify and develop activity in certain key sectors.

"The country has numerous assets, notably in the energy sector with wind and solar resources. It could meet around 70 percent of its power demands with renewable sources," Passat says.

Boost exports

Last year Greece's trade balance was -20.5 billion euros. The deficit was largely due to energy imports, but also the fact Greek companies have had difficulty holding their own in international markets.

"It's a country that exports little and poorly," says Charles Wyplosz, professor of International Economics at the Graduate Institute of International and Development Studies in Geneva.

Better trade promotion and helping Greek companies get onto foreign markets could correct that.

"Everywhere in Europe you find Italian and Spanish olive oil, but not Greek," adds Passet. Greek companies "lack today the capital and sales networks."

Battle the  brain drain

The crisis has seen Greece's unemployment rate more than double to 26.9 percent of the workforce. The figure is over 50 percent among under-25 year olds, who are more likely to exercise their rights to move to other EU countries to find work.

"The country has sunk into poverty. It is a social problem, and an economic one," says Timbeau, who recommends proactive measures to boost employment.

While emigration helps relieve social pressure from mass unemployment in the short term, it harms a country in the long term as it loses valuable skills.

"The educated are taking refuge in public service or leaving the country," says Passet. "This human capital needs to be shifted to productive sectors.
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