Increasing the Stability and Efficiency ofGreece’s Domestic Economy

Prepared forThe Brussels Group

(European Commission; European Central Bank; International Monetary Fund; European Stability Mechanism; and the Greek Government)

Prepared byTaylor Gilmour

School of Public PolicyPepperdine University

April 2015

Table of Contents

Executive Summary…………………………………………………………….. 2

Introduction……………………………………………………………………... 3

Policy Problem………………………………………………………………….. 7

Regulatory History……………………………………………………………… 8

Policy Goals………………………………………………………………….…. 11

Policy Alternatives………………………………………………………….…… 12

Recommendation and Implementation………………………………………….. 17

Appendices……………………………………………………………………… 20

Bibliography…………………………………………………………………….. 30

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EXECUTIVE SUMMARY

Since Greece ended its oppressive junta in 1974, the Hellenic state became a parliamentary democracy, similar to the structure of Great Britain. The Hellenic Republic has since adopted a public policy model based on a type of efficiency defined as “the allocation of goods that maximizes the social welfare function (the “greatest good” principle).1 This social welfare system, fueled in the 1980’s by the Ministry of Health, Welfare, and Social Security, expanded over time to extend its welfare programs to the Ministry of Labor, with the government even handling pension and health coverage programs.2 The Hellenic government owns so much enterprise in Greece, trying to provide an entire society of public goods, whilst offering 25.7% of its GDP (as of 2011) towards welfare benefits, according to the Organisation for Economic Co-Operation and Development, contributing to its government expenditures aggregating 59.2% of its GDP.3,4 In 2013, Greece’s GDP decreased over 45 billion USD, but it’s unemployment continues to rise at 25.9% as of 2014. Moreover, with a large fiscal investment in welfare programs, Greece is expected to cater to a historic high of its senior citizens, as the 65-and-over population is expected to reach 25% of the total population of eleven million people.

This growing problem of debt, caused by a socialist welfare policy approach, puts Greece in a tumultuous position with, not only its own social and economic stability, but also its position as a member in the Euroarea of the European Union. For the past five years, the Central Bank and a few economically stable Eurozone countries, specifically Germany, have bought bonds from Greece and offered financial aid as an economic bailout. Despite signing the Memorandum of Understanding to implement austerity programs to reduce government spending as a means of stabilizing Greece’s economy, these efforts have not succeeded in helping to lower Hellenic debt and have instead been blamed of Greece for rising unemployment and further economic instability. In the most recent parliament elections, Greek voted overwhelmingly for the Syriza Unionist Socialist Front (SYRIZA) Prime Minister candidate, Alexis Tsipras, to secure a Parliament majority for the coalition of the radical left.

The implications of this political and financial transition concerning the condition of Greece’s economy are vast. In the context of the recent political landscape, Greece must implement a type of public policy that will resolve the failure of its welfare state paradigm and public good market. A major priority of this analysis includes creating a solution that yields the highest probability of implementation and sustainability. Using a 1 Weimer and Vining (133).2 “Greece Social Welfare.” <http://www.photius.com/countries/greece/society/greece_ society_social_welfare.html> Accessed on February 2015.3 Organisation for Economic Co-Operation and Development. “Social Expenditure – Aggregated Data.” <http://stats.oecd.org/Index.aspx?DataSetCode=SOCX_AGG> Accessed on February 2015.4 The World Bank. <http://data.worldbank.org/indicator/NY.GDP.MKTP.CD/countries/GR?display =graph> Accessed on February 2015.

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five-goal plan of: (1) economic efficiency; (2) deregulation and privatization; (3) fiscal equity; (4) preservation of Greece’s membership in the Eurozone; and (5) political feasibility, this analysis will assess the policy alternatives to uncover the best option to restore economic stability in Greece and in Europe.

A comparison of these alternative options will reveal that creating a conservative policy of privatization and deregulation will best help Greece recover from its financial crisis. This solution sufficiently solves this policy problem by fostering new business, which lowers unemployment and stimulates the economy with consumption rather than government spending. By implementing a plan similar to the British model of privatization from the 1980’s, Greece can enjoy the benefits of a flourishing domestic economy, shored up by an operational market that thrives under liberalized and competitive market conditions.

INTRODUCTIONIn 2008, nearly the whole world suffered the consequences of the global financial crisis. Although most nations show some extent of a recovery nearly ten years later, four European nations– Greece, Spain, Ireland, and Portugal – all members of the Eurozone continue to suffer from unstable and unsuccessful economies.5,6 Most plagued by a failing economy, Greece leads the world in the highest debt of all developed countries in the world, boasting a national debt of over 175% of the country’s GDP, according to the most recent Google statistics. The Hellenic Republic’s trade deficit, which surpasses 25 billion USD, serves as another indicator of the state’s market failure. Interestingly, Greece achieved a trade balance in 2014 between service imports and exports, however the amount of goods exported by Greece are nearly half of amount imported. This statistic demonstrates a failure of efficiency in productivity of the Hellenic market supply. According to his research on new trade theory, Panayiotis Athanasoglou argues that, “for economies like Greece that face large trade imbalances, a key question is whether and how export growth can contribute to reducing these imbalances in the medium to long run.”7

Previous studies show that the at-times confusing political landscape and resulting policies offer a sure-fire way to secure the nation’s fatal debt. Nelson (2011; 2013) makes

5 Nelson. (2013). Sovereign Debt in Advanced Economies: Overview and Issues for Congress. Retrieved October 07, 2014, from http://fas.org/sgp/crs/misc/R41838.pdf6 Nelson, R. M., Belkin, P., & Mix, D. E. (2011). Greece’s Debt Crisis: Overview, Policy Responses, and Implications. Congressional Research Service (p. 19). Retrieved from http://fas.org/sgp/crs/row/R41167.pdf7 Athanasoglou, P. P., & Bardaka, I. C. (2010). New trade theory, non-price competitiveness and export performance. Economic Modeling, 27(1), 217–228. Retrieved from http://ac.els-cdn.com/S0264999309001588/1-s2.0-S0264999309001588-main.pdf?_tid=fcef585c-42a9-11e4-8279-00000aacb35d&acdnat=1411426038_8f0ab3ef6033c693835d9b2fbe31b074

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a persuasive argument that the implications of this small developed economy’s debt as far-reaching, significantly impacting the Eurozone, European Union, and the United States, who ultimately affect the global economy in great ways.8,9 With obvious ties to the greater European region, and other invested interests by other governments, policymakers must address this crisis and create policy options that can meet the goals and priorities of as many investors as possible, but with the chief goal of encouraging optimal efficiency in Greece’s domestic market.

Of all of the aspects regarding this market failure, one of the most significant factors influencing the crisis of Greek economy includes the republic’s domestic affairs. The founding state of democracy experienced an odd political past, as it endured all types of form of government in modern history, including the more recent monarch and brief junta. The militant ruling fell in 1974 to inspire the republic to reclaim its former democratic roots, implementing a Britain-styled parliamentary democracy. Despite this government change towards an outwardly “democratic” and “open” society, communist and socialist administrations still makeup the leadership, causing inconsistencies between its domestic and international policies.

Asking the state for an extension of austerity after years of no progress in debt or unemployment rates is the least likely solution in this situation. On the other hand, a policy that uses the market or other private entity to solve this economic catastrophe could be the key in this power struggle between socialist Greece and capitalist Germany. By employing the mutual benefits of conservative policy, like increased competition, varied prices, and stimulated economic activity, Greece could start an incremental process of privatizing its ownership of 75% of national enterprise, while simultaneously loosening business laws to encourage innovation and entrepreneurialism. On the other hand, Germany can feel optimistic that this restructuring of Greece’s historically socialist domestic economy as a sign of new beginnings for the capitalist Eurozone.

“There is no more fundamental question in economics than the economic role that the state – or, less precisely, the government – ought to play in a democratic country with a market economy.”10 With the research presented thus far, it is apparent that through Greece’s “invisible hand” credo, the Hellenic government continues to grow its economic role in everyday affairs. In his book, Government versus Markets, Tanzi offers two assumptions that justify this role of the state, including: (1) “the view that citizens are myopic, and left to their own, they would not, individually or collectively, take the actions needed to protect themselves and their families against economic risks,” and (2) “even if they wanted to do so, various private associations would not have been capable of satisfying the citizens’ needs at the desirable level.”11 This second assumptions ties in with the work of Weimer and Vining in that market failures lack the same efficiency and supply to the public as public goods do. This level of activity, however, proves

8 Nelson (2011).9 Nelson (2013).10 Tanzi, V. (2011). Government versus Markets: The Changing Economic Role of the State. New York: Cambridge University Press. (3).11 Ibid. (13).

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expensive. While voters often forget where the money comes from, basic taxation policy research illustrates the lack of affordability to sustain such public programs. According to Tanzi, budget changes and reforms often lead to fiscal deficits and high public debts in normal times. Moreover, “past policies created a kind of ‘path dependency’ and a one-way street for governments that led toward a higher spending and higher taxes.”12 Yet, even the highest of taxation and government spending can yield competitive efficiency. Tanzi employs the research of economists like Tullock, to contend that, “government programs tend to be less efficient that the private sector’s programs, because those who make the decisions (policymakers) are pressured or have an incentive to promote their personal or their group’s interests.”13 Politically, this policy paradigm makes since when it comes time for elections. Despite what policy results voters see in the big picture of the Republic, public choice theory explains how people will act in their best interest. As George Bernard Shaw said, “A government that takes from Peter to give to Paul can always count on the support of [Paul].”14 With the rise of welfare programs in the 1980’s, Greek civil society progressively changed for the worse, according to Tanzi’s argument. He explains that the welfare state replaces social norms with “market norms,” creating less efficient citizens than otherwise observed in social norm responses.15

A deeper look into this role of the state causes doubt for an economically healthy Greece in the future. This big brother tradition evokes rhetoric of Platonic political theory; citizens are incapable of providing security for themselves, so we must leave the decision-making and productivity to the elites (the state). Tanzi, however, provides us with hope in alternative contemporary roles for the Hellenic state. “As Kenneth Arrow observed four decades ago, ‘It is a mistake to limit collective action to state action.’”16 The significance of the role of civil society cannot be overstated. It is not revolutionary to know of the studies that show that when government power rolls back, private and non-profit industry quickly steps in to fulfill those societal and market needs. This account was observed first hand in central and Eastern Europe after the collapse of the Soviet Union in the 1990’s. Greece, too, can experience the benefits of an active and engaged civil society, which would also foster economic growth and prosperity.

The “less extreme” alternative, Tanzi suggests that the Hellenic Republic could instead adopt a “paternalistic approach” to policymaking. Alternatives to an economically-involved state would encourage more private programs, either through enterprise or volunteering, that would ultimately take care of the same issues the overly-involved government tried to solve. This contemporary role abolishes government programs, reduces public spending, and ultimately lowers taxes.17 The government, according to Tanzi,

“could encourage, or even require, that the citizens buy directly from the private market, but with their own incomes, some of the protection against

12 Ibid. (15).13 Ibid. (18).14 Ibid. (8).15 Ibid. (21).16 Ibid. (19).17 Ibid. (21).

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particular economic risks that they had been getting previously for free or at highly subsidized costs from the government against the payment of higher taxes.”18

For Greece, this kind of state role would need a long-term transition, but essentially, the state “would not change the objectives of its intervention, but it would change the instruments used to achieve those objectives.”19 This logic follows that of Weimer and Vining too, in that a more conservative approach to a policy focuses on the market or other private entity as the instrument to affect the desired change. The market would quickly observe a brighter condition following this sort of implemented change in government power. Tanzi contends, “there is little doubt that, should governments give up their quasi-monopoly power over [certain] sectors, especially in today’s world, private-sector alternatives would quickly appear…”20 Winston supports this claim in his own work, employing various studies to “cast strong doubt on whether federal programs have supported socially beneficial programs that would not have been undertaken without federal assistance.21

In the context of the recent political landscape, Greece must implement a type of public policy that will resolve the failure of its welfare state paradigm and public good market. For many, the first thought regarding overspending and debt breeds ideas of austerity policy and other fiscally conservative policies to offer policymakers as solutions. Yet a major priority of this analysis includes creating a solution that yields the highest probability of implementation and sustainability. Despite the known distaste for austerity programs amongst the people of the Hellenic Republic and its lawmakers, I remain convinced that some sort of conservative approach to this problem could produce significant, positive results and potentially some compromising agreements between Greece and Germany and the rest of the Republic’s investors. Conservative policies focus on implementing market-based solutions or other private industry (-ies) to solve a problem. Since Greece lacks a competitive, operational market and theory suggests that there would not necessarily be a market failure if an operating market did exist, then according to Weimer and Vining, policymakers should “consider deregulation, legalization, privatization, etc.”22 From this rationale, I contend that creating conservative, private policy would achieve the greatest efficiency in Greece’s economy. This sort of policy would help to achieve the goals of economic efficiency, sustainability, and growth by fostering new business, which lowers unemployment and stimulates the economy with consumption rather than government expenditures. More private enterprise would help achieve the goals originally set out by the government in the overextension of its ability boundaries.

THE GREEK DOMESTIC ECONOMY

18 Ibid. (23).19 Ibid. (23).20 Ibid. (25).21 Winston, C. (2006). (54).22 Weimer and Vining (2011). Fig. 9.1. (205).

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According to the latest study, Greece’s economic freedom score is 54.0, declining 1.7 points since last year.23 Regionally, Greece outscores only three countries in the Europe region: Russia, Belarus, and Ukraine. Heritage attributes this decline in freedom scores to increased government spending and decreased business freedom, labor freedom, and fiscal freedom. The index points to three main problems with the Greek economy: (1) weakly enforced property rights; (2) rising tax evasion; and (3) persistent corruption.24 Despite the attempts of previous governments and international leadership from the EU and IMF, the Greek economy continues to suffer from negative growth and high unemployment.

Greece’s public good market, inspired by a thirty-year-old tradition of the welfare policies proves to be an unsustainable and failing paradigm amongst an innovative, competitive, and globalized world. “Government spending consumes more than 50 percent of the domestic economy, crowding out productive investment.”25 These failed public goods cause consumer externalities, high unemployment, entitlement benefits that require high taxation upwards of forty percent in some cases, and a record-breaking and long-standing national debt. Additionally, the tightly regulated business laws in Greece, mixed with the heightened presence of the state, results in an unlikely origination point for innovation and production improvements. Without a competitive market, there is nothing fueling research and development in Greece to improve the current status quo of goods and services. Figure 1 (located in the Appendices) illustrates this market failure in action. The Hellenic government demands an increase in taxes from its citizens to pay for the public good. This negative externality pays for less efficient productivity compared to that of the private sector, creating a welfare loss for the economy. For decades, both taxes and product prices have continued to rise to support this inefficient production level, and today, the Greek state can no longer sustain such an economic model. Aside from sustainability issues, Parliament supports inefficiency in the economy by pursuing this market type. Figure 1 illustrates the higher costs, both individually and socially, for supplying public goods rather than allowing a free market to produce market demands. The “social optimum” in this case, is neither optimal for industries nor individuals in Greece.

This economic catastrophe heavily weighs down the stability of its surrounding nations, as they use the same currency, and continue to buy Greek government bonds to help support the failing economic system. Since 2010, institutions and countries have had to continually bail out Greece from its bankrupt state. Figure 2 shows a graphical representation of the lenders Greece owes, and how much stake various institutions have in this financial crisis. Figure 3 shows further detail of loan distribution, with a breakdown of Greek lenders. Out of its grand total of €323 billion of debt, €246 billion originates from the international bailout funds. Of this total, the chart shows the various Eurozone countries with the most to offer Greece. Germany has issued more than €55

23 Heritage Foundation (2015). 2015 Index of Economic Freedom. Retrieved from <http://www.heritage.org/index/country/greece>.24 Ibid.25 Ibid.

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billion to support Greece, followed by France at €42 billion and Italy at €35 billion, surprisingly, considering the country’s own debt crisis.

The current geopolitical landscape in Europe evokes high tension amongst the regions leaders. Germany has issued ultimatums to Greece regarding next step measurements for Greece’s bailout program, illuminating the fundamental differences in political philosophy between Greece and its Eurozone co-members. At the time of this analysis, it is still unclear what will actually result in this face-off of powers. Although both sides speak candidly of a possible Grexit, that option would be wildly unbeneficial many more than just Greece and Germany. This capstone will address these problems, as they continue to come to light, and employ the political theories discussed in our readings and seminar to analyze this market failure and offer realistic options to achieve the goals I will lay out in the next section.

A BRIEF HISTORY OF REGULATION OF THE DOMESTIC ECONOMY AND POLITICAL LANDSCAPE

EARLY HISTORY

Greece’s stake in the economic puzzle of indebted developed economies is a large one. Many economists and legislatures alike wonder why the nation seems to be in perpetual economic disarray. Greece has a long and repetitive history of sovereign debt and economic struggles since it’s independence from the Ottoman Empire in the late nineteenth century. In fact, it was this long line of defaults and increasing globalization that inspired the International Committee for Greek Debt Management, in 1898.26 Despite this attempt of debt control in both the domestic and foreign spheres, Greece has been unable to escape their latest default. Figure 4 shows the extent of Greece’s debt in relation to its GDP and then in a monetary representation. Sovereign debt has been teeter-tottering around 100% of its GDP since at least the mid 1990’s, translating into € 100 billion and escalating towards 180% of its GDP – or €350 billion - in its debt peak in 2011. While they are a developed and (by definition) a democratic country, unlike their European and American counterparts, Greece is a labor-abundant nation, which only makes up a small percentage of the EU and world market. Finally, much of their government and policy issues have remained unchanged, also contributing to their inability to solve their disastrous economy.

1980-1990: THE RISE OF THE WELFARE STATE AND THE RISE OF DEBT

26 Fox, E (2011). “The History of Greek Sovereign Debt Defaults.” Investopedia. Retrieved from, <http://www.investopedia.com/financial-edge/0911/the-history-of-greek-sovereign-debt-defaults.aspx>.

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Into the new decade following the installment of the new democracy in Greece, and the republic was rapidly transforming into a welfare state. Within the decade, several new ministries were created to prop up this expansion of government programs, thereby supporting and funding the expansion of the public good in Greece. Not surprisingly, as the state grew, so did the number of public employees. This decade marks the era of borrowing, for Greece. To pay for all of their initiative sand benefit programs, such as education, healthcare, the elderly, etc. Greece had to borrow a lot of money from international banks, the IMF, and other countries.

2010: THE FIRST ECONOMIC ADJUSTMENT PROGRAM

On May 2, 2010, the International Monetary Fund (IMF), European Central Bank (ECB), and European Commission (EC), collectively known as the Troika, and the European Financial Stability Facility (EFSF) responded to Greece’s record high government debt by initiating a bailout loan of €110 billion, set to expire in June of 2013. The economic adjustment program was an agreement between the EFSF, the Hellenic Republic – the beneficiary member – the Bank of Greece, and the Hellenic Financial Stability Fund – the guarantor. Several days later, the institution and Greek government signed the Memorandum of Understanding, declaring the conditions for the payment of the loan as the following: austerity measures; structural reforms; and privatization of government assets. Greece’s implementation of these conditions was delayed because of a quick worsening in the Greek financial crisis and ultimately; the first program was discontinued (while still guaranteeing the remaining financial distribution).

Table 1 shows the breakdown of disbursements from the first financial program. The IMF and EFSF, funded by all the countries of the Eurozone, invested heavily in this first recovery package. They offered six tranches, or disbursements, over the course of 20 months, totaling €73 billion by December of 2011. The difference in amounts between the agreed upon loan and the actual disbursement may be attributed to the heightened crisis only a year after this program began, inspiring a second package all together.

2012: THE SECOND ECONOMIC ADJUSTMENT PROGRAM

Despite Greece’s failure to implement the predetermined conditions for receiving the bailout in the first program, the heightened threat to economic stability in Greece still inspired a second program with €130 billion euro bailout loan from 2012 to 2014, officially agreed in February 2012. Combined with the financial package of the first program, the Troika established a €240 billion loan. In addition to the conditions for the beneficiary of the program, the private creditors of Greece were forced to sign an agreement to accept extended maturities, lower interest rates, and a 53.5% face value loss of Greek government bonds.

The Master Financial Assistance Facility Agreement was signed on March 15, 2012, which laid out the details of when and by whom Greece would receive its financial benefits. It was amended twice in December of 2012, and originally set to expire at the end of 2014, however it was extended in the second amendment to February 28, 2015.

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Upon the recovery program’s adoption, the EC established five program reviews over the course of the three years to maintain keen surveillance on Greece’s financial crisis and economic recovery.

Table 2 represents the disbursements under the second program. Stretching over the course of 14 months, the IMF and EFSF totaled €153.88 billion, in addition to the aid offered in the previous program. In observance of the Second Economic Adjustment Program, the European Commission recorded progress on certain categories to help Greece meet its conditions for the money. Table 3 summarizes Greece’s compliance with policy conditionality under the second program. Observable in the information provided by the European Commission, Greece failed, for whatever reason, to reform the specified policy goals while receiving financial benefits included in the Second Economic Adjustment Program. In terms of the goals themselves, the institutions failed to provided Greece with more specific timelines and paths to achieve such policy reforms that could have potentially helped Greece observe these transformations more successfully.

2012-2014: The First through Fourth Reviews.

From the summer of 2012 through the summer of 2014, the European Commission created a team to visit Athens and generate a review of Greece’s progress out of debt. This review includes the accumulated compensation the Euro state has received at the time of the review and a summary of the compliance with the policy conditions set out in the first and second programs. Table 4 represents the schedule of disbursements up to the first review. Until June 2012, disbursements under the second program amounted to €148.6 billion, including seven tranches of the first disbursement under the program. The tables in the back of this report show how much these international organizations and neighboring countries have invested in a healthy Greek economy for the last five years. Until May of 2013, at the time of the second review, disbursements under the program amounted to €200.9 billion, including the four distributions made in the second disbursement under the first review and the €7.2 billion available five months earlier in January to cover bank recapitalization and resolution costs in Greece and other international banks involved in this recovery program. The third review of the program was held in June of 2013. Table 6 shows the disbursements of all the new and past funds, allocated by either the EFSF or the IMF. The fourth and final review was held in the end of 2013. Table 7 shows a breakdown of these disbursements under the Second Greek Adjustment Program up until the beginning of the most recent negotiations. The Commission had a fifth review scheduled for the middle of 2014, however, the Hellenic Republic and its lenders, namely the troika and Germany, have since began renegotiations, bringing us to the current state of the economy.THE CURRENT AND EXPECTEDSTATE OF THE ECONOMYAccording to the European Commission, the Eurozone and the IMF have been providing financial support to Greece in the form of the two previous discussed economic adjustment programs. These institutions, along with the EC, aim to “support the Greek government’s efforts to restore fiscal sustainability and to implement structural reforms

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in order to improve the competitiveness of the economy, thereby laying the foundations for sustainable economic growth.”27 On February 18 of this year – ten days before the fifth and final review of the second program was scheduled – the newly elected Greek government requested an extension of the program by an additional four months. One day before the scheduled review, and end of the second program, the board of directors of the EFSF agreed on Greece’s extension request. This extension allows the Greek authorities to design and implement, in close coordination with the troika, reforms that should lead to a successful conclusion of the review and the design of the follow-up arrangements.28

POLICY GOALSHow can Greece restructure its domestic economy without weighing down the stakeholders? A successful policy answer to this complex question will first address and establish major goals to solve this problem. Once we establish these goals, we can understand the costs and benefits to each policy alternative to determine the most appropriate course of action for policy adoption. Any serious policy recommendation must recognize the relationship of these policy goals and satisfy each goal best. This section will explore and determine such goals that will help to compare and determine the final recommended policy to solve for Greece’s market failure of the public good.

The chief policy goal of this analysis includes better economic efficiency, through better utility of resources and productivity on the supply-side of the market. To achieve such a goal, this policy analysis will rely on market-based solution options that lean on a rising private sector to help one-day release Greece of her fiscal shackles. In addition to offering efficient and effective conservative, private policy, creating viable and realistic solutions maintains an integral part of this process. This goal will be measured by the following four standards: (1) impact on loan needs; (2) impact on loan repayment; (3) avoids market failure; and (4) impact on productivity.

Second, the policy goals of this analysis include recommending a policy that will preserve Greece’s membership in the Eurozone. It is very important in this analysis that Greece not implement policies that will potentially cause the resurfacing of the Drachma. Despite this head-to-head disagreement between Greek Parliament and the other European leaders, a Grexit would cause even more trouble for Greece, the Eurozone, and even the European Union, so achieving a compromising plan of action is crucial for both parties. This analysis will determine how each policy alternative follows current rules and treaties in the context of Greece’s participation in the Eurozone to measure how well each policy option achieves this goal.

27 Economic and Financial Affairs. “Financial assistance to Greece”. European Commission. Retrieved from, <http://ec.europa.eu/economy_finance/assistance_eu_ms/ greek_loan_facility/index_en.htm>.28 Economic and Financial Affairs. “Financial assistance to Greece”. European Commission. Retrieved from, <http://ec.europa.eu/economy_finance/assistance_eu_ms/ greek_loan_facility/index_en.htm>.

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Third, encouraging a flourishing, liberal economy with innovation for development and quality of goods; competition of prices and the opportunity for economic independence and security for Greece’s citizens are all important aspects of this policy analysis, as theory suggests that a competitive market with high productivity and low government spending yields the most economic stability. Therefore, deregulation and privatization must be a goal in this analysis. There are three measures to determine the achievement of this goal, including: (1) the ease by which business can enter the market; (2) the impact on the number of private enterprise; and (3) the impact on the number of state-owned enterprise.

Fourth, political feasibility proves an important aspect of creating and implementing any sort of policy. Standards of measurement for achieving this goal include: (1) the likelihood of Eurozone approval; (2) the likelihood of lender approval; and (3) the likelihood of successful adoption in Greece, given the recently radical political landscape and public opinion.

Finally, this analysis will seek to satisfy fiscal equity in creating an appropriate policy recommendation. Attainment fiscal equity will be measured based on how each policy alternative impacts the following: (1) the fairness for the Greek government; (2) the fairness for the private lenders; and (3) the fairness for Greek taxpayers. These goals may only be achieved in the long run, so this analysis’s policy recommendations will reflect such efforts.

SOME ALTERNATIVE WAYS TORESTRUCTURE THE HELLENIC MARKETThis analysis will consider further options that will help move Greece closer to achieving the goals expressed in the previous section. This section will explore the three best options to solve this policy problem, including: (1) continuing the status quo of Greece’s refusal to abide by austerity programs; (2) standing on the side with the Troika to reaffirm the conditions established in the Memorandum of Understanding; and (3) offer a new possibility, to change the infrastructure of Greece’s economic system. Only the most realistic policies with the potential of agreement by the key players of this policy issue will make it to the recommendation board.

THE STATUS QUO: TO ELLĪNIKÓ TRÓPO (THE GREEK WAY)

The first option at hand includes siding with the Greek government in the current faceoff between the Hellenic Republic and its primary lenders in the matter of austerity. Moreover, going along with the status quo would allow Greece to create their own path to economic recovery, as the financial institutions have essentially been permitting for months. The Greek way towards a solution appears radical with its immediate refusal for any more austerity measures.

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Austerity is typically seen as a go-to fiscal policy for controlling government debt and helping to improve national GDP. Despite its theoretical promise, Greece argues against austerity measure. Due to Greece’s public-good economic model, the government employs a large percentage of the Greek labor force. Therefore, initiating measures that aim to decrease government spending, national employment will undoubtedly suffer. The austerity measures set by the economic adjustment programs only increased unemployment, as the private sector had not been expanded enough to take in any released public servants. Not surprisingly, the public is adamantly against continuing such measures, and the new prime minister and government was recently elected on the public-appeasing platform.

Aside from austerity initiatives, the status quo alternative would allow Greece to create its own path towards recovery. Already, Greece has made changes towards liberal restructuring, like amending the 1976 Constitution to allow for the establishment of private universities (legalized in 2011) to encourage competition of education and alleviate partial responsibility of the state to offer high education. More recently, the Hellenic state took steps towards eliminating monopolies of markets, such as its efforts in the trucking industry. However, there is must still the same in the composition of the domestic market in Greece, and leadership has not offered the rest of the Brussels Group any reason to believe there are further significant changes on the way.

In 2013, before his appointment, newly appointed Minister of Finance, Yanis Varoufakis, proposed a complete reform to the EU and Eurozone. The Modest Proposal, follows the logic of America’s New Deal from the early twentieth century as a model for economic recovery for, not only Greece, but also the entire Eurozone. Committed to the welfare state and Keynsian economics, Varoufakis continues seeking an expansion of the role of the ECB and EU. Capital surplus would go to member-states in debt the same way a U.S. state borrows from the U.S. Treasury, thus creating a “European surplus-recycling mechanism.”29 It remains unclear whether or not Minister Varoufakis will propose a variation of this proposal again, however it is certain that the Prime Minister and Varoufakis share similar economic sentiments, and equal dissatisfaction with the program offered by the troika.THE TROIKA PROPOSAL: GOVERNMENT AUSTERITY PROGRAM IN EXCHANGE FOR BAILOUT MONEY

Another alternative response to the problem of economic instability involves implementation of the Troika proposal. The current proposal set by the Troika expect continued Greek commitment towards austerity programs, privatizing government programs, and restructuring the economy in exchange for further financial support. These conditions have been assigned since Greece’s first economic adjustment program in 2010. These conditions were however the institutions have only recently started to

29 Varoufakis, Y., Holland, S., Galbraith, J. (2013, July). A Modest Proposal for Resolving the Eurozone Crisis, Version 4.0”. Wordpress. Retreived from <https://varoufakis.files. wordpress.com/2013/07/a-modest-proposal-for-resolving-the-eurozone-crisis-version-4-0-final1.pdf>.

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enforce such requisites. This policy option focuses on more Hayekian economics and classical liberalism as a model for this type of policymaking, versus the Keynesian approach of their Greek counterparts. This difference in fundamental economic understanding has led to months of stalemate in negotiations between the involved parties.

THE BRITISH MODEL: LIBERALIZE AND EXPAND PRIVATE INDUSTRY

In the late 1970’s, several of Britain’s largest industries, including: steel; aerospace; and shipbuilding had all been nationalized as public goods. This increase in nationalization of industries led to increases in government spending, state stake in investments, and government employees. This view of Britain in the late twentieth century is not far off from Greece’s economic makeup today. Fortunately for Britain, however, Margaret Thatcher developed a plan to save the country from economic ruin, liberalizing the market through privatization.

The third and final policy alternative would come in a three-step, long-term process, focusing on privatizing markets with the aim of eliminating a market failure of public goods. This type of privatization could come in small, incremental phases starting with just the deregulation of the stringent corporation laws that block so the creation of so many businesses throughout the Republic. This legal amendment would limit the barriers to entry in the domestic market that is required of competitive markets. Afterwards, the government could work with the private sector to actually swap out its responsibility in so many government-operated projects. That is, as the number of private enterprise increases, the more the government can shed its responsibility of its ownership of enterprise and sell its property to the private industry. Simultaneously, as the private industry grows, employment opportunities will hopefully rise, eventually easing the shift of employees from the public sector to the private sector.

This private-public type solution would eventually give way to an increase in Foreign Direct Investment, as productivity and price competition increase, making for a more diverse economy. As it stands, Greece benefits from only $2.6 billion from FDI, compared to its neighboring Turkey and Italy who enjoy $12.1 and $16.5 from FDI, respectively. Economic theory suggests that as the private sector expands in a competitive environment, with competition for the lowest costs and highest quality, more opportunities will arise to globalize its goods and services and bring in foreign enterprise.

A COMPARISON OF THE ALTERNATIVESHowever good a policy option sounds in theory, only those options that achieve each of the aforementioned goals may be selected as the final recommendation. This section of the analysis critiques and measures each policy alternative according to how well it achieves the aforementioned goals. Each goal will be measured according to the impact categories discussed in the Policy Goals section, so an appropriate comparison of each of the alternatives may be made.

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Status Quo: To Ellinkó Trópo (The Greek Way)

Economic Efficiency. Continuing the Greek status quo will not achieve efficiency by any of the four predetermined standards. This policy alternative continues Greece down its path of a welfare state, investing too many state resources into public goods and preventing an operational market from forming. In fact, our four indicators: impact on loan needs; impact on loan repayment; avoids market failure; and impact on productivity are each worsened by this alternative.

Fiscal Equity. To determine whether or not this option meets the goal of fiscal equity, this analysis measures the fairness for all three parties involved in this policy problem. First of all, in terms of fairness, the government of Greece wins across the board. The implementation of this option would benefit Greece with more international funding whilst potentially continuing the notorious welfare programs that got the state into this mess in the first place.

Deregulation and Privatization. It is more difficult to discern how well this alternative may achieve this goal. Greece is offering no direct or concrete strategy in its proposals, other than an adamant opposition towards austerity measures. That being said, Greece has not provided any reason to believe the government is interested in deregulating their strict business laws or privatizing the many public goods it endures or establishing an operational market.

Preservation of Greece’s Membership in the Eurozone. The standstill between Greece, the institutions, and Germany make it obvious that this alternative will not help Greece remain in union with the Eurozone. Although Greece has threatened pulling from the Eurozone to see help from Russia or China, this would be a dangerous move for Hellenic leadership. Therefore Greece, instead must consider policy implementation that will keep them in the safety of the Euro area and using the Euro.

Political Feasibility. This alternative is in no way politically feasible. Neither the Eurozone, or other institutions, nor the remaining lenders, like Germany and France, will settle for this method as it goes against their entire understanding of economics.

The Troika Proposal: Government Austerity Program in Exchange for Bailout Money

Economic Efficiency. The Troika proposal is a great option for creating a positive impact on loan needs, and ultimately loan repayment. Centered around the premise of austerity, when the government spends less money, the state will need to borrow less, and be able to work towards repayment. The current proposal set by the Troika does not press privatization very much, however, so without that coupling with

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austerity, Greece will see much of the same results they have seen in the earlier years of the bailout. Therefore, productivity will not necessarily be impacted as much as desired through this policy alternative.

Preservation of Greece’s Membership in the Eurozone. Although this policy may be a middle-of-the-road policy proposal for economic efficiency (depending on other details the Troika has not yet laid out), it will most certainly keep Greece as a member state in the Eurozone, abiding by all current treaties and rules. Harnessing the favor of the leading institutions and Germany – Greece’s leading lender – this policy is an obvious choice for several parties involved in this policy dilemma.

Deregulation and Privatization. This is the aspect of the policy alternative that leaves confusion in its ability to attain economic efficiency. Currently, the proposal expresses interest in a gradual or eventual privatization in the economy, but no effective timeline or plan to obtain such a feat. There is not any course of action to determine over what length of time or when new private enterprise will emerge into the market, nor any way to predict when or how the government will relinquish its own enterprise to permanently lower government spending.

Fiscal Equity. In regards to fairness, once again this policy favors some parties over others. In terms of fairness to the Greek government, this policy is not that fair, because it sets the market up for failure by not providing the necessary means for a successful transition from a public good to an operational market. On the other hand, this policy potentially relieves a great responsibility from the lenders, so the Troika proposal appears much more fair to those institutions. For the taxpayers, however, this option is unfair because austerity without a better plan for the economy post welfare will only lead to greater unemployment and further private saving, which negatively impacts the market.

Political Feasibility. Similarly with the Greek proposal, this too appears impractical due to the political landscape. Greeks elected their current government based on a platform of no more austerity, and this standoff over the last couple months supports this adamant economic and political principle. Regardless of the other policy goals this option could achieve, the political factors outweigh any potential greatness.

The British Model: Liberalize and Expand Private Industry

Economic Efficiency. Liberalizing and expanding the private sector in Greece’s economy will not only alleviate the need for continued international fiscal support, but also increase productivity and impact Greece’s ability to repay its loans for the better. There is no reason to think that if Greece created an operational market they would suffer from market failure, and it would increase employment with new opportunities in a competitive market.

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Preservation of Greece’s Membership in the Eurozone. This would certainly match well with the rules and treaties that may constrain policymaking for this problem. It doesn’t demand too much from any party, nor does it violate the mission or purpose of the European Union, the Eurozone, or the European Commission.

Deregulation and Privatization. In its nature, the proposal of liberalizing and expanding the private industry would achieve all three measurements of attaining this goal. First, this proposal, following the model of a competitive economy, will work on changing current laws to increase the ease at which enterprise can enter the market. As the number of private enterprise increases, the state can begin to relinquish its grips on the market by privatizing its programs and initiatives and allowing a healthy private sector and civil society to achieve its goals.

Fiscal Equity. Liberalizing and expanding the private sector of Greece’s proves fair for all parties, including the Hellenic government, the lenders, and the taxpayers in Greece. This policy frees Greece from the shackles of debt, by freeing the economy and empowering the market to a more productive and efficient economy. Likewise, Greece’s lenders are freed from the weight of responsibility to continually feed Greece continual loans without any hopes of full repayment. Finally, this policy is the most fair for the taxpayers, which has been an underrepresented party throughout this policy dilemma. By privatizing the economy,

Political Feasibility. Liberalizing the domestic economy is the most fair for all parties; offers the most productivity and efficiency; and still maintains Greece’s membership in the Eurozone. This is by far the most feasible option of all the policy alternatives.

ASSESSMENT AND RECOMMENDATIONTable 8 in the Appendices shows a breakdown comparison of each policy alternative and its measurement of success against the several standards of the impact categories and five goals. While some policy options, such as the Troika proposal, greatly achieved many of the goals, the possible policy solution lacks political feasibility for the Greek government and therefore this analysis cannot be recommend the implementation of such a policy. The Policy Comparison Summary in Table 8 provides a visual aid of this cost-benefit analysis. Since some goals are achieved in certain proposals, while other goals are not, the weight of each policy goal and the numerous impact categories vary according to likelihood of policy adoption and likelihood of policy success. Based on the comparison of the policy options, we can conclude that the best policy option proposes to liberate and expand the private sector in Greece’s domestic economy. This solution will create the best results if implemented as a three-step and long-term process rather than a quick solution. This multi-pronged solution includes three primary steps for successful economic recovery and stability in Greece: (1) Expand; (2) Employ; (3) Privatize.

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Expand. At first implementation, the Greek government must quickly and efficiently change its laws to remove the barriers to entry and allow easier processes for entrepreneurs to create new businesses. According to the free market model, easy entry into the market is crucial for a competitive and healthy economy. For the first eight to ten years of implementation following these legal amendments, Greece will encourage the expansion of the private sector by creating new businesses and increasing the total number of private industry at all levels of enterprise: micro; small and medium (SME’s) and large. This phase marks the first step towards an open and competitive market. After this phase of changing laws and creating new businesses, employment opportunities will naturally increase, as the private industry expands and its individual enterprises along with it.

Employ. The successful expansion of the private sector paves the way for the second phase of this policy solution. As Greece continues to liberalize its fiscal policy and take steps towards a more competitive market system, the increase in total number of private enterprise will naturally increase the opportunities for employment. This second phase will last between ten to fifteen years, most likely, during which these new organizations will find employees from the 26% unemployment rate and also from the high volume of public servants. This analyst predicts such a lengthy timeline for this phase because of the required time needed for employees to shift sectors. Additionally, the recently changed education laws will play an important role in this phase. As previously mentioned, the Greek government amended its constitution in 2011 to allow for the creation of private universities in its higher education. If Greece maintains these efforts to diversify education and offer more competitive opportunities, the state will see positive results from new jobs, better education, and higher employment. Finally, the increase in employment opportunities will decrease the “brain drain” Greece endures from previously graduated university students.

Privatize. Once the expansion and stability are reached, the state can begin to close out its wide range of expensive programs and public goods and allow the market to take over. This phase must expect to take as long as a decade to fully complete for several reasons. Greece has accumulated a great deal of social programs and public goods over the last four decades. For sustainable privatization, this process must be slow and steady to counter any political resistance it will most certainly face. The current party in office will not likely agree to a fast transition of market model or closings of services and programs. As Greece stops each service, the private sector will begin to supply each need to meet the demands of the market and each community. When government stops its overreach, a healthy market and civic society – which flourishes under economic health and prosperity – can successfully offer solutions to such domestic demands.

Overall, this policy will take between 30 and 40 years to fully implement, but Greece can create a sustainable and healthy domestic economy under more competitive market conditions. This policy analysis shows that the best policy option is one that has yet to be explored and discussed by the member parties of the Brussels Group. By implementing this three-phase policy, not only will Greece eventually recover from its state of high debt, but also the entire Eurozone can seek recovery from its financial crisis, dragged

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down by the intensive social programs of a continually transforming progressive, welfare region.

APPENDICESFigure 1. Greece’s Market Failure

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Figure 2. Who Does Greece Owe?

Source: “ Greece Debt Repayment in Full is ‘Unrealistic’, Says Syriza.” BBC News: Europe.

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Figure 3. Breakdown of Greek Lenders

Source: “Greek Debt Crisis: Who Has the Most to Lose?” CNN Money.

Figure 4. Government debt as percent of GDP

Source: Google, Public Data. “Government debt as percent of GDP.”

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Table 1. Disbursements under the First Financing Program (EUR billion)

Table 2. Disbursements under the Second Program in Billions €

Disbursement Date EFSF IMF Total1 March – June 2012 74 1.6 75.62.1 December 2012 34.3 - 34.32.2 January 2013 7.2 - 7.22.3 January 2013 2.0 3.24 5.242.4 February 2013 2.8 - 2.82.5 May 2013 2.8 - 2.83.1 May 2013 4.2 1.74 5.943.2 June 2013 3.3 - 3.34.1 July 2013 2.5 1.8 4.34.2 December 2013 0.5 - 0.55.1 April 2014 6.3 3.6 9.95.2 July 2014 1.0 - 1.05.3 August 2014 1.0 - 1.0Total Mar 2012 – Aug 2014 141.9 11.98 153.88

Source: Economic and Financial Affairs (2015).“Financial Assistance to Greece”. European Commission.

Table 3. Summary of Compliance with Policy Conditionality under the Second Program

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Table 4. Disbursements under the second Greek adjustment program, first review

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Table 5. Disbursement under the Second Greek Adjustment Program, Second Review

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Table 6. Disbursement under the Second Greek Adjustment Program, Third Review

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Table 7. Disbursement under the Second Greek Adjustment Program, Fourth Review

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Table 8. A Summary of Greek Alternatives in Terms of Policy Goals

Goals Impact Category

Policy Alternatives

The Status QuoThe Troika Proposal

The British Model

Economic Efficiency

Impact on Loan Needs LOW MEDIUM HIGH

Impact on Loan Repayment LOW MEDIUM HIGH

Avoids Market Failure LOW MEDIUM HIGH

Impact on Productivity LOW NEUTRAL HIGH

Deregulation and

Privatization

Ease of Entering the

MarketDIFFICULT NEUTRAL EASY

Impact on the Number of

Private Enterprise

LOW NEUTRAL HIGH

Impact on the Number of

State-Owned Enterprise

LOW NEAUTRAL HIGH

Fiscal Equity

Fairness for Government FAIR UNFAIR FAIR

Fairness for Lenders UNFAIR FAIR FAIR

Fairness for Taxpayers NEUTRAL UNFAIR FAIR

Preservation of Greece’s

Membership in the Eurozone

Follows Current Rules and Treaties

NO YES YES

Political Feasibility

Likelihood of Eurozone Approval

LOW HIGH HIGH

Likelihood of LOW HIGH HIGH

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Lender Approval

Likelihood of Successful Adoption

LOW LOW HIGH

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