Troika’s poor understanding of microeconomics led to Greek programme failure
Via Cyrus Mail on April 7, 2015 FEATURED
By Stelios Orphanides
International creditors underestimated the the role of certain social groups determining factors which could have helped Greece regain its competitiveness, such as the cost of lending, electricity and non-wage labour costs, a prominent Greek academic economist said, adding that this mistake could also be repeated in Cyprus.
The failure of the troika of the European Commission, the European Central Bank and the International Monetary Fund which supervises bailouts in the euro area, to understand how established interest groups think and act, led in the final analysis to wage cuts, which reduced in turn Greece’s economic output and to the failure of the Greek economic and financial reform programme, Theodore Pelagidis, who teaches economics at the University of Piraeus and is non-resident senior fellow of the Washington-based Brookings Institution, said.
The wage cuts aimed at compensating the competitiveness loss resulting from the increase in interest rates on corporate lending and electricity prices, made the reform programme even more unpopular in Greece and thus deprived it of political support, said Peragidis who was commenting at a gathering of the Cyprus Economic Society on March 31. He added that while the IMF has a good understanding about macroeconomics, it has little insight of the microeconomics in Greek society.
“If there is something to blame the troika for, it is for mistakes of this type,” he said. “All this led to further austerity”.
Medium size industries in Greece saw the price of electricity rise from €0.0855 per kilowatt-hour in 2010 to €0.0917 in 2011 and above €0.10 in 2012 and the subsequent years, according to Eurostat. Cypriot industries had to pay €0.1483 per kilowatt-hour in 2010, €0.165 in 2011 and €0.2171, €0.2002 and €0.1672 in 2012, 2013 and 2014 respectively. The average price for a kilowatt-hour in the euro area ranged between €0.909 and €0.961 in the above mentioned period. The amounts do not include taxes.
European Central Bank data show that Greek and Cypriot companies had to pay close to or often up to more than double the interest rates for bank loans throughout 2010 to 2014. In February, the Central Bank of Cyprus took action to reduce interest rates in the island’s banking system by slashing a variable in a formula determining the capital needs of banks. This led to a considerable drop in interest rates.
“With all these, you can’t be competitive,” when the two economies have to seek to increase their respective exports to compensate for the drop in domestic spending, Pelagidis said.
The reason behind this type of phenomena is related to the ties between ruling parties on the one hand to workers’ unions and certain business people on the other, from which they enjoy support, the Greek academic said.
These ties, he added, are an obstacle to the implementation of reforms. Pelagides singled out the decision of Greece’s state-owned Public Power Corporation to sign a new collective agreement with the union Genop, which provides for pay rises via the introduction of allowances.
A month ago, prime minister Alexis Tsipras told Angel Gurria, secretary general of the Organisation of Economic Cooperation and Development, that his government intended to reform product markets to strike at the oligarchs, Pelagidis said, adding that in reality, the government had no proposals on how to do that. “There is no plan A, no plan B, or anything whatsoever, just essays, whereas the OECD has done work,” with concrete papers.
Pelagidis’s comments came days after the Cypriot government signalled it was prepared to look into the possibility of backing down from its obligation to privatise state-owned power producer Electricity Authority of Cyprus, as put down in the terms of the March 2013 bailout agreed with international creditors.
Energy minister Yiorgos Lakkotrypis said February 27, the government was planning to commission a report to demonstrate “if” the EAC can be privatised and if yes, “how”. The minister’s comments came hours after unions of the EAC workers, who are better off compared to their peers in the private sector, decided to suspend strike measures aimed at preventing the company’s privatisation which is scheduled to be completed by the end of 2018.
The country has miserable institutions,” Pelagidis said in reference to Greece adding that this applies not only to the constitution, the quality of elected politicians and election procedures but also to the press and the educational system. “How can this economy be governed when the political market is not functioning properly?” he asked.
“In the Greek society, everyone is after a rent, the production someone else does,” Pelagidis said.
All above distortions turn the Greek society into a “society of the Vikings,” he said. “They either carried out attacks to ask for rents, or asked for rents by threatening to attack. The Vikings are these groups which have reappeared.”
“They want to have reforms taken back,” while the economy has to increase its productivity, the academic said.
As a result “the crisis is paid only by the suckers”, not the ruling party clientele, he said.