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Victoria Mindova

In the critical hours before the vote on the final version of the austerity plan we turned to the Professor of International Financial Markets and Financial Law Emilios Avgouleas from the University of Manchester. He is the Director of the LLM Programme and analyzes the latest developments exclusively for GRReporter.

Infrastructure investments, lower taxes, credit expansion and clever privatizations, coupled with generous cutting of public expenditure are the foundation of Greece’s success and growth. Without them, the country will face the disastrous solution to introduce the drachma again and the consequences will be hyperinflation, deep recession and a new form of the euro area, in which there will be no room for weak and uncompetitive countries.

The mid-term recovery program has to be voted this week, no matter that it has a lot of opponents both in the parliamentary group of PASOK and the opposition party. Do you think that the bill will pass through and what would be the consequences if it is rejected?

Much ado about nothing! The plan is not only unfair it is also ill prepared and ineffective. Taxing income in a high tax evasion country is meaningless. The government and the Troika ought to target, for tax purposes, accumulated wealth that may not be justified by disclosed income and not disclosed income, as the plan does. As much of this vast wealth is ill-gotten, being the product of corrupt practices, looting or tax evasion, it should be taxed at punitive rates. This punitive taxation programme should include all deposits held by Greeks abroad which are the product of activities carried out in Greece and real estate that is held in offshore companies, which is used for commercial or residential purposes Note that this is not the usual ‘why don’t you tax the rich?’ cliché. The Greek tax base is very thin. It has to be broadened substantially for the country to become fiscally sound. But through a progressive tax rate and clever and modern mechanism to catch foregone revenue not through a flat tax per capita, as envisaged in the plan, which is a fiscal practice more closely associated with the Ottoman Empire rather than modern western democracies.

Under what conditions do you think that Greece would gain the right to go back to the capital markets in the end of 2011? In other words, where were the main shortcomings of the current policy, which led to the need of Memorandum 2 and the mid-term recovery program?

None the chances are zero. The reason that the memorandum has failed and so will the next one is that the Troika has ignored two fundamental truths. First, that the Greek problem was not simply one of liquidity but one of solvency. Second, that the Greek fiscal crisis was not just an issue of bad systems and some corruption which if addressed properly the country would produce balanced budgets. On the contrary the Greek budget problem is essentially a problem of governance. The Greek republic has been captured by a kleptocratic business and political class and the two main political parties. As a result, corrupt practices and cronyism are at the heart of all forms of public activity from public investment to tax collections. For instance, the two political parties do not curb public sector wastage in order to maintain their armies of client-voters. Also, the ministers shy away from a restructuring of the banking sector that is desperately required if the country is to return to growth. The Troika seems blissfully and rather willingly oblivious to the above truths calling also for futile policies, such as a widespread privatizations programme at firesale prices, which shall push Greece further into economic and fiscal crisis, since those state owned companies are also major contributors to public coffers through large dividend payments. 

How do you find the public spending to taxes mixture of measures in the mid-term recovery program? In your opinion, is there a way to optimize the spending and reduce the tax burden?

Greece needs a transparent, cleverly structured, and competitive privatizations programme, which on the one hand reduces debt and on the other attracts foreign investors for public companies and other public infrastructure projects at competitive prices. The country desperately needs a fresh injection of foreign direct investment in the areas that it is competitive. It also needs a healthy banking sector that will stimulate growth through credit expansion, namely, extension of credit to worthy businesses. If wastage in the public sector is slashed – e.g., Greece has 5 state owned TV channels - then it is possible that in certain areas taxes can be (and should be) lowered. However, high taxes are not the reason for the country’s plight and the failure of the memorandum. The policies were misconceived from the outset because they exhibited a very flawed understanding of the true illnesses of Greek economic, political, and social life and thus they pursued the wrong remedy.

Even if the mid-term program passes through, the government does not have the public support to introduce the reforms. Do you think the elections will prove compelling to the end of this year and what change they will bring?

The ruling party won the last election on a totally different platform. Essentially they lack the popular mandate for most of the policies they implement. So a general election would indeed remedy the crisis of legitimacy government actions currently face. Yet little will change post-election since the two big parties in Greece have much more in common than they like to admit. Greece desperately needs a new and functional democratic constitution and calling for the election of a new constitutional assembly and a referendum over a new constitution is much more important than a general election. The new constitution should carve certain public functions such as education, fiscal policies, the justice system, and defence out of the imperium that political parties currently maintain over them.

Clearly the party system and the way it is financed needs a radical overhaul and a directly elected president expressing a broader agenda should replace the current prime ministerial system. Other reforms should refer to promotion of democratic accountability through referenda and a bicameral parliament. The new constitution should also promote private enterprise, free competition targeting the local robber baron cartels that have deformed the pursuit of private enterprise in the country and provide institutional checks and balances, as well as for an independent justice system.

One of the conditions for Greece to obtain the second rescue package is the voluntary participation of private owners in the rescheduling of the debt payments of Greek government bonds for the next three to four years. In that case what will stop the credit agencies to read this action as a credit event?

ISDA does not share the view of credit rating agencies (CRAs) and ISDA is the author and provider of the contract on which CDSs are concluded and the guardian of the true interpretation of its ‘definitions’. Unlike ISDA the Credit Rating Agencies seem like uninvited guests intent on ruining the negotiations. Clearly they rather express the agony of bond holders rather than an objective view. There should clearly be a way to roll over, reschedule, and then restructure, through a generous haircut, Greek debt without fearing the overreaction and the views of the CRAs, which in the past have proved that their opinion is nearly worthless. The successive restructurings of Latin American debt in the past 30 years would have been blocked

Many economists predict that Greece will have to exit the eurozone sooner or later. Do you agree with this statement and if so, under what conditions will this happen? What would be the consequences for Greece and the European Union in this case?

If the governance reforms suggested above are not implemented soon and a payments transfer mechanism is not established to alleviate the competitive pressures on deficit EMU countries, rendering in the process the EMU into a true currency union, not only Greece will have to leave the Euro but also the Eurozone will survive in a different form losing at least half of its existing members. A Greek exit would be a catastrophic development for all. For the International financial system the chances of repayment of Greek debt would edge closer to zero, creating in this case a true Lehman type event. Greece itself would experience for years of hyper-inflation and successive devaluations, which would mean the disappearance of the savings of Greek people.

This government suffers serious criticism of the lack of measures to restore economic growth. How can it be achieved in conditions of excessive deficit and large external debt?

The government’s policies were fatally flawed leading to massive contraction of output. Not only did not negotiate any kind of economic stimuli with the Troika, it also remained blind to massive rates of negative growth showing how unfit was the specific group of people to handle the biggest crisis of the Greek economy in the post-war years.

There are four prerequisites for growth. A targeted programme of infrastructure investment. Privatisations that attract foreign investment. Credit expansion and fostering of worthy private enterprise. Tax breaks to domestic and foreign investors that enhance the country’s productive capabilities and increase employment. Adoption of such policies would not only increase tax takings, but would also stimulate private sector employment relieving the social pressure created by rising unemployment would also create an environment of renewed optimism, which is also a key factor for economic development.