At the height of the strike protests of truck drivers, railway workers and doctors the former Polish deputy prime minister, financial minister and chairman of the National Bank of Poland Leszek Balcerowicz visited Athens and immediately gripped the media attention. All expected that the Polish economist who has the reputation of the "father of shock therapy" has a recipe to cure the Greek economic crisis. Our conversation begins with a joke. "You have a very strong prime minister," said the professor when he understood that I am from Bulgaria. "Yeah, literally and figuratively,” I smile. "Mostly literally" the professor laughed too.
Interview by Maria S. Topalova
Speaking about the global financial crisis about a year ago you said the solution is the production site of the economy so that the economy could become more competitive on the global market. Do you share this opinion as far as the Greek crisis is concerned?
My experience with other crisis shows that supply is very important. That policy should not harm private investment. It should create confidence and not create too much risk. Generally speaking, if the policy of the major economies of the world was of such a nature then the crisis would be over. It is over in the sense that there are no deeper and deeper recessions. The question now is what will be the economic growth. The economic growth will be different depending on the policies regarding the supply side. With respect to Greece, there have been two problems – the huge fiscal deficit accumulating serious public debt to GDP ratio and the second problem is the supply side. There was too much spending at the cost of increasing public and private debt and the competitiveness of Greece has suffered. So, Greece has to implement two reforms simultaneously – to restore its fiscal soundness and competitiveness.
In a period of high taxes, bad labour laws and a lack of loans the Greek real economy is dieing slowly. What could be done to encourage local production?
The IMF does not say that the Greek economy is dying. It only says that its GDP declines and it could be expected. There was much deeper decline in the Baltic countries but they are coping. The key here is that these problems that contributed to the crisis should be reformed. I will try to mention these most important reforms. On the fiscal side, these are the reforms that would reduce spending, say, the pension reform. This is a very important reform to reduce spending. On the supply side it is to eliminate monopolies, eliminate restrictions of the free entry like what the government has done with the truck drivers. Generally speaking, to introduce competition. Market economy can not exist without competition.
The banking system in Greece faces a strong liquidity problem and in practice largely depends on the European Central Bank. The government encourages the bankers to merge and create stronger financial institutions. Do you think bank mergers will solve the problem of liquidity?
I have not studied bank problems. I can only say that the IMF stresses that, generally speaking, there is pretty high capital ratio in the banks. So, they don’t see any alarming problems. Banks, of course, are very important and all measures that will improve their capital ratios belong to important reforms.
Will the mergers improve their capital ratios?
I am not in the position to comment on the specific mergers.
You have always stressed on the market liberalization. However, it always provokes strong reactions among certain groups the interests of which are concerned. Having in mind your experience in Poland, what would be your suggestion to the Greek government?
The Greek government has been introducing reforms despite the protests that are declining over time rather than increasing. This is the right approach, because every responsible decision maker should consider the situation. We should make a comparison with what would happen without reforms? Then the economic situation would only get worse and everybody would protest. The second scenario is to make the reforms. Yes, there will be problems, but let us persist. And if we persist with the right reforms then the economy would recover. And there would be less protest and better future.
How long it will take?
It depends. If you make the reforms fast like we did in Poland and to some extent you in Bulgaria, then inflationary pressures can be eliminated pretty fast. This is not the case with Greece, of course. There is not very high inflation in Greece. Greece has to rather remove the monopolies of the market. But usually, it is not years before benefits of reforms start. And then if you persist, if the economy improves sufficiently, then things change. Let me say that we in Poland and Bulgaria have been facing much more serious problems. We inherited very high inflation, declining economy, which was paralyzed by various regulations and we have managed. So, why won’t Greece?
What will happen to the Greek debt? Will there be any kind of restructuring of the payment? Will the debt be reduced? And finally, who will pay for it - the European citizens or the Greek citizens?
These are tricky questions. I don’t want to make any firm declaration. I don’t have enough information anyway. I can only say that recently I have read a very good paper written by IMF economists which stresses that Greece can cope without debt reduction.
Some analysts suggest that the only way for Greece to become competitive on the global market again is to go back to the drachma. Is this a realistic scenario for Greece?
No, I don’t think so. It is politically unrealistic because I don’t think there are serious political forces in Greece, which would go for that. This scenario is unrealistic economically too. There would be huge problems. Much debt is denominated in Euro. Its revaluation through the reintroduction of drachma would be a shock, because the nominal cost is much higher. So, I don’t think this is a realistic and good option. Rather, the Greeks should look to the Baltic republics or to Bulgaria. You are linked to the Euro and maintain a stable rate. You do not devalue, but you try to regain competitiveness through what is called internal devaluation – reducing wages or reducing the wage growth and improving productivity. This is the right approach.
Many economists consider the Greek crisis the beginning of the end of the Eurozone. What is its future in your opinion?
No, I don’t that catastrophic scenario has to be fulfilled. I think the crisis in Greece has its background. The Eurozone countries faced problems, which existed before and they did not cope with. Decisions should be made both on country levels and European level. Look at Spain and its socialist government. They are true Thatcherists – they are slashing public expenses, they are reforming the labour market in order to avoid the Greek problems and regain the confidence of the market. To some extent the same goes on in Portugal, Ireland. And these are respected member countries of the Eurozone. At European level there is much discussion how to strengthen fiscal discipline, how to make stability growth effective. So, there are initiatives.
Having in mind the level of the Greek investments in South-East Europe, will the Greek economic crisis affect them?
If Greece copes with the problems through reforms that would also reduce the risks for the other countries. And besides, these countries should first of all look at their own economic problems before the crisis.
You have said that not all the policies are positive for the economic growth, namely the European policy on the climate change. Would you explain what do you mean?
First of all, because there is insufficient analytical data concerning the decisions for serious reductions of emissions taken during the top-level meeting several years ago. I haven’t seen any analytical justification. It matters because of the consequences. For example, the so-called non-conventional fuels are more expensive than conventional fuels. If there is a technological breakthrough it may be the other way round. But so far there is no technological breakthrough. The mandatory increase in the share of bio-fuels means that these bio-fuels should be subsidized. Someone has to subsidize these fuels. This goes for the European Union and this goes for the United States. And this is a clash; this is in conflict with the fiscal side of the economy. So, the decisions taken in the European Union should be based on better analytical foundations. And the countries of the European Union should care about it in order not to suffer the consequences.
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