Joins the European University Institute in September 2011 from Universitat Autònoma de Barcelona, where she is Associate Professor, and also Research Professor of Barcelona GSE. After graduating from UPF, she was an assistant professor of economics at the LSE (2001-2006), Bocconi University (2004-2005) and UAB (2005-2006). Her main research interests are International Macroeconomics and Monetary and Fiscal Policy. Given Evi’s interest in monetary policy analysis, she has been a visiting researcher in many Central Banks, like the Bank of England, the European Central Bank, the Federal Reserve Bank of Atlanta, and the Riksbank (Sweden). She is a member of the Applied Macroeconomics Network (Amen), is a MOVE (Markets Organizations and Voting in Economics) Research Fellow and a Research Affiliate of the Center for Economic Policy Research (CEPR). She has received the IGIER Scholarship for Young Researchers in 2003-2004, the Paolo Baffi Fellowship in 2008 and the Ramon Areces scholarship in 2010. She has published in international journals such as Journal of Monetary Economics, International Economic Review, Journal of Public Economics and Economic Policy.
· Greece’s bankruptcy:
What are the main reasons Greece was led to the brink of uncontrolled bankruptcy in 2010?
To start with, Greece has never satisfied any convergence criteria for entering the EMU. At the time of entrance, it was running a deficit much higher than 3% of its GDP. It’s also unclear how the debt to GDP calculations were made. So, the introduction of Greece in the Eurozone was political as now the discussion is about Grexit.
On top of that, Greece has never really been reformed. It has remained an uncompetitive economy, with a huge public sector with many administrative weaknesses, and widespread tax evasion in key sectors and corruption of both politicians and other insider groups such as labor unions, oligopolistic sectors etc. Yet, the introduction of Greece in the EMU guaranteed a relatively less risky investment with good returns. The market assumed that sustainability of Greek debt would be guaranteed by the other EU member states with more solid finances like Germany, while the ECB would ensure that Greek debt would not become inflated in the first place. So investors came in. The availability of cheap abundant credit showed an increase in growth that was, however, very fragile. Given the absence of structural changes, realized investments were inefficient and the lax credit led to a surge in consumption, twin deficits and rent seeking.
When the financial crisis came about in the US in 2008, Greece seemed to be the weak link in a chain of risky investments. Many European banks had exposure to US mortgage loans. As a result, when defaults rose, they lost a lot of money and became reluctant to lend to other, diminishing the flows in the international banking system and making it difficult for firms and consumers to borrow from banks. The decline in bank lending contributed to a fall in aggregate demand. Even countries which didn’t have any exposure to subprime lending were affected by the global credit crunch and Greece. The sudden stop in Greece, i.e., the sudden slowdown in private capital inflows, made the vulnerable growth in Greece collapse. Like “Salome” Greece started taking off one by one her veils, flashing to the financial world all her structural weaknesses.
Sovereign spreads opened up again for Greek bonds after 8 years of low spreads with the introduction of Greece to the EMU, reflecting perceptions of sovereign default risk. Since September 2009, the markets have clearly perceived Greece to be in a sovereign risk class of its own, as reflected in its sovereign default risk spreads in both the CDS and the government bond markets.
Some political forces in our country, as well as a minority of analysts, argued that a voluntary restructuring of its public debt would be more beneficial for Greece than having recourse to the support mechanism in May 2010. In other words, it would have been better –back then– if we had declared boldly that we fail to satisfy all of our obligations to our creditors, inviting them to negotiations over the exact payback percentage. Do you share this view?
Definitely. The prolonged austerity did not help Greece. The combination of the austerity measures asked by the Troika and bad fiscal policy and administration from the part of the domestic government, have completely killed Greek domestic demand. Given that Greece is not exporting a lot of goods, the real devaluation obtained with the fall in salaries did not bring a lot of benefits, instead the cut in pensions, salaries, public and private jobs decreased significantly domestic demand deteriorating even further the initial recession, leading to today’ s depression.
Even the IMF has admitted this publicly. IMF officials had severe doubts about whether Greece's debt would be sustainable even after the first bailout. A possible reason why this was not given as a choice to Greece could have been the fear of contagion for the other countries in trouble at the time.
The support mechanism has failed in all its targets: a) it has not restored market confidence; b) it has not helped exiting the recession; c) it prolonged uncertainty; and d) led to the political turmoil that had as a result the election of the current populist government in power and its devastated consequences for the Greek people and the Greek economy.
· The policies of Memoranda:
The criticism made of Memoranda focused mainly on the over-taxation imposed on the private sector. Could the target of the immediate primary surplus production have been achieved in any other way?
The word “immediate” is the first thing that went wrong with Greece. European and Greek politicians alike did not realize that the problem of Greece was structural and hence needed to be treated with the right time profile and not immediately. Reducing deficits and debt immediately as we have seen was feasible but clearly inefficient and incorrect, as we have unfortunately also seen. Cutting the deficits would not solve the problem in the long run. The problem of Greece is structural and since it has not been addressed correctly before entrance it should be in the top priority list for any honest and benevolent politician, whether he is Greek or Northern European.
Let’s assume for a second that the word “immediate” was appropriate. As long as demand would be sustained and the government would be able to collect correctly the taxes with no rent seeking and corruption, an increase in taxation of the private sector would not be the problem. Tax rates before the crisis were not exceptionally high in Greece. The problem was that not all firms or citizens beared equally the increases in taxation. The burden became heavier for those unable to avoid or evade taxation.
At the same time, there were more efficient ways to raise the primary surplus: a once-and-for-all wealth tax. A one-time wealth levy, if introduced quickly and unexpectedly, could have solved easily and almost painlessly the deficit reduction. If it were really possible to ensure the public that the wealth levy would be temporary, such a tax would be much less distortionary than imposing higher marginal tax rates on income.
Another idea could be to raise more revenue from carbon permits, sugar products or taxes. Raising funds by taxing negative externalities reduces distortions rather than creating them. So taxes on cigarettes, fuel emission, unhealthy sugar products, although I understand could be unpopular, could at least correct for distortions that individuals are unwilling to accept.
Anyway, any of the suggestions I provide here are no substitute for fundamental long-term reform that should make the Greek tax system simpler, fairer, and more efficient.
What kind of measures can be implemented in our country in order to fight tax evasion and integrate the black economy into the formal economy?
Tax evasion and avoidance and the black economy exist because incentives are not strong enough to discourage them. Here is a list of a few measures one could consider to adopt in order to reduce the black economy, tax evasion and tax avoidance:
– The obvious: Lower tax rates: reduce and simplify taxes and tax collection. In Spain, were I have lived for many years, the Government prepares your tax statement according to the data it collects from private and public employers and data on property. The individuals have just to accept the form, sign and return it, and in case of an error the tax payer can make appointments with the tax office to correct or amend the initial declaration. I do not know of any physical person in Spain who uses the help of an accountant to complete his/her tax declaration. At the same time, I do not know of any physical person in Greece who does NOT use an accountant in order to complete his/her declaration.
– The tax system should be fairer: In Greece the payment of taxes to the government has always been perceived as a silly thing to do. Instead, it has always been considered a point of pride to avoid taxation. This can be due to historical reasons (taxation under the Ottoman empire, or during the dictatorship, especially because a big part of the current population lived under the Papadopoulos regime), but it can also be due to the fact that people perceive taxation to be unfair in Greece and that the social returns from paying taxes are low. Education can of course help people realize that public schooling, health care, police protection etc. are financed though tax revenues. Improvements in public goods and administration, a fall in rent seeking and corruption could make people more willing to pay their taxes. A solution could be, for example, to let people choose between public or private health insurance or education, and adjust accordingly the tax rates in the tax code for the different services provided by the government.
– Minimum contribution for self-employed, to be eligible for pension, health care or public education for their children, with pensions and health care coverage being a function of declared income. It is very well known that self-employed are among the groups that evade taxes mostly. Providing incentives for these individuals to declare their income would help. Of course, many of self-employed might result into private insurance schemes if the public alternative implies tax compliance. In that case, given that they are in a private insurance scheme, they will have all incentives to declare their correct income, and insurance companies will have by law to share the provided information with the government.
– Active labor market policies (ALMP) and punishment for non attendance. Many young unemployed work in the black economy. ALMP should be in place of either continuing training and education or short-term employment. If unemployed fail to show up in those programs on specific dates, then they are no longer entitled to unemployment.
– Subsidizing youth employment: any young person who declares to be working, even part time, should be entitled to an employment benefit provided by the government. It could also be favorable for the calculation of pension years even for short-term employment spells of weeks or months. This would be something like a negative labor income tax that would decrease the incentives of young people to work in the underground sector and will implicitly increase the wages in the informal sector making it more expensive for firms to operate under black contracts.
– Loss of social security benefits if caught working in the black economy or in case of tax evasion. Any individual caught working in the black economy or evading taxes will lose part or his/her social security benefits.
– Parallel existence of public and private tax collecting companies and random assignment between the two for every year’s taxation. Cross checking between the books of each of the two tax collecting companies.
– Establishing Erasmus programs for public employees within the EMU. This could potentially improve public administration, increase efficiency within the public sector in Greece and incentivize workers to work better and more efficiently. It would also help to fight corruption.
– Reduce the number of transactions in cash to a minimum. Fine for firms or businesses that do not have cash machines, even if these firms are groceries in Popular Markets (Laikes), not to mention doctors or restaurants. Whenever I go on vacation to Greece on islands and Athens alike, it very often happens that the cash machine of the restaurant were we had supper or the hotel were we have stayed is broken. All tourist shops should be equipped with payment systems that only need the credit card’s number, expiration date and security code to make the transactions (like online payments). On the other hand, consumers, tourists or local people should all be informed about the payment systems.
– Impose special taxes on representatives of offshore companies having property or operating in Greece. More than 23,000 foreign and offshore companies have developed profitable activity in Greece over the last thirty years. At the moment, authorities have found several people who operated as legal representatives for multiple companies. Those legal representatives are natural persons or Greek companies that can be charged extraordinary taxes for operating such activities, for example.
Greece ranks fifth among the EU countries with the highest real estate taxation (2.3% of GDP in 2014 and 2015), mainly due to the Single Property Tax (ENFIA). Do you consider the tax burden imposed on Greek-owned property to be a necessary evil?
I do not consider the taxes on property in Greece very high, having lived in many other European countries, and actually the data support this claim. According to a study by the European Commission, “Taxation trends in the European Union” (2014), property taxes in Greece are currently high but not the highest in the EU. The property tax rates were 2.1% of GDP in Greece compared to 4.1% in the UK, 2.2% in Spain and 2.6% in Italy in 2012. I do not believe that the property tax is the issue; the problem is the synchronization of increases in many taxes and cuts in many salaries and wages. After all, the property tax is a wealth tax and it should have positive distributional effects in favor of the weak tale of the income distribution.
Also, recall that our GDP has been falling, so referring to measures as a percentage of GDP might be misleading. Looking at the ratio property taxes revenues-total tax revenues could be a better measure.
Ηow far is still the Greek State from making a sustainable entry into the markets;
Greek debt is highly unsustainable, but sustainability can be restored by either a further haircut of a substantial amount (close to 50% or even more), large interest rate concessions, or a rescheduling of debt to longer maturities (See, Consiglio and Zenios (2015), link http://www.voxeu.org/article/greek-debt-sustainability-devil-tails)
Consiglio and Zenios also support, and I agree with them, for action now! Debt relief should not be postponed to some indefinite future, but it should happen the soonest possible. The country needs some positive news so as to improve the politics of reform. Moreover, the much desired foreign direct investments cannot be attracted to a country facing the uncertainty of exit from the EMU.
Debt relief can be reached now. The refugee crisis is the best excuse. Yet, there is a lack of trust in the current Greek government that, unfortunately, I also share with the Northern European leaders.
A contingent contract for debt relief could be the way out at the moment. Withholding the disbursement of funds without prior actions is the stick that creditors exert. Contingent debt relief is the carrot, contingent on successful structural reforms.
· Greek Banking System:
According to data from the Bank of Greece, almost 40 billion euros flew out of the Greek banking system in 2015 – this is the highest amount ever compared to any other year since 2009. Do you think that, under the certain circumstances, this money can return to the banking system?
Under certain circumstances, no capital is going to come back. Euros can return to Greece, but not necessarily to Greek banks. I believe one way to further integrate and secure the banking system in Europe is by lifting the barriers to entry into the domestic retail banking sector of each European member country. It is really unthinkable for an American to live in a union with no union-wide banks, I do not understand how it’s thinkable to have Europeans living in a union with only national banks! It makes no sense. Globalizing (Eurolizing, if you wish) commercial banks would make deposit insurance guarantees more credible and would avoid bank runs in the future, so capital might come back once the debt relief has been guaranteed, and foreign investors have started investing in Greece again.
From the previous recapitalization of Greek banks, the Greek State lost 22.5 billion euros due to the collapse of their stock prices. Is it inevitable that the money of Greek taxpayers placed in the last recapitalization will have the same fate, as we see today?
I am not an expert on this. Yet, again, calling in foreign EU banks could be a solution and the non-performing loans problem should get a suitable solution in the meanwhile.
Non-performing loans (overdue for more than 90 days) in the Greek banking system exceed 100 billion euros, which equals 50% of total loans – whereas the corresponding average in the developed world is only 5%. According to your opinion, what is the most suitable solution to cut the Gordian knot of the “red” loans?
Establishing asset management companies as independent entities to manage and dispose of bad debt, by disposing assets removed from a bank’s balance sheets or restructuring a corporate debt. Independence of the companies from bank institutions is essential to avoid possible conflict of interests. Asset management companies will be able to handle the debt while the banks have their balance sheets strengthened by removing their non-performing loans.
Also, red loans might also present an opportunity, especially non-performing real estate loans, allowing other investors to buy out the loans through the asset management companies. The bank has bad loans removed from the balance sheets, the borrowers have their debt resolved, and the investor buys out the loan with the prospect of making the loan and/or the property profitable.
· Economic Growth:
What are the structural changes that are necessary in order for Greece to return to high rates of economic growth?
Structural reforms, such as tax collection, have been considered as of immediate importance by the Greek government. Fighting tax evasion and corruption has been emphasized as one of the main goals of the new government. Obviously, tax evasion deprives the government of the tax revenues required to pay for social programs, pensions and the salaries of civil servants. Yet, increasing tax collection would not bring growth, which is what the country needs to experience. Fighting corruption might or might not be beneficial as institutions remain rigid in Greece; corruption can be an antidote for growth, so unless institutions become flexible just fighting corruption might not be enough to recover growth.
Greece’s lack of competitiveness is problematic. According to the global competitiveness index the Greek economy is ranked in the 96th place compared to Finland, for example, which ranks 3rd and Spain 35th. How can competitiveness increase in Greece? The structural reforms should target social infrastructure and political institutions, fiscal policy and the business environment.
– The government can improve the level of competition in product markets by deregulation and by reducing barriers to entry. The reduction of monopoly power through deregulation and competition policy are strategies that can be effective in creating a more dynamic and competitive micro-economy. Tax incentives should be given to new startups to encourage new product development.
– Privatization of industry is also likely to improve competitiveness.
– The promotion of entrepreneurship is essential in Greece. The Greek economy does not mobilize enough knowledge, as expressed through the knowledge composition of the country's exports, relative to the rest of the world. Among 128 countries, Greece has the largest gap between its level of income and the knowledge content of its exports.
– But most importantly, competitiveness can be gained by creating a stable macro-economic environment. As long as there is political uncertainty, as long as there is no credible government and no fiscal rule in Greece, investors will not come in and without investment there is no sustainable growth.
– Improving public administration services, making them more efficient and more international (for example, by accepting documents in English without the need of an official translation from the Greek ministry of foreign affairs in public offices) would make it simpler for foreign investors to enter the Greek market.
In what areas can Greece demonstrate a comparative advantage over other economies in order for growth not to rely on domestic consumption funded by borrowing once again but on exports of Greek goods and services?
– Solar energy: An investment plan should include a part of research and development of ways to deposit and transport (without destroying the environment) wind and solar energy for the longer horizon.
– High level Tourism: While labor cost indexes reflect the fall of employee compensation in Greece, reflecting the success of the Troika policy to internally devalue incomes, the anticipated revival of export-led growth has never materialized. A big part of exports is tourism. Tourism comprises on average 18% of GDP over the last 5 years. Moreover, according to the World Economic Forum, in 2013 Greece was in the 32nd position out of 140 countries included in the Travel and Tourism Competitiveness Index, while, as mentioned above, it occupied the 96th position in the Global Competitiveness Index. This data proves that Greek tourism is one of the few sectors of the national economy that is competitive at a global level and that it may provide potential for growth and creation of value added. Tourism is the sector on which the Greek government has to concentrate its efforts. Greece has to specialize in exporting “high quality” tourism. How can Greeks do that? I have three ideas for that:
1. make Greece the "Maldives” of the Mediterranean
2. build marinas for sailing boats and make Greece the Mecca of sailing (see also below) by organizing international prestigious regattas
3. promote epic trips to international tourists (reproduce the trip of Ulysses from Troia to Ithaca, the trip of Theseus to Minoan Crete, the trip of Jason from Volos etc.)
– Specialize in high-quality biological and agricultural products.
· Greek Labor Market:
Besides restoring the high economic growth rates, what other measures should be taken to reduce unemployment, which is officially recorded at rates higher than 25% of the working force?
There are two reasons why labor market reforms are urgently needed in Greece. The unemployment rate in Greece is extremely high as a result of a dysfunctional labor market reacting to the negative shock. The second reason is that medium- and long-run perspectives are not bright because of the interactions between the debt legacy of the Crisis, and demographic developments (the refugee crisis) and diminishing expectations of productivity growth.
– The government can improve labor productivity by increasing spending on education and training to help develop skills and close the skills’ gap attributable to long spells of unemployment.
– The government may also promote a more flexible labor market by reducing trade union power, encouraging part-time work, and encouraging new business start-ups.
Do you agree with the minimum wage reduction and the policies that enhance flexibility in the labor market?
Wages were too high in Greece before the crisis. The fact that wages fell by 23% in the period 2009-2013 has increased the competitiveness of the Greek economy. Also, the employment contraction in the same period caused the wage share in the economy to fall significantly. On the other hand, capital income, mainly comprising the gross operating surplus of the business sector, has proved more resilient. As a result, new hirings are more profitable at the moment, as improving business profit margins should lead to higher investment and business expansion.
· Greek Social Security System:
Under the current EU directive, pension spending in all EU Member States is forbidden to register an increase of more than 2.5% of GDP compared to 2009 levels; in 2009, pension expenditure in Greece amounted to 13.6% of GDP. What changes should be made to our pension system so as to achieve the goal of keeping pension expenditure below 16% of GDP in the coming years?
The pension system in Greece was unsustainable. Apart from numbers, we should also talk about individuals, our parents or grandparents, when we talk about pensions.
A reform reducing pensions should account for poverty in old age, which is higher in Greece than the EU average. This should be done by cutting mainly larger pensions. Reforms should address the unfairness of the pension system, whereby some individuals receive pensions that are large relative to their lifetime contributions, at the expense of other individuals who receive much smaller pensions.
· Greek Public Debt:
In 2016, the Greek public debt will approach a staggering 185% of GDP. Generally, a country’s public debt sustainability depends mainly on its size to GDP or on the annual costs of servicing to GDP?
The debt-to-GDP ratio is not a very good metric for sustainability. A reason why the debt-to-GDP ratio has been increasing in Greece is also because the denominator has been decreasing for the last 8 years. Since the debt is serviced from tax revenues the ability to repay debt should be based on tax revenues, not on the GDP. The best measure could be the annual costs of servicing debt to tax revenues ratio.
Given that tax revenues can no further increase in Greece, since the country has reached its fiscal limit in the sense that it cannot generate any more increases in revenues (we are on the right of the Laffer curve), and given the very low expectations for recovery, from whatever angle we want to look at debt, size to GDP or annual costs of servicing to GDP, or ratios relative to tax revenues, the picture is rather gloomy.
Τhe Agreement signed during the Eurozone Summit in June 12, 2015, clearly states that the nominal depreciation of our debt (“haircut”) is impossible. To what extent can reducing interest rates and extending the official creditors’ payback period be acceptible?
As I have mentioned before, large interest rate concessions, or a rescheduling of debt to longer maturities, could restore the sustainability of public debt. Yet, any relief provided should be conditional, because debt is a variable we should think in the long run and not in the short run. Conditional debt relief would be the best possible solution for Greece. Greece seems to have been offered conditional debt relief: First, in the Eurogroup Statement, November 27, 2012; then most recently, in the Eurogroup statement of August 14, 2015. The Eurogroup Statement on Greece, August 14, 2015, states: “The Eurogroup considers the continued program involvement of the IMF as indispensable and welcomes the intention of the IMF management to recommend to the Fund's Executive Board to consider further financial support for Greece once the full specification of fiscal, structural and financial sector reforms has been completed and once the need for additional measures has been considered and an agreement on possible debt relief to ensure debt sustainability has been reached.”
Is the target set in the new fiscal adjustment program concerning our debt-servicing obligations, i.e. producing primary surpluses of 3.5% of GDP by 2018, feasible;
No, especially with the refugee crisis in place. According to the European Comission’s own calculations: “General government deficit is expected to widen to 4.6 % of GDP in 2015, reflecting the negative impact of uncertainty and economic downturn on public finances. However, it is projected to gradually decline over the forecast horizon to - 2.2 % of GDP in 2017, as the fiscal measures agreed under the third adjustment program yield savings, bringing the primary balance back into surplus.”
Why haven’t we yielded the desired benefits from the front of making full use of the Greek State’s property yet?
If you were a foreign investor, would you trust the current government for striking a deal for a Greek State property? The debt crisis and the continual brinksmanship in negotiations have created too much uncertainty, even if a Greek exit from the euro zone is unthinkable, rapid changes in tax or other policies from the part of the Tsipras government is not unthinkable at all, I am afraid.
· The Eurozone policies:
The Fiscal Compact signed in 2012 between the EU Member States is criticized for its obsession with austerity as well as its lack of development policies. What do you think of its content?
I think my answers to the previous questions clearly indicate that I disagree with blind austerity. I am a supporter of structural reforms and I want to highlight that the Fiscal Compact is the result mostly of agreements between politicians and not well trained economists.
Many economists argue that the fundamental Eurozone malfunction results from the competitive gap between the countries of the North and the countries of the South. Would it be possible, in the future, to set limits to the current account surplus of the Eurozone northern countries (as was once suggested by John Maynard Keynes) or to transfer a significant amount of resources from the North to the South, ensuring that we recycle surpluses smoothly within the Eurozone?
While Greece’s fiscal problems required reducing its budget deficits, a logical accompaniment to that would have been for Germany or other Northern European countries to expand its own economy and buy more things from the South, like tourism, or other goods in terms of consumption or investment that could have been taxed at low rates to ease the fiscal consolidation in Greece. That would have given a boost to demand in the Greek economy, an increase in tax revenues and would have helped to reduce the imbalances in both the south and the north European current accounts.
Yes, direct investments or consumption could transfer resources from the North to the South, but there should be no need for explicit rules for this. The markets should work. Rules can be distortionary. Maybe subsidies could work on this direction until the necessary reforms will take place that will make Greece a naturally attractive place for Northern investments.
· International Financial System:
What structural changes do we need to make to the function of the global economic system in order to bring the uncontrolled and distorted development of the financial sector under control and limit the impact of the markets on our daily lives?
The crisis has taught us that the financial system did not work efficiently and was associated with distortions that policy can come in and correct. The capital flow reversals during the fiscal crisis have shown that even advanced economies are vulnerable to the inadvertent consequences of capital account liberalization when the procyclicality inherent to capital flows is not adequately addressed.
The procyclicality of capital flows can be addressed through coordinated global regulation and globally coordinated monetary policy. In practice, such coordination is not always straightforward to design or implement, even when countries have parallel interests.
Luckily, for the euro area, coordination can be an attainable outcome through a sufficiently robust financial regulation together with banking integration. A full banking union with a single regulator, as has been proposed recently by the European Commission, would be an effective means to this end. Alternatively, national banking systems that are conservatively regulated at the national level (for instance, through macro-prudential measures that limit banks’ reliance on short-term wholesale funding) would help moderate capital flows that could otherwise exacerbate procyclical behavior and generate risks.
Finally, foreign direct investment and equity portfolio investment contribute to increased international risk sharing and tend to be stabilizing. Instead, credit flows are not. Hence, the current biases in favor of debt financing over equity financing in many countries should be reduced.
Δημοσιεύτηκε στο αγγλόφωνο περιοδικό «Business File» τον Ιούνιο του 2016: