Fiscal Austerity and Greece

Richard Portes, Professor of Economics at London Business School is Founder and President of the Center for Economic and Policy Research (CEPR), and Senior Editor and Co-Chairman of the Board of Economic Policy. In the interview, Professor Portes discusses the problems of Europe and then specifically drills down into Greece itself. Portes has long been clear that the policy of austerity has been counterproductive and inimical to the growth prospects of the continent. And he goes further, suggesting that the German government in particular (which consistently insists on "following the rules") has been a serial violator of the Stability and Growth Pact, and conveniently forgets its own history when it comes to issues of debt forgiveness. But Portes also suggests that Greece is a special case, a country that does not lend itself readily to easy reform. There is an ongoing banking crisis, unsustainable debt levels (Portes argues that Greece is fundamentally insolvent and that the EU and its attendant institutions should recognize that fact and work immediately toward some form of sovereign debt restructuring), and institutions by and large remain malfunctioning. So whilst Portes agrees with much of the prevailing sentiment that further fiscal austerity will be counterproductive, he also argues that Greece must relent as well: it must signal its commitment to deep structural reform, particularly in regard to the endemic corruption in public administration, tax evasion, and the complex oligarchic system that links political parties to the media and administration. For Portes, no further fiscal austerity makes sense, but he suggests that Greece could aid its cause by reforming product markets and services that are still oligopolistic, with numerous barriers to entry and, hence competition. A second priority is to modernize the legal framework of property rights, investor protection and corporate governance, as well as a massive reorganization and restructuring of the public administration. These, rather than further wage cuts, are the only way to raise the competitiveness of the Greek economy. Strong signals are needed to reveal the government’s political will to tackle endemic corruption in public administration, tax evasion, and the complex oligarchic system that links the political parties to the media and the administration. And Europe must respond in kind with significant debt reduction.