ΟΙΚΟΝΟΜΙΚΟ ΔΕΛΤΙΟ. Greece and the State: PrometheuS Bound?... σελ. 3. the economic crisis in the light of GloBal macroeconomic imbalances... σελ.

Transcript

1 ΟΙΚΟΝΟΜΙΚΟ ΔΕΛΤΙΟ Greece and the State: PrometheuS Bound?.... σελ. 3 the economic crisis in the light of GloBal macroeconomic imbalances... σελ. 19 Η ΑΝΑΓΕΝΝΗΣΗ ΤΗΣ ΕΛΛΗΝΙΚΗΣ ΟΙΚΟΝΟΜΙΑΣ: ΑΠΟ ΤΟΝ ΚΙΝΔΥΝΟ ΤΗΣ ΧΡΕΟΚΟΠΙΑΣ ΣΕ ΡΙΖΙΚΕΣ ΔΙΑΡΘΡΩΤΙΚΕΣ ΑΛΛΑΓΕΣ ΓΙΑ ΜΙΑ ΝΕΑ ΑΝΑΠΤΥΞΙΑΚΗ ΠΟΡΕΙΑ.... σελ. 38 ΒΑΣΙΚΑ ΟΙΚΟΝΟΜΙΚΑ ΜΕΓΕΘΗ... σελ. 62 TPIMHNIAIA ΕΚΔΟΣΗ / ΣΕΠΤΕΜΒΡΙΟΣ 2010 / ΤΕΥΧΟΣ 113

2 ΟΙΚΟΝΟΜΙΚΟ ΔΕΛΤΙΟ ΣΕΠΤΕΜΒΡΙΟΣ 2010 ΤΕΥΧΟΣ 113 Το "Οικονομικό Δελτίο", πέραν του πληροφοριακού χαρακτήρος του, αποβλέπει στη συμβολή της Alpha Bank σε επίκαιρους οικονομικούς προβληματισμούς. Τα κείμενα του συντάσσονται κατά κανόνα από τα στελέχη της Διευθύνσεως Οικονομικών Μελετών της Τραπέζης. Επιτρέπεται η αναδημοσίευση με την παράκληση να αναφέρεται η πηγή και να στέλνονται στον εκδότη τα σχετικά δημοσιεύματα. Tριμηνιαία Έκδοση της Alpha Bank A.E. Υπεύθυνος σύμφωνα με το Νόμο: M. E. Μασουράκης Σταδίου 40, AΘHNAI Επιμέλεια / Παραγωγή: 2 OIKONOMIKO ΔEΛTIO

3 Greece and the State: PrometheuS Bound?* The political economy of the Greek state Once upon a time, there was a small country called Greece. Actually, according to a selfgratifying anecdote, the location was so beautiful that God, when parcelling out land to various nationalities, had kept it aside for his own retirement! Ever since Eurozone entry, the Greek economy has boomed on the back of macroeconomic and structural adjustment and the easy money conditions prevailing worldwide, with Greek GDP growth at least 2 percentage points higher than in the rest of the Eurozone. *by Michael Massourakis, World Economics, Vol. 11, No. 2, April-June 2010 Once upon a time, there was a small country called Greece. Actually, according to a self-gratifying anecdote, the location was so beautiful that God, when parcelling out land to various nationalities, had kept it aside for his own retirement! The Greeks arrived late so they could not properly enter the allotment process and started pleading for God s own place to call home. God was finally persuaded and granted them their request. Much later, this same practice was referred to as derogation that is, securing some exception from, or delayed application of European Union (EU) directives and regulations. This attitude has defined Greek EU relation ships, as the Greeks have always been vigilant in cushioning their way of life against, usually imaginary, threats arising from European integration. In fact, Greece was the only EU country that adopted the euro with a two-year delay as Greeks were not ready at the prescribed time. Ever since Eurozone entry in 2001, they have lived, beyond their means, happily thereafter to the chagrin of their partners. Following a period of fiscal profligacy, which peaked in 2009 with catastrophic consequences for the economy, Greece is now again making use of a unique EU International Monetary Fund (IMF) crisis support mechanism, especially concocted for Eurozone countries with no access to market funding [sic]. A very long trip has finally come to an end. And this is the beginning of a new era. This time around, Greece has no option but to change its ways. What this paper intends to do is to probe how an underachieving state can mess things up for a country with an enviable record of economic performance. I always thought that reinventing government in Greece would push potential output well beyond the 4% real GDP growth achieved yearly on average since the early 1990s. It was actually then, after a period of political and economic instability in the 1980s, that a seri ous effort of adjustment was undertaken with the objective of bringing Greece to the core of Europe. This success, which entailed substantial efforts in industrial restructuring, privatisation, financial liberalisation and fiscal consolidation, was crowned by the admission of Greece to the Eurozone club. Ever since, the Greek economy has boomed on the back of macroeconomic and structural adjustment and the easy money condi tions prevailing worldwide, with Greek GDP growth at least 2 percentage points higher than in the rest of the Eurozone. Despite all this success, a dichotomy unfolded between the dynamism of the private sector and the backwardness of the state. The latter was unable to adjust to developing trends in the global economy hostage, to a certain extent, of well-entrenched interest groups, be they labour unions in the public sector or business interests in traditional and/or low-productivity, low-value-added industries. These groups felt threatened by the challenge of competition forces sweeping the globe, and saw their interests better 3 OIKONOMIKO ΔEΛTIO

4 Every decision is taken at the centre, with local communities constrained institutionally and financially to take charge of their lives, in a vicious circle where control breeds dependency, dependency brings reliance on mediation, with politicians fostering further control in a loop that is dif ficult to break. The current debt crisis awaken ing will, it is hoped, exert a profound formative impact on how the society is to function in the years to come. protected by an omnipresent and omnipotent state. The state in Greece has the status of deity in the popular imagination. A God that, alas, is not omniscient and definitely not in a position to lead the society forward. The political class, on the other hand, the stewards of the state, cultivated this idea in every way possible as their interests lie with the glorification and the aggrandisement of the state. The result is that every decision is taken at the centre, with local communities constrained institutionally and financially to take charge of their lives, in a vicious circle where control breeds dependency, dependency brings reliance on mediation, with politicians fostering further control in a loop that is dif ficult to break. A majority of the population looks to the state for economic help, be it compensation because of earthquake damage, be it education and employment for their children, be it support in old age, be it health insur ance, be it paving a road in their village, etc. Some even subscribe to simplistic paternalistic theories that whatever happens to them is not the result of their own decisions to work, save, get education, etc., but rather the sinister result of powerful outside forces like the rich, the markets, the great powers, American imperialism, etc. The current debt crisis awaken ing will, it is hoped, exert a profound formative impact on how the society is to function in the years to come. Political debate in Greece most of the time takes the form of who is to blame for, rather than how to improve, the situation. Political parties con sider each other as incompetent and corrupt and, once elected to power, they repeat old patterns. War cries of Where is the money? or Who took the money? or Why is there no money? pollute political discourse. In October 2009, a new government came to power in Greece following elections. In a monumental error of judgement, the new socialist govern ment announced that the budget deficit in 2009 was more or less double the outgoing government s estimate, surprising negatively the markets and Greece s European partners, without announcing at the same time a concrete plan to remedy the situation. This was done in an effort to take revenge against the previous government s similar attempt back in 2004 to discredit the then outgoing socialist government, again restating deficits upwards in previous years so as to show quick improvement in the budget ary front. In the intervening five years, the conservatives managed to run the boat aground by failing to take advantage of extremely favourable eco nomic conditions to redress the longstanding inefficiencies of the Greek economy. In 2009, under the influence of two national elections and the uncertainties and discontinuities created by the international financial crisis and the ensuing global recession, publicsector finances were seri ously mismanaged, with tax evasion, new hirings and budgetary transfers to special groups going through the roof. On top of this disaster, the new government decided to take the familiar road to perform kitchen sinking operations so as to discredit the conservatives and to perform miracles with budgetary adjustment subsequently. However, they failed to take into account the reaction of the markets this time around. And this was the catalyst pushing the situation out of control as there has been an instant loss of credibility. The rest is history. Of course, old-style politics is not but a symptom of the rather shaky struc- 4 OIKONOMIKO ΔEΛTIO

5 The state has damaged performance and perverted incentives, forcing Greece to a lower than potential trajectory. Welfare can be significantly raised if inefficiencies are lifted. tural edifice of the Greek economy. The real culprit must be sought elsewhere. The state has damaged performance and perverted incentives, forcing Greece to a lower than potential trajectory. No theoretical discus sion can match up to the scale and scope of the Greek state s interven tion in the economy. This goes well beyond the usual provision of basic services and protection from market failure into regulating almost every single aspect of the Greek economy. In what follows, I intend to tell a story of recklessness, of how distorted and rigid an economy can become by maximising the benefits for insiders, rent seekers and others who align the state to their service with scant, if any, regard for the rest of the population or future generations. I intend to give the reader a panoramic tour of Greek state inefficiency, sampling state intervention in all its glory in almost every aspect of economic policy and every sector of economic activity. My goal is to support my position that welfare can be significantly raised if inefficiencies are lifted through a programme of privatisation, market liberalisation and deregulation a programme that is long overdue and urgently needed if Greece is to overcome its debt predicament. The state as a hindrance to competition Tertiary education in Greece can be provided only by state universities, with a ban on private universities, and therefore effectively on competi tion, imposed by the Constitution. The result is that Greek universities function as government agencies of low productivity and service. There is no better way to ponder the weight of the Greek state than to look into the number of employees in the public sector and, more impor tantly, the sectors of activity in which they are employed. Table 1 shows that 22% of the labour force is employed in the wider public sector (and this does not include the clergy). This is a staggering figure, especially if one takes into consideration that core government (public administration, services to the public and social security administration), where only civil servants are employed, represents only 38% of the total. This means that 62% of publicsector employees are employed in activities that, poten tially, could be privatised! The figure may be reduced somewhat if the provision of basic education and health services to various means-tested income groups is considered. But this still leaves a huge amount of public-sector employees working in areas where higher-quality services could be offered with greater efficiency by the private sector. Given that 73% and 64% of the people employed in education and health, respectively, are government employees, one should probe a little deeper into those two sectors. There is a myth in Greece of free educa tion and free health, in the sense that all levels of education and health are available free of charge to the population if one chooses to go to a state school or hospital. However, the reality is that the public system operates in such a way so as to require parents almost universally to pay consider able amounts of money to prep schools or individual teachers so as to bring the students up to par for the exams. Similar issues have emerged in the provision of hospital services, where additional payment is sometimes required to expedite service from hospital administrators and doctors, usu ally by people who think this is the normal procedure. Tertiary education in Greece can be provided only by state universities, with a ban on private universities, and therefore effectively on competi tion, imposed by the Constitution. The result is that Greek universities function as government agencies of low productivity and service. The performance 5 OIKONOMIKO ΔEΛTIO

6 of students, professors and schools is poorly evaluated. Students can study practically for ever with no penalty or without attend ance requirements. Finally, any linkage between university research and business applications is condemned as suspect and inappropriate. Private institutions of higher learning do exist but do not possess the status of the university, and their degrees are not recognised in the same way. And, of course, thousands of Greeks who study abroad face, on their return, an uphill battle to have their qualifications certified by a system that con siders itself superior. Nevertheless, education is highly valued. Learning foreign languages is a must. According to The Global Competitiveness Report , from the World Economic Forum, Greece ranks 43rd among 133 nations in higher education and training, with an overall score of 4.4 (out of 7). The United States ranks 7th with a score of 5.6. Despite this huge quality differential, Greece ranks on par with the US in terms of the quality of its maths and science education (4.5), with ranking in terms of gross secondary and tertiary enrolment being higher in Greece than in the US. If only these students had a better alternative to work with than this mediocre state system of education! Still our children are among the best educated, irrespective of the quality of Greek schools or maybe because of it as parents make sacrifices to support their children s futures. But Greece cannot absorb them all, so increasingly they are seeking employ ment abroad. Hospital care in Greece is predominantly provided by poorly run, corruption-prone state hospitals, around which a nexus of private-sector suppliers and health providers make a comfortable living. Private hospitals cater primarily to higher-income segments and thrive in a no-competition environtable 1: Greece Participation of public-sector employees by activity Hospital care in Greece is predominantly provided by poorly run, corruption-prone state hospitals, around which a nexus of private-sector suppliers and health providers make a comfortable living. Private hospitals cater primarily to higher-income segments and thrive in a no-competition environment, with public hospitals losing customer business almost con stantly to expensive private hospitals. Public-sector employees (000s) As % of total employees Total employees (000s) 1, Public administration Services to the public Social security administration Education Health Banks Electricity Social support services Sanitation Telecoms Libraries, museums, etc Postal services Water Labour and employer unions Trains R&D Sports Radio and TV Other activities Source: National Statistical Service of Greece, OIKONOMIKO ΔEΛTIO

7 Social security funds for old age and health insurance are exclusively state controlled and run, relying on ever increasing govern ment subsidies for survival. There is little or no relationship between the pensions granted and life-time contributions! The state in Greece is instrumental in limiting competition in a variety of economic activities that warrant special attention. More specifically, competition is compromised by the perpetuation of the protection status of the so-called closed professions. These are professions that are protected by pervasive regulations through barriers of entry and various tax and other privileges. ment, with public hospitals losing customer business almost con stantly to expensive private hospitals. Administrators appointed in public hospitals possess no real executive powers and operate with no budget constraints or business plans, only to perpetuate mismanagement, with performance impossible to evaluate and/or compensate. Revenues come primarily from state-controlled health insurance funds on the basis of prices fixed at inappropriately low levels by a debt-ridden state, which adds to the general malaise of the system. Furthermore, social security funds for old age and health insurance are exclusively state controlled and run, relying on ever increasing govern ment subsidies for survival. Social security contributions whenever they are paid, by employers and employees to the tune of about 40% of gross wages are still not enough to cover generous entitlements and benefits, including early retirement. There is little or no relationship between the pensions granted and life-time contributions. The state in Greece is instrumental in limiting competition in a variety of economic activities that warrant special attention. More specifically, competition is compromised by the perpetuation of the protection status of the so-called closed professions. A non-exhaustive list may include: road haulage operators, taxi drivers and other road passenger transport operators, hairdressers, beauty technicians, farmers market vendors, bak ers, doctors, dentists, vets, pharmacists, midwives, physical therapists, opticians, psychologists, speech therapists, dieticians, civil engineers, architects, electricians, plumbers, maintenance technicians, machine operators, lawyers, legal counsellors, notaries, assessors, auditors, insur ance brokers and agents. These are professions that are protected by pervasive regulations through barriers of entry and various tax and other privileges. These tend to distort competition and lead to suboptimal welfare outcomes by raising the cost of setting up new businesses. Such restrictions take the form of practice licensing, setting of administrative prices and the creation of arti ficial demand for the services of professionals. Some characteristic examples concern the technical professions as well as lawyers and notaries, where their fees are uniformly set at high levels and not on the basis of cost and quality considerations. In the technical professions, licences to practise a wide range of tasks are granted only to those with specified educational attainment. This often means that tasks that could be performed by individuals of lesser education are reserved for highly qualified professionals. Moreover, the setting of a floor for the fees of civil engineers, architects and so on adds substantially to building costs and business operating costs, reducing welfare. In the case of lawyers, it is a legal requirement that lawyers be present in various stages of market transactions, such as the signing of contracts, artificially generating fees; further restrictions are imposed with respect to the requirement that a trial in a certain geographical area should be conducted by employing only lawyers licensed to perform duties in that particular area, raising costs still further. Moreover, the profession of notary is one of the most regulated in Greece, as the number, the level of fees and the geographical jurisdic tion of notaries are all strictly prescribed by law. For example, notaries fees in real estate 7 OIKONOMIKO ΔEΛTIO

8 transactions are set at 1.2% of the value of the property transferred. Restrictions on licences and fees are also found in transportation-sector services. These often lead to unwarranted rents for insiders, thereby distorting competition. In the case of the trucking business, the state intervenes in a variety of ways with regulations regarding the number of licences that may be issued at any one time, as well as upper and lower bounds on the fees that truckers may negotiate for their services. There are two kinds of licence: for own use that is, obtained by companies wishing to transport their own (and only their own) products; and for hire that is, obtained by operators who wish to hire their trucks to oth ers. Truck licences for hire are heavily regulated, bought and sold in the market, with their number having remained fixed at 36,495 units since This market is segmented beyond imagination: licences are issued for local transport (that is, within a prefecture Greece has 54 prefectures), national transport (between prefectures) and international transport (from and to Greece, and within or between EU countries). Truck licences for own use are normally issued on demand, although there are limits to how many licences are issued per company, their numbers being always a bone of contention between owners of truck licences for hire and the govern ment. This is primarily the case regarding fuel trucks, whose licences are mostly in the hands of individuals. This system condemns companies in Greece to own and operate, at great cost and inefficiency, their own fleet of trucks without having the possibility of outsourcing distribution to spe cialised transportation companies, which simply do not exist. In the case of taxi drivers, though, it is generally acknowledged that there is a need for licensing and regulation; uniform regulated prices, usually at low levels, do not acknowledge differences in quality and ser vice. This tends to hinder the formation of taxi companies, which can bring higher efficiency and scale benefits. Moreover, restrictions exist not only in the case of taxis but also of renting cars with a driver (limos), with adverse consequences for tourism. Another example is provided by pharmacists, who operate with a fixed profit margin of 35%. Furthermore, they are legally prohibited to offer discounts, and uniform hours of operation are legally set at 45 hours per week. Moreover, the number of pharmacies allowed in a given region is determined on the basis of the density of the population, which arguably creates an unfair advantage for those already in the business. Also there is no allowance for supermarkets to employ pharmacists and operate units within the store for selling prescription drugs. Overall, the profession of pharmacist is a pretty lucrative one. More generally, there is a great gamut of regulations aiming at harmonis ing commercial practice. Usually, the justification lies with the protection of small business units disregarding consumer interests and efficiency losses for the economy at large. Not only are store opening and closing hours strictly regulated, but stores are not allowed to offer discounts, except twice yearly in specified periods. Moreover, to protect smaller businesses, regulation limits the floor size for larger retailers in certain geo graphical areas. Nothing compares, of course, with the limits imposed on supermarket bakery operations, in an effort to protect independent bak ers. For even selling one loaf of bread in a bake-off arrangement (baked on site from frozen dough) and up to 8 OIKONOMIKO ΔEΛTIO

9 One of the key hindrances to growth is the lengthy, and therefore costly, procedures affecting the ease of doing busi ness in Greece. Productivity can actually be raised substantially if red tape is reduced, and pervasive distortions and rigidities in labour and product market are eliminated. The Greek state s idea of support has been protection, protection, protection. The result has been detrimental to all industries involved, with the exception of shipping. The latter could pick up and go (or rather sail) to set up business elsewhere. 3000kgs, a supermarket is obliged to set aside a minimum floor space for bakery operation of 44m² (32 m² for production and 12 m² for sales). The state s meddling in economic affairs in Greece of course goes beyond closed professions. One of the key hindrances to growth is the lengthy, and therefore costly, procedures affecting the ease of doing busi ness in Greece. Productivity can actually be raised substantially if red tape is reduced, and pervasive distortions and rigidities in labour and product market are eliminated. Comparative information on the ease of doing business in Greece and the US is contained in Table 2. Greece ranks 109th of 183 countries in the World Bank Study and is ranked last among EU countries. It is evident from casual observation of the data in Table 2 that, in the areas considered, the government s bureaucracy and market regula tions may imply substantial costs to the conduct of business in Greece. Recently the government announced measures to shorten the steps, and reduce the costs involved, in starting new businesses. Apart from this welcome initiative, however, in most other areas, constraining practices remain in effect. table 2: Greece (Gr) and usa (us) - ease of doing business rank GR US GR US EASE OF DOING BUSINESS (rank) Paying taxes (rank) Payments (number per year) Starting a business (rank) Time (hours per year) Procedures (number) 15 6 Total tax rate (% profit) Time (days) 19 6 Cost (% of income per capita) Trading across borders (rank) Min. capital (% of income per capita) Documents to export (number) 5 4 Time to export (days) 20 6 Dealing with construction permits (rank) Cost to export (US$ per container) Procedures (number) Documents to import (number) 6 5 Time (days) Time to import (days) 25 5 Cost (% of income per capita) Cost to import (US$ per container) Employing workers (rank) Enforcing contracts (rank) 89 8 Difficulty of hiring index (0-100) 44 0 Procedures (number) Rigidity of hours index (0-100) 67 0 Time (days) Difficulty of redundancy index (0-100) 40 0 Cost (% of claim) Rigidity of employment index (0-100) 50 0 Redundancy costs (weeks of salary) 24 0 Closing a business (rank) Time (years) Registering property (rank) Cost (% of estate) 9 7 Procedures (number) 11 4 Recovery rate (cents on the dollar) Time (days) Cost (% of property value) Source: Doing Business 2010, World Bank, IFC. The state as a hindrance to economic development Greece is all about location. Traditional industries in Greece, such as agriculture, energy, tourism and shipping, are all intimately related, as far as their development is concerned, to the natural endowments of the country. Of course, a reliance on nature to bring growth should be supported with proper policies. The Greek state s idea of support has been protection, protection, protection. The result has been detrimental to all industries involved, with the exception of shipping. The latter was able to escape the suffocating embrace of the Greek state simply because of its mobility. It could pick up and go (or rather sail) to set up business elsewhere. Restrictions on crew 9 OIKONOMIKO ΔEΛTIO

10 Today only one in four Greekowned ships carries the Greek flag. Actually, Greek shipping, operating with no restrictions whatsoever internationally, has performed miracles in developing one of the most formidable com mercial fleets in the world, currently being number one. Even though merchant shipping escaped unscathed the shackles of the Greek state, its cousin, coastal shipping, operating largely within Greek territorial waters, has not had the same fortune. A customer of a US cruise ship cannot start their cruise of the Aegean islands from Athens because, if they do, they cannot return to Athens. numbers, composition and so on were circumvented by Greek-owned ships registering in other jurisdictions rather than raising the Greek flag and suffer the consequences. Today only one in four Greek-owned ships carries the Greek flag. Actually, Greek shipping, operating with no restrictions whatsoever internationally, has performed miracles in developing one of the most formidable com mercial fleets in the world, currently being number one. The success of Greek-owned shipping is well documented, and a tribute to unfettered competition combined with skills acquired throughout history, as Greece has been a seafaring nation since ancient times. Even though merchant shipping escaped unscathed the shackles of the Greek state, its cousin, coastal shipping, operating largely within Greek territorial waters, has not had the same fortune. Up to 2005, coastal ship ping was operated under a quasi-central-planning system, where the government determined sea routes, selected companies to service particular islands, and set prices, frequency of service and months of operation, boat staffing numbers, etc. It is interesting to note that in a 1996 law the number of customer service crew as well as the staff composition of the boat s kitchen was set as a percentage of the ship s tonnage. In this frame work, the right to run a high-traffic, profitable, sea route allocated monop olistically to particular operators also included the obligation to service loss-making routes. As a result, the cost of operating the system was borne by the summer tourist, who had to pay prices set to recover all kinds of hidden and unrelated costs resulting from the support of Greek coastal shipping. Moreover, only domestic companies were allowed to operate (cabotage), staffed with Greek-only or Greek-speaking-only personnel with set wages and benefits. One can only imagine the kinds of deals, compromises and horse trading taking place among all parties involved. Cabotage was nominally lifted in 2002 and EU operators were allowed to participate in the improved procedures for allocating routes to particular companies. In order to operate, however, they had to comply with higher staffing requirements with Greek or Greek-speaking crew, in effect pre serving cabotage. Further liberalisation took place in 2006, but substantial restrictions remain that hinder competition and discourage investment in the sector. Moreover, even today, non-eu cruise ships are allowed to pick up passengers in Greek ports only if they discharge them in non-greek ports. What this means, in effect, is that a customer of a US cruise ship cannot start their cruise of the Aegean islands from Athens because, if they do, they cannot return to Athens. This epitomises the unbearable capac ity of regulation to constrain economic activity in a desperate attempt to protect Greek seamen s jobs, while not allowing the creation of other jobs elsewhere in the economy. Greek seamen are highly skilled and valued in the shipping industry, so restrictive regulation is difficult to comprehend. This brings us naturally to a discussion of Greek tourism. Greece has failed to take advantage of one of the best real estate locations on Earth. Tourism, one of Greece s major export industries, remains undeveloped primarily because of deficiencies and distortions in its zoning laws and building codes. For decades, it was impossible to develop large residen tial complexes in areas outside city limits. Even today, the law restricts building to no more than 200 m² per 4,000 m² plot. So, in an area, say, of 200,000 m² 10 OIKONOMIKO ΔEΛTIO

11 Greece is one of the most beautiful, relatively unspoilt and undeveloped locations, with a coastline as long as that of all of Europe put together (if one includes the islands), a temperate climate, and a rich history and culture. However, it lacks the infrastructure to become the Florida of Europe, especially in the areas of transportation, health, education and housing. All efforts should be directed towards exploiting the only major viable asset for Greece that is, location, location, location. Greece s future as a tourist destination of high quality is intimately linked to real estate development. This cannot succeed, however, unless foreign direct investment is facilitated, and private domestic and foreign entrepre neurship is allowed to develop the opportunities. Shielding small and local interests from competition gets us nowhere. one could build 50 housing units of 200 m² each, but they have to be separate. They cannot be located in one part of the plot so that other facilities (e.g. pools, tennis courts, fitness centres) can be built in another part of the plot so as to create a commercially viable, protected commu nity operation of high quality. Moreover, major developments would face excruciating licensing procedures from the authorities governing archaeol ogy, the military, forestry, zoning, and so on, which, at the end of the day, would force investors to abandon any hope due to long delays and undue restrictions that would render any project barely economical. Since 2008, a new law has provided for the development of complex and integrated tourist infrastructure of mixed use, meaning building com plexes combining four- or five-star hotels, recreational facilities and so on, and villas for sale. Already there are two world-class integrated complexes being built in the Peloponnese, in the areas of Costa Navarino and Porto Heli, of which more are needed if Greece is to move upscale in terms of its tourism services. The law provides that the plots should be larger than 150,000 m² and cannot be located more than 600 m above sea level or on islands with an area of less than 90 km². Moreover, in the 30 islands where such developments are allowed, there are further restrictions as to their size. All this, though moving in the right direction, still smacks of compromise as to the interests of big hotels/small hotels, big construction companies/small contractors, national interest/local interest, and so on. Still the law does not allow the construction of any major housing project unless there is a hotel present in the complex. This is an absurd requirement, of course. A more liberal law is urgently needed if Greece is to become a country of domicile, work and pleasure for high-income individuals. European baby boomers will be retiring in increasing numbers in the 2010s. Greece is one of the most beautiful, relatively unspoilt and undeveloped locations, with a coastline as long as that of all of Europe put together (if one includes the islands), a temperate climate, and a rich history and culture. However, it lacks the infrastructure to become the Florida of Europe, especially in the areas of transportation, health, education and housing. To further develop the tourism industry away from a three months in the summer proposition, what is needed is to build state-of-the-art infrastructure in ports, airports, highways, housing developments, hospitals, universities, golf courses, athletic facilities, and summer and winter sports venues, as well as improved transportation links via boats, planes, hydroplanes and anything else imaginable. All efforts should be directed towards exploiting the only major viable asset for Greece that is, location, location, location. Greece s future as a tourist destination of high quality is intimately linked to real estate development. This cannot succeed, however, unless foreign direct investment is facilitated, and private domestic and foreign entrepre neurship is allowed to develop the opportunities. Shielding small and local interests from competition gets us nowhere. For tourism to thrive, a good transportation infrastructure is needed too. In Greece, the ports and airports have traditionally been owned and managed by state-controlled entities and enterprises. The port authorities monopolistic profits have been stagnating, with no investments under taken to increase capacity and traffic. Last year, however, China s COSCO was 11 OIKONOMIKO ΔEΛTIO

12 In Greece, the ports and airports have traditionally been owned and managed by statecontrolled entities and enterprises. As regards airports, with the exception of Athens airport a model operation run by the com pany that built it all other airports are run by the government in a similar fashion to the ports. To complete the story of the transportation infrastructure, trains and buses, urban and intercity, are heavily regulated. The result of operating with no income constraint and no cost recovery is the usual one: high operating costs, low transportation volume. Although Greece has abundant solar and wind power endowments and, therefore, is an ideal location for solar and wind energy production, the contribution of renewables to electricity lags behind that of countries like Germany (4.5%) and Spain (8.9%). The reason is that the government had not until very recently developed a fully workable system of production incentives and location guidelines so as to provide the stable environment required for invest ment. granted rights to operate a docking station in the port of Piraeus, in the midst of fierce opposition from the trades unions fearing competition, and eventually marginalisation, if customers were to prefer the modern facilities and better service of the Chinese operator. As regards airports, with the exception of Athens airport a model operation run by the com pany that built it all other airports are run by the government in a similar fashion to the ports. As in the case of coastal shipping, flights to low-traffic destinations are subsidised, with the government granting rights to land to one of the two or three operating airlines usually for one flight per day at fixed low prices. In the summer, even if there is demand for more daily flights, the airlines are not allowed to put on more flights or raise prices, as this would upset the delicate balance of allocated business between coastal shipping companies and airlines, or would upset the locals. This is all non sense, of course. Simply, the government has no clue as to how to run the airports, how to promote traffic, how to make investments in air strips, in airport facilities, and so on. Finally, efforts to introduce hydroplanes to ser vice certain islands or coastal areas have been effectively thwarted by the established boat and airplane operators, while a foreign company that set out to exploit hydroplanes on a pilot basis went bankrupt and closed down operations. To complete the story of the transportation infrastructure, trains and buses, urban and intercity, are heavily regulated. With respect to trains, the government not only owns the tracks but runs the trains as well, although the market is, in theory, liberalised. The story here is sim ply ludicrous in terms of business operations and management efficiency. Not including depreciation, the business incurs an operating loss of about 1 billion a year and has a debt of around 10 billion. The trains and sta tion facilities are below par, and the transportation load suboptimal. The government simply lacks the entrepreneurship and management skills to turn this operation into a commercially viable business. Urban transport is another example of the debacle of having the government run businesses. The result of operating with no income constraint and no cost recovery is the usual one: high operating costs, low transportation volume, pervasive use of private cars and taxis raising air pollution to high levels, buses that are not well maintained, infrequent and indifferent service, and so on. Energy is a sector where production and distribution is predominantly, though not exclusively, in the hands of the government. And this has primarily been the reason behind lost opportunities, investment delays and great inefficiencies. More than 50% of electricity production comes from domestically mined lignite, 30% from burning imported fossil fuels, 10% from hydropower and, among the rest, only 3% from renewables, expected to reach 20% by 2020 at the expense of lignite. Although Greece has abundant solar and wind power endowments and, therefore, is an ideal location for solar and wind energy production, the contribution of renewables to electricity lags behind that of countries like Germany (4.5%) and Spain (8.9%). The reason is that the government had not until very recently developed a fully workable system of production incentives and location guidelines so as to provide the stable environment required for invest ment. And, of course, Greece never entered into the manufacturing of solar panels and wind turbines, as there was no local industry to absorb the supply. 12 OIKONOMIKO ΔEΛTIO

13 Production of renewable energy is supposed to be promoted in Greece via sales to the national grid at prices covering the higher cost of produc tion. Prices guaranteed to solar and wind power producers of electricity are currently set at about 450/MWh and 90/MWh, respectively. Similar arrangements are made for producers utilising geothermal, hydro power, biomass and biogas technology. The Public Power Corporation (PPC), the state-controlled entity producing electricity using non-renewables, prices electricity at 65/MWh, roughly 60% of the price electricity is sold for in most other EU countries. This is primarily a function of using cheap lignite (a high-polluting carbon ore extracted from PPC-owned mines) and not paying for the associated environmental cost. Cheap electricity may be good for the economy but, at the same time, discourages invest ment in power plants with higher costs of production, like renewables. With current electricity prices in Greece, no investment outside the PPC can take place either using conventional energy sources or renewables, without extensive government subsidies or a rise in the cost of electric ity to the consumer. As renewables cannot be trusted to come on stream quickly enough to deal with capacity constraints developed over years of delays, the most likely course of action is for PPC, alone or with a partner, to continue investing in modern low-polluting power stations using lignite or other kinds of clean carbon. Finally, with respect to agriculture, Greece s climate and soil are ideal for cultivation of high-quality produce and other crops. Family farms may be small in size and short in entrepreneurship but this may not be a formi dable constraint as long as incentives and rewards are in place to mobilise farmers. The industry has, however, been corrupted by subsidies and government transfers, mostly in the context of the bungled EU Common Agricultural Policy. Over the years, the many layers of bureaucracy have been a major hindrance to attracting fresh investment interest in the energy sector, causing undue delays. A new draft law on renewables tabled recently for debate in parliament seems to cut down the time needed to obtain licences from years to months, especially for small investments. However, in the area of big renewable projects (e.g. offshore wind parks and pump-storage hydro plants) additional bureaucratic obstacles seem to have been imposed that risk putting off for many years investments of about 12 billion for off shore wind parks in the pipeline. Finally, with respect to agriculture, Greece s climate and soil are ideal for cultivation of high-quality produce and other crops. Family farms may be small in size and short in entrepreneurship but this may not be a formi dable constraint as long as incentives and rewards are in place to mobilise farmers. The industry has, however, been corrupted by subsidies and government transfers, mostly in the context of the bungled EU Common Agricultural Policy. Since 2003 there has been a moving away from sub sidies based on production to income support. This support is based on acres owned, cultivated or not, multiplied by a per-acre subsidy received over a reference past period, with special regimes applying for specific products cultivated. This is a transitional phase leading to the abolition of most kinds of direct income support planned from 2013 onwards. The emphasis thereafter is to be placed on new cultivations/new methods of production, bridging the gap between demand and supply. Although some farmers have already turned towards new types of cultivation, which are in demand (e.g. mushrooms, asparagus, biological cultivation of fruits and vegetables, biofuel plants), most farmers are either unable or unwilling to extricate themselves from traditional surplus cultivations. Thus, the prob ability is high that they will experience a decline in their incomes down the road. This is the 13 OIKONOMIKO ΔEΛTIO

14 perfect setting for unrest, of course. Every January, protesting farmers block the main highways of Greece for days, asking for more financial support from a cash-strapped government constrained at the same time by EUwide policies. In this setting of dependency, a mul titude of highly political agricultural cooperatives and associations lobby the government, not about production and investment initiatives for new crops but, unfortunately, about distribution of soon to disappear income supports. The reader must by now have formed a fairly good idea as to the depths of inefficiency plaguing the Greek economy, and the dire need to change everything through structural reform, deregulation and privatisation. The Greek state in the reformatory IMF involvement in the support package for Greece would be instru mental in ushering in a new era in the field of structural reform. Indeed, the IMF s Memorandum of Understanding, dated 3 May 2010, contains significant changes in the institutional framework aimed at freeing the economy from the yoke of the Greek state. All these initiatives are expected to boost the competitiveness of the Greek economy. They are absolutely necessary if the competitiveness gap with other economies is to be bridged. IMF involvement in the support package for Greece would be instru mental in ushering in a new era in the field of structural reform. Indeed, the IMF s Memorandum of Understanding, dated 3 May 2010, contains significant changes in the institutional framework aimed at freeing the economy from the yoke of the Greek state. All these initiatives are expected to boost the competitiveness of the Greek economy. They are absolutely necessary if the competitiveness gap with other economies is to be bridged. To highlight the issue, the competitiveness differential between Greece and the US is depicted in Table 3. Certain components of competitiveness referring to the institutional framework, and product and labour market flexibility indicators, are referred to so as to demarcate the road left to be travelled if Greece is to become an efficient world-class economy. Progress has been slow in the past because good times and easy money tend to hide inefficiencies and shortcomings, which become appar ent in more difficult times. Greece has entered a brave new world with the activation of the ultima ratio EU IMF 110 billion three-year support package. A substantial part of the imposed conditionality concerns, as expected, fiscal adjustment. The Greek government has already adopted a major tax reform bill with a view to tackling tax evasion, and a pension reform bill is in the pipeline. The support package contains specific commitments in the area of social security such as: raising the retirement age of female government-sector employees to 65 by 2013 starting in 2011 (so as to equalise it with that of male employees) raising from 37 to 40 years by 2015 the minimum period of social secu rity contributions so as to be entitled to a pension raising the minimum age of early retirement to 60, while reducing eligibility restricting the list of so called hazardous and unsanitary occupations entitled to early retirement automatic raising of the retirement age on the basis of changes in life expectancy granting of a basic pension to all above 65 on the basis of income criteria and of a supplementary pension in line with life-time contributions limiting disability pensions. With respect to the national health system, emphasis will be placed on 14 OIKONOMIKO ΔEΛTIO

15 improving the management of prescription drugs, which will favour the use of generics and will include an electronic system of tracking prescrip tions issued by doctors. At the same time, hospital management will be upgraded by strengthening budgetary discipline and control. table 3: Greece (Gr) and usa (us) - ease of doing business rank RANKING (out of 133 countries) 71 2 TOTAL SCORE (out of 7) Institutions Property rights Intellectual property protection Diversion of public funds Public trust of politicians Judicial independence Favouritism in decisions of government officials Wastefulness of government spending Burden of government regulation Efficiency of legal framework in settling disputes Efficiency of legal framework in challenging regulations Transparency of government policymaking Business costs of terrorism Business costs of crime and violence Organised crime Reliability of police services Ethical behaviour of firms Strength of auditing and accounting standards Efficacy of corporate boards Protection of minority shareholders interests Goods market efficiency Intensity of local competition Extent of market dominance Effectiveness of anti-monopoly policy Extent and effect of taxation Total tax rate (profit tax, labor tax and other taxes), of profits (hard data) Number of procedures required to start a business (hard data) 15 6 Days required to start a business (hard data) 19 6 Agricultural policy costs Prevalence of trade barriers Tariff barriers (hard data) Prevalence of foreign ownership Business impact of rules on FDI Burden of customs precedures Degree of customer orientation Buyer sophistication Labour market efficiency Cooperation in labour-employer relations Flexibility of wage determination Rigidity of employment index, (worst) scale (hard data) 51 0 Hiring and firing practices Firing costs, in weeks of wages (hard data) 24 0 Pay and productivity Reliance on professional management Brain drain Female participation in laboru force, ratio (hard data) Source: Doing Business 2010, World Bank, IFC. 15 OIKONOMIKO ΔEΛTIO

16 To facilitate the setting-up of new businesses, the government intends to lift restrictions in services in particular tourism, retailing and educa tion in terms of, for example, quantitative and geographical require ments, legal requirements, equity participation requirements, and setting of minimum or maximum fees. In levelling the playing field, the commitment is to liberalise certain closed professions. With respect to the operation of the railroads, the changes include the closing down of loss-making routes as well as unloading real estate and other assets in an effort to rationalise operations and return to profitability. Other measures include the full liberalisation of the electricity and natural gas sectors. Labour laws are to be overhauled with a view to imposing an annual ceiling on hours worked so as to effectively reduce overtime pay, increas ing the 2% monthly limit on redundancies and reducing redundancy compensation, keeping the nominal minimum wage fixed at current levels for three years, lowering the minimum wage for youth and the long-term unemployed, and promoting part-time work. Moreover, wages will be allowed to be set at lower levels than those negotiated at industry level and to be linked to productivity at company level. According to current practice, in case of disagreement in wage bargaining negotiations, one of the two parties can ask for mediation, with the decision of the mediator being obligatory for both parties. It is now proposed that resort to media tion can be effected only if both parties consent to that end. To facilitate the setting-up of new businesses, the government intends to lift restrictions in services in particular tourism, retailing and educa tion in terms of, for example, quantitative and geographical require ments, legal requirements, equity participation requirements, and setting of minimum or maximum fees. Moreover, the government is expected to recognise the occupational qualifications of individuals from other EU countries wishing to work in Greece, in the context of the transposition into Greek law of the EU Services Directive, aiming to facilitate freedom of establishment for providers in other, and provision of services between, member states. Finally, initiatives are being undertaken to reduce tax-related restrictions on M&A activity, to simplify the custom clearance of exports and imports, and allow this activity to be carried out also at the level of big companies or industrial zones instead of custom houses, and, last but not least, to reduce the red tape involved in starting a business. In levelling the playing field, the commitment is to liberalise certain closed professions, specifically that of lawyers (lifting minimum fees, bans on advertisement and geographical restrictions), pharmacists (lifting restrictions on number of pharmacies and the minimum profit margin), notaries (lifting restrictions on number of notaries, minimum fees and geographical restrictions), and, finally, architects, engineers and auditors (abolishing minimum fees). Finally, the liberalisation framework includes road haulage operators by lifting entry barriers and minimum guaranteed prices. The government has already tabled a draft bill that aims to liberalise the sector. However, it is not aggressive enough if one judges by its welcome reception on the part of the very same people it intends to inconvenience! According to this draft legislation, new licences will be issued at a fee more or less equal to what is the current market price of licences, with a view to adjust it down wards in future if and when This scheme compares rather poorly to the liberalisation attempted in Italy, with the government giving a new licence free of charge to all the people who already had a licence, instantly effectively doubling the number of licences in the market without protest. With respect to the operation of the railroads, the changes include the closing down of loss-making routes as well as unloading real estate and other assets in an effort to rationalise operations and return to profitability. Other measures include the full liberalisation of the electricity and natural gas sectors. 16 OIKONOMIKO ΔEΛTIO

17 There are hundreds of pieces of prime land that can be tapped for tourist development all over Greece. Although there is no concrete valuation information for all these properties, the figure suggested of 300 billion seems to underestimate their potential value. The support package contains nothing about privatisations or manage ment of the state s real estate holdings. I will, therefore, try to sketch out some elements of this process because it is part of shaping the future of Greece. The government s privatisation programme will involve, prob ably, selling additional stakes of various sizes in state-controlled entities. Table 4 lists all major state holdings for companies listed on the Athens Stock Exchange, which potentially could be fully privatised if the govern ment takes the bold decision to relinquish control. Also, the government is considering offering long-term concessions for commercial exploitation in exchange for private-sector participation in investments in infrastructure. Also, the government plans to priva tise ground-handling services at regional airports, rail stations and other venues. The Greek state is also the 100% owner of ports, airports, the Salonica International Trade Fair, the Olympic Games venues, Hellenic Railways, the Athens Horse Racing Track and numerous real estate holdings, under the auspices of two state property management companies: Tourist Real Estate (ETA) and Real Estate Management Company of State Holdings (KED). There are hundreds of pieces of prime land that can be tapped for tourist development all over Greece. Although there is no concrete valuation information for all these properties, the figure suggested of 300 billion seems to underestimate their potential value. This figure is based upon a newspaper interview with Mr. V. Maglaras, Head of Corporate Development of KED (the real estate management company of the Greek state) whose estimates of the tax assessed value of more than 71,000 properties is 272 billion. As this figure is substantially less than the market value of the properties, Alpha Bank estimates that the prob able value could be more than 300 billion, although the actual valuation study has not been released (Report in Kathimerini Daily of 24 January 2010). To take advantage of dormant opportunities, the government is also considering the commercial promotion of the west coast of Athens (Glyfada), the east coast of Athens (Marathon Nea Makri Rafina), the coast between Neo Faliro and Microlimano in the Athens port of Piraeus, as well as several major office buildings in Athens. table 4: Greece State holdings (> 100 million) of companies listed on the athens Stock exchange State holdings (%) Value ( million) Electricity Oil Refinery Natural Gas Athens Water Salonica Water Athens Port Salonica Port Athens Airport Lotteries Postal Savings Bank Agricultural Bank of Greece 77 1,365 Source: Hellenic Republic, Stability Program, OIKONOMIKO ΔEΛTIO

18 Finally, one major project that could unleash the full potential of the commercial utilisation of state properties is the 1.8 million-acre old Athens airport at Ellinicon, which was vacated in early 2000s when the current Athens airport at Spata was built. This is a unique property of great value in the Mediterranean, being a coastal area in the middle of Athens that could potentially be put to good use by developing an integrated complex with parks, marinas, athletic facilities and residential areas. Unfortunately, it is unutilised and, due to government indecision and lack of funding, will remain so unless the government opts to auction this jewel to private investors for development. Its land value is estimated at about 4 billion. Overall, Greece will emerge stronger and more resilient than ever if all these structural reforms are implemented. I am confident that Greece will adjust much faster than predicted in the support package if more empha sis is placed on privatisation, and especially on taking advantage of the real estate endowment of the country. The potential is huge. The cost of inaction should not be underestimated. Epilogue It is high time that Greeks have a state commensurate with their abilities and aspirations. The political class in Greece has failed the Greek people miserably. The political class in the Eurozone, through action or inaction, has condemned the fiercely independent Greeks to austerity and submission, under the banner of community solidarity. With the Greek budget on the skids, an issue of misreporting in 2009 was blown out of all proportion, eventually becoming an issue of stability for the euro, requiring 110 billion to fix and who knows how much more if there is contagion. Whatever may be said about the Greeks, one thing is certain: their ingenuity, endurance and adaptability cannot be denied. This is clearly seen in their dominance of world shipping. When outside Greece, Greeks usually excel. It is high time that Greeks have a state commensurate with their abilities and aspirations. Greeks are ambitious, resourceful, competitive and pragmatic. They are hard workers and risk takers, ready to move (even to other countries) to improve their lives. They love and seek out opportunity. So, the current restructuring taking place in the Greek economy and society is a step in the right direction. Archimedes, proud of his prowess in the mathematics of levers, once said: Give me a place to stand, and I shall move the Earth! Paraphrasing this, I would say: Give Greeks a state that functions, and they will work miracles! Of course, nobody will give Greeks a state. They have to look inside and find the strength and courage to reinvent themselves. Because they are the state. 18 OIKONOMIKO ΔEΛTIO

19 The economic crisis in The light of global macroeconomic imbalances* Introduction The current global economic crisis will not be properly understood without explaining the impact of global macroeconomic imbalances (GMI) as the major factor behind its eruption and propagation worldwide. We specify GMI as the rapid growth, over , of large surpluses in the world creditor economies (CEs), which were reflected in equally sizeable CA deficits in the world debtor economies (DEs). *by Demetrios K. Maroulis, Manager, Economic Research Division, Alpha Bank Georgios Anastasiadis, adjunct Professor, American College of Thessaloniki, International Journal of Economics, Vol. 4, No. 1, June 2010 In this paper we argue that the current global economic crisis will not be properly understood without explaining the impact of global macroeconomic imbalances (GMI) as the major factor behind its eruption and propagation worldwide. We specify GMI as the rapid growth, over , of large current account (CA) surpluses in the world creditor economies (CEs) including China, Japan, Germany, Switzerland and a number of other emerging economies, which were reflected in equally sizeable CA deficits in the world debtor economies (DEs), including the USA, the Eurozone (except Germany and Netherlands), the United Kingdom and a large number of emerging economies, especially in Central and Eastern Europe. These GMI reached unprecedented proportions by 2007, triggering a crisis first in the financial sector of the USA, the major global DE, which was promptly diffused to the financial sector and the real economies worldwide, including the major CEs. The process of recycling of CEs surpluses into the financial systems of DEs, supporting their domestic demand expansion through over-borrowing by households and governments, and thus sustaining the exports of CEs, eventually reached its limits. Once deleveraging by households and governments in DEs began, in the wake of the financial crisis, CEs could no longer sustain their export-led growth falling also into recession and making the crisis global. The scant importance placed on the role of GMI in precipitating the financial and economic crisis has resulted in a timid and probably inadequate global macroeconomic policy response: Firstly, the incompatibility of monetary policies followed by the FED and the ECB in the period between August 2007 and July 2008 led to the abnormal appreciation of the Euro and the surge of oil and other commodity prices, precipitating the unprecedented decline of the world economy in H and H Secondly, there are still signs of a destabilizing persistence by some major CEs on policies aiming at real exchange rate undervaluation as a tool for the eventual recovery of their economies via net exports. Thirdly, the policies of monetary and fiscal stimuli applied in the wake of the crisis in CEs were either inadequate, as domestic consumption in these countries barely grew in H1 2009, or directed mainly towards investment and aid in tradables, or even investment in valuable raw materials (as in the case of China), thus increasing further their existing excess production capacity. Overall, the unprecedented financial crisis and the ensuing global recession of has contributed to the dampening of GMI, as the CA deficits of the US and many other DEs have shrunk in the first half of 2009 and at the same time the large CA surpluses of the CEs have been contained (See also IMF, October 2009). For example, in the Eurozone the trade bal- 19 OIKONOMIKO ΔEΛTIO

20 The extraordinary monetary and fiscal policy measures applied since September 2008 for boosting domestic liquidity and aggregate demand in CEs and DEs have proved quite successful in bringing the economies out of the recession and to give them a positive GDP growth from Q onwards. However, this growth is being based on different foundations in DEs and CEs. In the USA and in some other DEs domestic demand based positive GDP growth may again lead to negative net export growth and to negative contribution of the external sector on GDP growth. All the major CEs, including Germany, China and Japan have also implemented domestic demand stimulus measures, which, however, have not implied an essential increase of their private consumption and have not prevented a significant fall in their imports. ance registered a surplus of 9.1 billion in January-July 2009, compared with a deficit of 21.3 billion in January July This, however, was achieved despite the fact that the combined trade surpluses of Germany and Netherlands (the main CEs of the Eurozone) was down from billion in January-July 2008 to 76.9 billion in January July In fact, the main rebalancing force behind this adjustment has been the inordinate fall of domestic demand in DEs, due to the credit crunch, and the consequent fall in the price of oil. Until Q this fall in DEs domestic demand and imports implied a substantial decline of CEs exports and the fall in their external goods and services balance. Moreover, in H and H1 2009, domestic demand was stagnant or even falling in the CEs as well, thus, bringing these countries and the world economy into the deep recession experienced in this period. In this respect, of particular importance is also the situation developing in the world economy in H onwards. Initially, there is an important boost to global growth originating from the slowdown or reversal of the falling trend in stocks. Moreover, the extraordinary monetary and fiscal policy measures applied since September 2008 for boosting domestic liquidity and aggregate demand in CEs and DEs have proved quite successful in bringing the economies out of the recession and to give them a positive GDP growth from Q onwards. However, this growth is being based on different foundations in DEs and CEs, as follows: a) In DEs, this positive growth is being achieved at the expense of further substantial increases in their public sector indebtedness and the possible premature termination of their households deleveraging process. Moreover, in the USA and in some other DEs domestic demand based positive GDP growth may again lead to negative net export growth and to negative contribution of the external sector on GDP growth. Concerning the DEs of the Eurozone (Spain, Italy, Portugal and Greece), which are also burdened by an appreciating currency, it is evident that the room for fiscal expansion in most of them is rather limited, while the existing domestic credit restrain, the on going households deleveraging process and the negative contribution to GDP growth from their net exports, may actually prevent their GDP from turning to positive growth in the following quarters. b) All the major CEs, including Germany, China and Japan have also implemented domestic demand stimulus measures, which, however, have not implied an essential increase of their private consumption and have not prevented a significant fall in their imports. In fact, most of these measures are designed primarily in order to provide support to their internationally tradable goods sectors, with little consideration for domestic consumption, which in any case is being tested by rising unemployment. Overall, in the CEs positive growth in Q3 will again be based excessively on positive net export growth due to the domestic demand stimuli applied by DEs. Thus, it is possible that the expected recovery in CEs and many DEs from Q onwards will be mainly due to the expansionary monetary and fiscal policies in some major DEs (namely the US and the UK) and it will most possibly be accompanied by a new exacerbation of GMI. To the extent that this takes place, it will also carry with it the risk for the world economy to 20 OIKONOMIKO ΔEΛTIO