Last month, the Eurogroup agreed to lend Greece another €2.8bn. So far, Greece has received €29bn – almost one third of its third bailout programme, which totals €86bn. In what seems like last-second deals, Tsipras and his government have implemented all of the 15 reforms necessary to obtain the bailout funds. This has partially come as a surprise, given that only two of the 15 were implemented the previous month. As many times before, the Greek prime minister assured the public that the country is now on its way to a solid recovery.
Reforming Key Sectors
Too often this has not been the case. Too often the Greek public has been disappointed and put into even more hardship. Previous bailout funds in 2010 were only tied to fiscal and labour market reforms. It was mainly employees and retirees who had to bear the sole costs of it. With their lower incomes, lower demand resulted in a downward economic spiral that continually reinforced itself. The bailouts – and the way that the EU and the IMF are managing them – were described as an institutional failure or even economic imperialism. Nonetheless, this time the Greek government’s reform efforts are different.
This time, the Greek government implemented a liberalisation of the energy sector, bank governance and the management of a new privatisation agency. Of course, this reform effort has met great resistance from the left-wing Syriza and many other international organisations. They claim that it is another strike against the Greek people, and for big international companies.
But in fact, it is the opposite. One look at the profit margins of Greek companies that would be affected by the privatisation makes things clearer. This is illustrated in the graph above.
Retail trade, manufacturing of petroleum products and metals as well as electricity supply have seen much higher profits margins than the average company in the EU. The graph shows that Greek companies in retail trade (except for motor vehicles and motorcycles) have seen net profit margins that are 283% higher than the EU average. For companies manufacturing coke and refined petroleum products, the net profit margin is almost double the EU average, at 97%. Is that just because these businesses are doing exceptionally good work? Not really. Over decades, these companies, which have been in the governments’ hands or very close to it, have reaped supernormal profits due to high regulation and substantial barriers to entry that have protected them from any competitors. It has made fair competition in these markets almost impossible. As a result, a few vast companies have made huge profits.
Hence, it does not seem surprising that product market reforms have been feeble. Of reforms for better competition in retail trade, food processing, building materials and regulatory changes only 30% of the target was met, while all of the labour market reforms have been implemented. Powerful vested interests that represent either the largest Greek companies or the Greek public administration have delayed or constrained any reform effort the government has attempted in this field. A small group with high-powered resources and useful links to the government has benefited from rigorous and often unnecessary regulation in the past, at the expense of the majority of people.
Pressure On Labour
On top of retrenchments of social benefits, Greek workers have also faced naturally higher prices that come with these monopolistic structures. They have been hit by too much retrenchment of social benefits, and too little deregulation of rigid market regulations. That is why the reforms so far have had little positive effects. The reforms with most economic impact have not been tackled due to clientelism and structures that favour the well-represented and well-connected.
The OECD estimated the productivity gains from these market reforms to be immense. If fully implemented, reforms could raise output by more than 13% in the next decade. This is not going to happen through labour market reform and pension retrenchments only. Product market reforms are the key to a more productive and a more balanced recovery in Greece.
For this reason, the conditionality on bailouts can have positive effects. It is true that at times it puts the wrong pressure on the wrong people, namely those who already bear the biggest share of the costs. If it puts pressure on the government to dismantle damaging overregulation in the products market, it can have a positive impact on the whole Greek economy.
Last month, the government had to tackle these product market reforms to receive further EU funds. Being close to the implementation deadline, the government had to disregard vested interests and the demands of overly profitable market incumbents. This time, the reforms can be a success for the whole country.