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Quick Progress Is the One Course Left for Greece

by Vassilis Antoniades and Kimon Palinginis
AUGUST 05, 2015

The death knells tolled even before the deal was struck, before the Greek Parliament gave its necessary approvals, before
the extent of the new austerity measures had a chance to sink in. Naysayers from the left and the right, from Greece, the
EU, and elsewhere began beating the drums of demise for the latest rescue package that tries to secure Greeces future in
the Eurozone.

The prophets of doom may prove to be right: this is surely a very tough deal. Its unpopularity has led some experts to
continue arguing that leaving the Eurozone is the preferable course. With the exception of the leftmost- and rightmost-
leaning members of the Greek political system, few of these proponents live in Greece. They ignore the fact that the vast
majority of Greeks see their future as part of Europe. Polls regularly show that 65 to 70 percent of the population supports
remaining in the Eurozone. A Grexit would permanently undermine Greeces position in Europe, seriously limit its influence
in international affairs, especially in its immediate neighborhood, and substantially negate the significant achievements that
the country has registered over the last four decades with regard to economic and sociopolitical change.

The proponents of Grexit talk of the consequences as if they were the lesser of two evils, but there is no way to understate
the severe and lasting impact of the devaluation of at least 50 percent that a new currency would entail. It would mean a
minimum drop of 50 percent in per capita GDP. Greece would need 7 percent average annual growth over the next ten
yearsan improbable scenario at bestjust to get back to todays level of economic output. However harsh the latest
austerity measures are, they are not the equivalent of an economic atom bomb.

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Demonstrating quick progressto itself and to the worldis the one way Greece has left to move forward. The good news
(a relative term in this context, to be sure) is that as painful as the deal may be, it does contain several solid cornerstones to
build on.

Taxes, Stability, and Investment

In a consumption-driven economy such as Greeces, higher taxes bite hard. Economists, politicians, and taxpayers
themselves can argue the merits of raising taxes in an already suffering economy, but increases in VAT and the corporate
income tax are part of the deal, and these increases are now law. The focus should therefore be on the future.

The only thing that businesses like less than higher costs (including taxes) is uncertainty. The only people who like
uncertainty less than businesspeople are investors. The government has an opportunity now to signalstrongly and
repeatedlythat the corporate tax code will not change until Greece gets back on its economic feet and can tackle a full tax
overhaul. The country desperately needs investment. And it can create plenty of opportunities. But the prospect of new or
altered taxation will constitute a big deterrent to capital investment unless the government acts with a clear and credible
commitment to remove it.

Privatization

The deal with Europe includes the requirement that Greece privatize a host of state-owned assets. Critics of
privatizationand there are plentyshould look to other countries as diverse as France, Portugal, and the UK, where
privatization has often proved highly successful. Even in the former Soviet bloc, where assets were privatized in an often
clumsy, unfair, and traumatic fashionowing in large part to the lack of functioning capital marketsno one is seriously
suggesting a return to state ownership. Greece has functioning marketsand privatization doesnt necessarily mean sale.
There are many vehicles, including long-term leases, that enable the government to secure a predictable income flow,
attract investment, and participate in the upside of privatized ventures.

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The naysayers question whether the 50 billion privatization target is achievable. They miss the point. The list of assets on
the governments books is long, valuable, and attractiveand many have the potential for wider economic benefit. The easy
targets could include state-owned stakes in airports, Piraeus and other ports, and many large companies.

These are only the tip of the iceberg. Greece is a vacationers paradise (all the more so in the current circumstances,
because prices are low), and tourism generates about one-fifth of GDP. But the country has few world-class resorts with the
recreational infrastructure, such as golf courses, that wealthy tourists seek out, because the government owns much of the
most desirableand developablecoastal land.

Multiple Greek islands, vacation meccas all, have government-owned airports that currently host one flight a dayor less!
Meanwhile, the busiest airports, such as the one on popular Mykonos, need to expand their capacity to handle the traffic,
which requires investment. This wont happen under public ownership.

Yachters flock to the Greek islands. There is not enough marina capacity to serve them. Guess who owns most of the
marinas? The list of possibilities goes on.

Attracting Foreign Capital

In the years following the 1997 Asian economic crisis, countries such as Malaysia and South Korea showed how policy
reforms that facilitate foreign investment can help a badly roughed-up economy return to growth. Indeed, within only a few
years of the crisis, South Korea again topped the Asian economic-growth charts. Current regulations in Greece are a barrier
to investmentespecially foreign investment. It can take more than ten approvals from different government departments to
start a midsize manufacturing operation, and a delay on any one holds up the entire project. The government can take steps
immediately to eradicate red tape and make it easier for a foreignor anycompany to start new operations.

Commitment to Implementation

Prime Minister Tsipras can signal a strong commitment to reformsand help to ensure follow-throughby appointing a
centralized economic-reform delivery team that reports directly to him. Governments in other countries, notably the UK

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government under Tony Blair, have used such mechanisms to blow through the inevitable bureaucratic bottlenecks and
move reforms forward. Greece is good at stagnation, especially when political or bureaucratic turf is under attack. The prime
minister needs to show progress quickly and demonstrate to all concernedinside the government and outthat this deal is
different. He needs a team of tough-minded technocrats and reformers who arent afraid to twist arms or step on toes. And
he needs to personally oversee their progress so that everyone knows that the members of the delivery team speak for him.

Other Reforms

These are all only first steps. Greece cannot turn itself around fully without addressing many entrenched economic
problems. Unemployment, especially among young people; the unsustainable social-security system; and the ineffective tax
code and collection system are all high priorities. (See The Role of Structural Reforms and the Prospects for the Greek
Economy (http://www.bcg.gr/documents/file165411.pdf), a report by BCG and the Foundation for Economic and Industrial
Research [IOBE], May 2014.) These are systemic problems that will take years to fix. The prime minister and his
government must show progress soon. Its the key to getting additional time from European creditors, attracting the investors
whose capital Greece needs, and convincing Greek voters and consumers that there is indeed hope on the horizon,
however distant.

To his credit, since striking the deal, Tsipras has so far been doing his part to make it work. He has pushed two difficult
approvals through Parliament with an unexpected but broad coalition of the center right and the center leftand without the
help of a significant bloc of his own party. The politics of the next several months will be tricky. Given the open revolt on the
far left of Syriza, Tsipras will have to choose from a series of difficult options as he cobbles together the votes he needs to
govern. Another election in the fall, in which the prime minister tries to corral a new coalition, is a distinct possibility.

But politicsGreek and globalcannot again become a reason for failure. Theres a ticking clock (or time bomb) in the form
of a debt repayment schedule, but even more important for Greeks, theres the need to get beyond the pain of more
austerity and start building for the future. Economists and politicians can continue to argue about how we got here and who

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is at fault. Greece has to move forward. The only other option is debating a worse fate, from a weaker position, when the
next debt payment comes due.

Copyright 2015 The Boston Consulting Group, Inc.

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