U.S. News & World Report

A Way Out of the Greek Financial Crisis

Former Senior Fellow

On December 13 the European negotiators finally approved a long-awaited $57 billion bailout to the Greek government to deal with its sovereign debt crisis which has shaken the foundations of the European Union and the euro. Without economic growth however, these bailout plans simply prolong the suffering of the Greek people, many of whom see no way out of the economic crisis facing the country. The loans will provide sufficient funds for the government to operate for two and a half years, but require further controversial cuts in public sector spending. Since the world economic crisis of 2008, the Greek economy has contracted by 20 percent, driving up unemployment to 23 percent, a rate comparable to U.S. unemployment at the peak of the Great Depression in 1932.

The Greek depression has created an exodus of talented, ambitious, and well educated young Greeks to find jobs in economies that are growing—the very young people needed for an economic revival in their homeland. If the economy begins to grow again and new jobs are created, many will return, but historical evidence suggests the longer they are employed elsewhere, the less likely they will return home. Conspiracy theories and blame apportionment to explain the crisis have long been cottage industries in Greece, but none of this offers a way out of the mess, and in fact may impede clear thinking.

While the focus of western media attention and the EU negotiations has been on the country's fiscal balance sheets and on the Greek government's profligate spending, too little has been written on how to kick start the economy to drive unemployment rates down and increase tax revenues to give the long suffering Greek people some light at their end of the bleak economic tunnel. Three strategies hold promise for turning around the economy.

First, focus on the inherent and proven economic strengths of the country, one of which has been tourism. Over the past two decades the Greek private sector has built more luxury hotels, upscale restaurants, tourist shops, and high speed passenger ships to travel to the Aegean islands and pristine beaches. This new upscale tourism is embodied in the Costa Navarino Resort which features a Robert Trent Jones golf course at Pylos Island on the southern coast of the Peloponnesos. The Greek government constructed a new airport in Athens which is among the most modern in Europe, a new highway system, and a remarkable new museum to house the architectural jewels and art work of the Acropolis in Athens—a symbol of the Golden Age of classical Greece. The enormous stadium built for the 2004 Olympics could be converted into a regional sports center that could bring sports tourism to the country. However, aggregated tourist revenues have declined by 50 percent since 2008, so much of this new infrastructure sits unused. Some analysts have made the argument that the tourist industry was in decline well before the economic crisis of 2008 (revenues have been declining since 2000), because it relies on low-end tourism, which attracts tourists with limited money to spend. Tourist costs have come down significantly: According to a June 11, 2012 article in Ekathimerini, prices last summer for hotel rooms were down by as much as 25 percent compared to a couple of years ago. With better tourist infrastructure built over the past two decades, and discounted rates, upper-end tourists may be drawn to Greek hospitality. But this would require an aggressive international marketing campaign.

Some of the decline in tourism is a function of exaggerated media reporting of the political turmoil in Athens. My wife and I traveled all over Greece in 2010, when I visited the country to give a lecture at American College in Athens. We saw no political turmoil other than around Constitution Square in front of the Parliament, so we simply avoided that area. The rest of Athens was peaceful and stable and the smaller cities and Greek Islands saw no political turmoil and were a delight, as always, to visit. Restoring (and even expanding) the tourist economy would help jump start the economy over the short term more than any other measure. One way to reduce the fears of potential tourists of political turmoil would be a two-year moratorium on public demonstrations agreed to by all political parties, labor unions, and student groups. This could be done with a complete revamping of the protest permitting process to ensure the protests are held in areas away from downtown Athens and the provision of law enforcement to implement the new system.

Second, accelerate the competitive bidding process for contracts to explore the rich natural gas deposits estimated at 3.5 trillion metric meters off the coast of Crete alone, with additional reserves off the western coast of Greece in the Ionian Sea which appear to be considerable. Greek national gas reserves are slightly smaller than those of Venezuela, Algeria, and Nigeria. 

According to an article in Euromoney published Nov. 29, 2012, Mark Wall of Deutsche Bank in London issued a report which estimates the reserves at $555 billion, "Assuming a reasonable industry rule of thumb that a quarter of this economic value is absorbed by the cost of production, another quarter is the profit margin for the production company and half is the beneficial government's tax take, this reserve, if proven and fully exploited, could yield the Greek government €214 (US $283 billion) or 107 percent of GDP," according to Wall. Greek government debt, according to the Economist, stands at about $405 billion, and so the exploited reserves could go a long way towards reducing the national debt.

The drilling will take three to five years to confirm the size of the reserves and put the infrastructure in place to reach the deposits, after which the revenue will start flowing to the Greek government. But first the Exclusive Economic Zone delineation negotiations with Libyan government must be completed in order for the gas extraction to begin. The completion of these negotiations is essential for the investment climate to be right.

Third, the key to economic growth in any country is attracting investment to create private sector jobs. The Greek government massively increased its sovereign debt from 22 percent of GDP in 1980 to 98 percent of GDP in 1993 with unproductive public sector jobs and government subsidies to various groups. While the number of these public sector jobs has declined by 15 percent during the crisis, private sector job growth has been limited. The World Bank's Doing Business Report of 2013, which tracks regulations and laws that promote investment and economic productivity, showed that Greece's ranking improved from 89th to 78th (out of 185 countries that are ranked) mainly because of reforms enacted by the Greek government over the past few years. The two dozen highest-ranked countries are the wealthiest and most vibrant economies in the world, and if Greece aspires to enter these ranks, much more extensive reforms are needed. Not all political parties and public opinion itself in Greece appear committed to improving the business climate; some regard business and the private sector as fundamentally corrupt and predatory. In Anglo-Saxon countries, which are at the top of the Doing Business Report rankings, the word "entrepreneur" is one the most respected professions among the general public, while in Greece the word suggests someone who has achieved their wealth through corrupt and unethical behavior. If entrepreneurs are looked down upon, what hope is there for attracting the most innovative and ambitious young people to careers in business?

When Greeks emigrate from their homeland to Canada, the United States, and Australia, their per capita income rises above most other ethnic groups. According to Northwestern University sociologist Charles Moskos's book Greek Americans: Struggle and Success, the U.S. census of 1960 and 1970 shows that second-generation Greek-Americans were only exceeded by Jewish-Americans in income and continued to rank first among all ethnic groups in educational attainment. So it can't be the work ethic, education level, or cultural values of the Greek people that are the problem. It is the clientalist political system, antibusiness culture, and statist bureaucratic norms of the Greece government which suppress the natural instinct of the Greek people for commerce and business and discourage private investment; it will take more than regulatory reform to change these attitudes. It is during national crisis that the most transformational reforms are often implemented, when vested interests are pushed aside, and real progress is made. The Greek economic crisis could be used by able political leaders to force through political and economic reforms and begin the process of cultural change as well. Then the light at the end of the tunnel may be bright indeed.