CNBC | Interview with Michelle Caruso – Cabrera
LUCAS PAPADEMOS: Thank you, too.
MICHELLE CARUSO-CABRERA: How’s it going?
LUCAS PAPADEMOS: Well, we have many challenges ahead of us. As you know, the country is to achieve very ambitious targets both with regard to reducing its deficit and restoring its competitiveness. But I think progress has been made in the right direction. And we’re confident that this progress will continue during this year.
Now, the next few weeks are particularly challenging because we have to complete two interrelated processes. On one hand we have to complete the discussions concerning the voluntary restructuring of the Greek debt, the so-called P.S.I. process. And at the same time we have to formulate a new economic adjustment program for the period 2012-2015 in consultation with our European partners and International Monetary Fund. The two processes will have, this is the aim, to be completed over the next two to three weeks.
MICHELLE CARUSO-CABRERA: Extremely tough, but you’re confident that once you’re on the other side, both of those outcomes will be successful?
LUCAS PAPADEMOS: Well, I think that this is the objective. And I think the conditions are in place in order to do so. Definitely we’ll do our best. Now if we succeed in completing these two processes on time than Greece will be eligible for financing by its European partners and the I.M.F. That will provide a very good basis for completion of the economic adjustment program over the next three years. And we think we’ll be more than half the way towards taking the bold steps necessary to restore competitiveness and move in the direction of sustainable debt.
Of course the overall process of fiscal consolidation and reducing debt to sustainable levels will take much longer. There’s no doubt about this. However, the more difficult and demanding measures to be taken to this end, I expect that will be completed within about two years.
MICHELLE CARUSO-CABRERA: Two years from now?
LUCAS PAPADEMOS: Two years from now. Well, this year and 2013.
MICHELLE CARUSO-CABRERA: Two years from now, are you confident that Greece will still be using the Euro?
LUCAS PAPADEMOS: Yes. I’m very confident. I think it’s often discussed that leaving the Euro is an option for Greece. I think this is really not an option. This is the position of this government and of all the parties that are supporting it but what is more important, the overwhelming majority of the Greek people are in favor of Euro Area membership.
And I think the main argument for me is that membership in the Euro Area will actually facilitate the implementation of the economic adjustment program rather than hinder it. Some people think otherwise. But I think clearly this is not the case. Now as you know, Greece has two main problems. Its excessive debt and its low productivity. So correspondingly, the main objectives of this government is to eliminate the deficits, to reduce the debt to sustainable levels, and restore competitiveness.
I am personally convinced, and I think the Greek people share this in a fundamental way, that we can achieve fiscal consolidation more effectively and we can restore competitiveness in a more fundamental and permanent way within the Euro Area than outside. In addition the Euro implies, provides us rather, with an environment of monetary stability and an institutional framework conducive to fiscal discipline which will help promote long-term growth.
Let me also say that what I believe is relevant for this country is also supported by own experience. In the 20 years before Greece end up with the Euro, efforts to improve competitiveness through exchange rate and adjustments resulted only in temporary gains of competitiveness. And they were accompanied by very high inflation and low-growth performance. As a result of the fact that the economic policies pursued were not sufficiently disciplined and did not foster the fundamental restructuring the economy needed in order to foster growth.
So our own experience itself suggests that this is really not an option. And judging what is appropriate or not appropriate for a country, I think it is important in particular in judging what is the appropriate economic policy framework, one should take into account the overall political environment and the institutional framework within which economic policy operates.
MICHELLE CARUSO-CABRERA: The proponents or those who argue that you should leave the Euro so that way you could devalue say, if you stay in, you’ve got to do an internal devaluation, even further than what you’ve already done, which is very, very painful for the people. Can you achieve such an internal devaluation? And will the people go with you on it?
LUCAS PAPADEMOS: Well, what you have to do is to improve competitiveness, which partly depends on wage moderation and an internal devaluation reduction of prices and wages. But you can combine this with reforms that can boost productivity and market efficiency and enhanced competitiveness in different ways. Now clearly this process involves pain. It’s not only the process of internal devaluation. It’s also the process of fiscal consolidation, which is in parallel. Have as an inevitable short-term effect and a reduction, they lead to a reduction in real incomes. And they have resulted in an increase in unemployment.
But these effects are temporary. And by the end of the process, conditions will be in place that will help us foster a more sustainable growth path. Now, with regard to the progress made towards achieving internal devaluation, already in the two years behind us, that is in the year 2010-2011, since this program, since the first program started being implemented, measures of competitiveness based on unit labor cost show that we have gained competitiveness by about 5%.
And if the reforms being planned, and the other policies that are being also planned for this year and implemented, we estimate that by the end of this year, that is by the end of 2012 we should recover about one half and possibly three fifths of that competitiveness losses over the previous nine years. So the process has adverse effects in the short term, but it is working.
And as I said earlier on, I think the gains to be achieved by a combination of reforms and labor market adjustments are going to be more permanent and will provide a basis for reducing unemployment and improving expert performance and sustaining growth in a way that is more sound and more permanent.
MICHELLE CARUSO-CABRERA: Can you be more explicit on what the steps are? In order for – the true solution here is for Greece to grow. For Greece to grow, it has to regain competitiveness. You’ve mentioned some things already. What other things are part of the plan to restore competitiveness?
LUCAS PAPADEMOS: Well a range of reforms that aim to improve the efficiency of markets and remove obstacles to investment and improve the business environment so that economic activity is fostered both by external investment and domestic investment. Now in addition however, I will say a few more things about the reforms that have been implemented, then, the ones that are being planned.
I think achieving a higher fiscal stability is also a very important condition for restoring an environment which is conducive to growth because we have reached debt levels that were clearly unsustainable. As a result, global financial markets were no longer willing to finance the Greek economy. And indeed one of the problems, one of the factors, that is actually adversely affecting the economic activity in this country is the reduced liquidity associated with a difficulty of the country, not only the public sector, but also the private sector too to borrow.
So by establishing, by reducing, public sector deficits and reducing debt to sustainable levels, we will restore confidence in fiscal sustainability and the opening of financial markets. When it happens, that will provide an important driving force for restoring growth. In the meantime, however, because this will take, clearly, some time, we are pursuing reforms to improve the business environment.
Indeed, last week the cabinet approved a bill that aims through a variety of provisions to foster experts and make the establishment and the functioning of corporations easier. There are also reforms that aim at improving, you may think that this may not be essential but is quite essential, improving the efficiency of the legal system and the speed with which it provides justice. Because in the past, this has been a factor that has been discouraging investment.
MICHELLE CARUSO-CABRERA: Because you need enforcement of private contracts?
LUCAS PAPADEMOS: Of course. But also delays in the granting of justice very often reduce the speed with which investment could be undertaken discouraging discouraging investors. Now another area where some progress has been made, but more progress had to be made in the future, is liberalization of the markets for services. The so-called opening of the closed professions.
There were many restrictions in these markets that prevented competition, implying also that prices were kept at relatively high levels. Through legislation that was enacted last year, quite a few professions have been liberalized. What we aim now, and we aim to do this in the coming weeks, is to complete this process, first of all, by introducing measures that will fully liberalize some of the professions that have not yet been fully liberalized, as well as to introduce secondary legislation in order to ensure that the legal framework adopted before will be fully implemented.
MICHELLE CARUSO-CABRERA: What do you say to outsiders who look in and say, “It’s taken Greece too long to achieve these reforms. They’ve been at it for two years, and still you’re moving too slowly,” say some critics. How do you respond?
LUCAS PAPADEMOS: Well, there are various ways to respond. The first is, to say that the problem was big, not only with regard to the magnitude of I’d say structural weaknesses or rigidities that had to be tackled, but also with regard to the magnitude of the fiscal imbalances. So starting with the latter, because as I said before, there are two objectives, fiscal consolidation and the reform of the economy.
When the crisis was erupted, the deficit was at an exceedingly high level of G.D.P., close to 16%. Over the last three years, this deficit has been reduced by six percentage points. But what is more important is that the level, the headline level of the deficit in 2001, which is still very high, is substantially higher than the measure of the structural deficit that is the deficit adjusted for the effect of the cycle.
Now, because we’re in the middle of a recession, and correspondingly revenues, unemployment benefits are affected in a way that increases the deficit, this measure, the measure of the structural deficit is more indicative of the progress that has been made in addressing the fiscal imbalances. And recent estimates that I have seen suggest that this structural deficit is close or even lower than five and a half percent.
Now, coming to the reforms, I think it has to be realized that this country performed with significant restrictions and rigidities in the markets for a very long period. So addressing some of these rigidities requires both strong political will and commitment, as well as the support of the markets and the public to undertake the changes. Now I am convinced that the public, the large majority of the Greek people, realize that the policies pursued in the past and the market practices have to be changed in order to improve the prospects of the Greek economy.
So there is, I think, strong public support despite the increase in social tensions as a result of the recession that we’re in. And the formation of a government of national unity a few months ago, and by the way, this is the first time over the last 35 years that in Greece, we have a government which is supported by three parties, because the experience in this country was for all these years is to have a single party government, is a development that is a big step, I think, in the direction of achieving greater consensus on the appropriate, both macroeconomic policy to be pursued, but also on the reforms to be implemented.
And I believe this should contribute and will contribute towards speeding up the implementation of reforms. Going back to the question you initially raised, I think there had been some difficulties either political or related to the functioning of the public administration in the past that play a role in explaining the slow pace of reforms. But reforms have been made.
If I may add another example, back in 2009, one issue of concern, both with regard to public finances, but also with regard to the functioning of the economy in general was the sore state of the pension system. It was a pension system that because of structural factors, demographic factors, and others, was the most vulnerable in the European Union. Now, the reforms enacted in 2010, with regard to the main pension scheme were really fundamental and they have ensured, I think, the long-term sustainability of the main pension system.
And this has implications not only for the public finances. It also has implications about the way markets think with regard to the overall fiscal and environment within which the economy will operate in the future. Now this year, we hope to complete the pension reform by addressing the imbalances of the so-called supplementary pension funds. And to the final outcome of these two reforms together will be positive– not only, you know, for reducing the deficits, but also creating an environment which will be conducive for firms to perform better and invest more.
MICHELLE CARUSO-CABRERA: Are your European partners asking too much of Greece too soon? There have been statements by Mario Monti, for example, don’t ask for too much austerity, because it could lead to social splintering and the destruction of the European Union. Are they asking for too much from you?
LUCAS PAPADEMOS: Well, in the case of Greece, the magnitude of the fiscal problem was so large that it was necessary to take substantial and aggressive action, bold action, I would say, in order to address the imbalances and start the process that would imply with significant degree of confidence that fiscal imbalances will be reduced.
And as we discussed before, also the implementation of reforms at the same time were necessary. I think two points related to the questions. In the case of Greece, as well as in the case of other countries our partners and International Monetary Fund have provided substantial financial assistance, which was necessary for addressing our borrowing requirements during a very difficult period.
And I think it’s both understandable and necessary that this financial assistance is accompanied by conditionality on the policies to being pursued, in order to ensure that the risks that are being undertaken by those that are providing the financial assistance do not materialize. And progress is being made at a deliberate, at an adequate pace.
Now for Europe in general, the implementation in a number of countries at the same time of fiscal consolidation measures implies, of course, a combined adverse effect on economic activity. The answer to this, in my view is to try to combine the necessary actions in order to achieve, to return rather, to prudent fiscal policies, with other measures that can help to foster economic activity. Now what are the other measures? I don’t think there can be a single recipe for every country.
Coming to the case of Greece, one action, which also relevant for other countries, is precisely by focusing on changes in market structures and reforms that will contribute to improving export performance. Because by improving, by boosting exports, this is a way through which the short-term adverse effects on aggregate demand associated with the sharp fiscal consolidation can be initially partly offset and then later on more than partly offset.
Now in the case of Greece, so more generally, I think one will have to combine different sets of instruments in order on one hand to reduce debt, and at the same time, to support economic activity. In the case of Greece, the other instrument that is available, which admittedly has not been yet used very effectively, is to utilize in a more effective manner the available structural cohesion funds from the European Union. With regard to this, the available funds are substantial. And-
MICHELLE CARUSO-CABRERA: How much?
LUCAS PAPADEMOS: At this stage, more than $15 billion. And I think, at this stage Greece has been absorbing a relative low share of that amount. But this is an area, where I can point to an important achievement that was made last year that for the year 2011, the structural funds that were absorbed, close to $3.5 billion, for the year, were achieved the target that can be set in the memorandum of understanding in their economic adjustment program. Indeed, they achieved it 99%.
So this was, I think, a satisfactory and encouraging development. Having said that, however, there is much more progress that can be made towards improving the utilization of available funds from the Union. Now if this is done, we can stimulate economic growth in a more direct way and in the short to medium term. And I’m saying this, because although I’m convinced that reforms will play a central role in improving economic performance in the medium to longer term, it can not be expected that in the next six to 18 months, they will make a major difference.
But a better utilization of the structural funds can help to stimulate growth and contain the increase in unemployment and indeed help reversing it. One could argue that a slower pace of adjustment might be helpful in addressing the problems in a manner that also contains social pressures. I think this view is valid. And I think we have to keep in mind the balances that have to be reached.
But, again, returning to Greece, as I said before given the size of the problems, some of the deviations between outcomes and targets, as well as delays in implementing the reforms, which I admit, it is important not to reduce the pace of adjustment. It’s important because this will help us reach the final objective sooner. And also it’s important in order to convince markets. They’re not convinced yet that this process will be completed.
MICHELLE CARUSO-CABRERA: Do you have any estimate on when you think Greece can return to the markets?
LUCAS PAPADEMOS: Well, it’s difficult to say because there are uncertainties. There are two – a number of factors that are relevant in answering the question. The first, implementing the program effectively. One can make an estimate about this, but what is relevant for the opening of the markets, among other things, is the expectation that progress will be sustained over the medium and long term.
So it’s not easy, as you know, it’s always difficult to make predictions about the future. It’s particularly difficult to answer this question. But what is crucial, by the way, not only for the opening of the markets, but also for improving the performance of the Greek economy, is the reduction of uncertainty about the prospects, as well as increased confidence in the capacity of the country to do the right thing, to implement the right policies and address its problems.
If confidence is restored not only this will affect, and I’m talking also about confidence among the Greek people, not only this will affect in a positive way aggregate demand and performance. But also this will facilitate the return of funds, of capital, that have left the country in an environment of uncertainty and concern about the prospects. For all these reasons I think it is important to persevere and to try to complete the adjustment process as quickly as possible.
Now there are some that think that relaxing and returning to some of the policies pursued in the past would ease the pain, would provide a solution to some of the problems that we face. I think this is really an illusion. Because where we stand now any such action would really increase the risks. And will not really, at the end, have a positive impact either on activity or on employment.
MICHELLE CARUSO-CABRERA: Some economists look at the numbers, they see a fifth year of recession. They look at debt sustainability. And they think that somebody somewhere is going to have to come up with even more money for Greece. Is that an accurate assessment?
LUCAS PAPADEMOS: No, my assessment at present on the basis of what we know and on the basis of the economic adjustment program, which is going to be finalized in the coming weeks, is that this will not be necessary. I think the funds that have been pledged at Euro Summit combined with the outcome of the private sector involvement process should be sufficient in order to support financially the Greek economy.
Now, in the case of shocks or other factors that may affect the process, there can be adjustments either in the policy area, in order to, or in other ways in order to reduce any possible funding gap. We’re talking about many years ahead. We’re not talking about this year. So on the basis, as I said, of what we plan to do and what we know now, I don’t expect that this will be necessary.
MICHELLE CARUSO-CABRERA: Are you confident the private sector involvement can get done in time? And do you have any opinion on what interest rate you should be paying on your new debt, in the exchange?
LUCAS PAPADEMOS: Well, first of all, let me say that over the past few weeks, substantial progress has been made towards reaching an agreement between creditors and Greece. The process itself is not straightforward, because, as you know, it involves a 50% haircut in the nominal value of Greek public debt held by private investors.
And to complete the process, we have to reach an agreement on the various elements of this scheme that will ensure a voluntary bond swap on the basis of the objectives that have been agreed at the Euro Summit of October. So one of these objectives is that the P.S.I. itself combined with the policies to be implemented will result in a gradual decline in the debt to G.D.P. ratio of Greece to 120% by the year 2020.
So the discussions which are ongoing have I think helped us to reach a point, which is close to an agreement, but some further reflection is necessary on how to put all the elements together. So as you know, there is a little pause in these discussions. But I’m confident that they will continue and we will reach an agreement that is mutually acceptable in time.
MICHELLE CARUSO-CABRERA: Anything scheduled, any dates, where discussions are going to begin again?
LUCAS PAPADEMOS: Well, as I said, I’m confident that they will resume reasonably soon. But I do not want to make a specific prediction on a date.
MICHELLE CARUSO-CABRERA: The European Central Bank holds Greek debt at below face value. If all goes according to plan, they will be repaid at full face value. In other words, the European Central Bank would make a profit on Greek debt. Is that acceptable?
LUCAS PAPADEMOS: Well, this is an issue that has to be discussed and decided by the European Central Bank. I’m not going to make any comments on issues relating to decisions to be taken by the European Central Bank. Either the specific one that you raised or more general ones concerning the performance of its tasks. The E.C.B. is an independent institution that performs its tasks in accordance to its mandate. And I’m confident that will take the right decisions, first of all, to fulfill, in order to achieve its objectives of price stability safeguarding financial stability.
MICHELLE CARUSO-CABRERA: So it sounds like you’re trying to head off my next question, which is many believe that to truly solve the Euro Zone crisis and the European Union’s financial crisis, ultimately, the E.C.B. will have to print money. Is that an assessment that you agree with or disagree with?
LUCAS PAPADEMOS: The E.C.B. has an unambiguous mandate on what it has to do. And it has and I’m sure it will continue to perform its tasks in accordance with its mandate, which as you very well know, the primary objective is to preserve price stability, but also to safeguard financial stability. And my judgment is that the bank has performed its tasks in a very effective manner, during a very challenging environment. And I’m sure it will continue to do so.
MICHELLE CARUSO-CABRERA: The way I read that or hear that is if they were to face deflation, there are a lot more things that they would be willing to do
LUCAS PAPADEMOS: No, I did not say that. I said that they will, first of all, as an issue of principle and I’m someone being the vice president of the European Central Bank for eight years is a principle that they fully adhere to.
MICHELLE CARUSO-CABRERA: That’s why I asked -
LUCAS PAPADEMOS: We should not – yeah, we should not – and I’m no longer with the European Central Bank. We should not in any way through comments or other ways impair the independence of the Central Bank to perform its action, its tasks. As I said before there is a mandate and that mandate is guiding the policies of the Central Bank. And printing money’s not an answer to addressing the issues that you raised. The bank will decide what is appropriate to do. And I’m sure it will do the right thing.
MICHELLE CARUSO-CABRERA: When March comes around and you have $14 billion Euros worth of repayments, you’re you are confident that all the steps that need to be done ahead of that, and you don’t face the potential for default in March?
LUCAS PAPADEMOS: No, our objective is to complete the two processes that I mentioned at the beginning of our discussion. And also to fulfill all the commitments that have been made in the past, in the context of the existing program. And we are confident that we’re going to achieve this.