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Newsletter October 2013

ANALYSIS

Greece: A New Economic Model

A recent report by the European Commission highlights the successful transformation with which Greece is proceeding, from an economy based on consumption to one on investment and exports.

The report on the competitiveness of Greek manufacturing sector and enterprises said that an economic adjustment has sought to adjust the imbalances in the economy. Greece has started the process of transformation, from a consumption-based economy to an investment and exports one, with exports already increased over recent years.

Although the regulatory environment has constrained businesses and entrepreneurship, as well as some investment, steps are being taken to tackle many of the structural barriers and regulatory failings. Encouragingly, many efforts are starting to show results, and the ranking of Greece in the World Bank’s "Doing Business" indicators has improved.

Further significant measures have been taken to ease the creation of companies, and to simplify licensing procedures and investment authorisations. With the technical assistance of the Task Force for Greece, cumbersome export procedures are being simplified.

The difficult economic conditions, continuing uncertainty, and in particular the credit crunch continue to make conducting business difficult, in particular for small-and medium-size enterprises (SMEs). Economic growth is one of the top priorities of the government, and in this context, reforming the public administration remains central in terms of securing the capacity and competence to implement newly adopted legislation and to improve the business environment. Reforming the economy must remain a priority in order for the required changes to take place.

A dynamic corporate sector is crucial to re-starting the economy and achieving growth. By tapping the entrepreneurial potential of citizens and creating the right business environment, Greece can overcome its difficulties and achieve sustainable economic and employment growth, the European Commission said in the report.

The Second Economic Adjustment Programme for Greece was approved in March 2012, financed by the European Financial Stability Facility (EFSF). The programme foresees financial assistance of 164.5 billion Euro by the end of 2014, the Commission said.

The economy saw a drastic decline in competitiveness following an increase in labour costs of more than 50% in 1999–2009. In 2012, GDP decreased by 6.4%, and the forecast for 2013 is a decrease of over 4%.

However, competitiveness is currently being restored through increased wage flexibility and low inflation. According to the figures from the Hellenic Statistical Authority (ELSTAT), labour costs have been reduced by 20% over the past three years.

Services are the biggest sector in the Greek economy, and tourism is a major part of that, in terms of both importance to the economy and employment. Manufacturing contributes close to 10% of the total value added (the EU average is just over 15%). Greece specialises in food processing (manufacture of vegetable oils; processing and preserving of fruit and vegetables). Other important sectors are metals, chemicals, cement and textiles.

There are challenges ahead for the innovation system, as the country needs to transform itself into a stable environment for entrepreneurship and create conditions for growth. According to the Innovation Union Scoreboard 2013, Greece is one of the moderate innovators, with a below-average performance.  

In the past decade R&D expenditure has stagnated, at 0.58% of GDP. In 2011 Greece set an R&D intensity target of 2%, to be achieved by 2020, but the National Reform Programme for 2013 revised this target downwards to 0.67% of GDP, which is considered as more consistent with current trends and with the economic outlook.

The objective of Greece’s innovation strategy is to promote innovation in all sectors as a key driver for restructuring the Greek economy and for the transition to a knowledge-based economy.

In an effort to boost development through R&D, the government has recently adopted new legislation that further enhances tax incentives for enterprises engaged in R&D.

Greece faces many challenges to improve its skills base through improvements in education and training aiming to better adapt to labour market needs. This includes in particular teacher training and the quality and relevance of vocational education and training as well as lifelong learning. Reforms in tertiary education are only partially implemented. Among other issues, these reforms would include better use of universities to provide lifelong learning opportunities to local and regional populations and better monitoring of inputs and outputs.

An action plan to support youth employment and entrepreneurship was adopted by the Greek government in January 2013. It has been allocated a budget of 600 million Euro, 517 million Euro of which is provided through the European Social Fund and the European Regional Development Fund. The plan comprises a set of programmes that should benefit 350,000 young people in the age group of 15 to 35. The objective is to target employment and entrepreneurship for young people in the two age groups of 15-24 and 25-35. The plan stresses apprenticeship, traineeship and the transition from education to employment.

Although the economy as a whole remains oriented towards the domestic market, export performance continues to improve. The national export strategy has set ambitious goals for boosting exports of goods to 16% of GDP by 2015.

The national export strategy seeks to improve the international competitiveness of Greek companies through export promotion and export facilitation. It is based on three pillars:
1. Enlarging the export base by formulating industry-specific policies to encourage companies to produce and offer internationally competitive goods and services.
2. Trade and promotion of foreign direct investment by integrating economic diplomacy efforts, building a national brand and overall support for companies to engage in international trade networks and find trading partners abroad.
3. Trade facilitation. The national trade facilitation strategy was announced in November 2012. It features 25 measures aimed at reducing the time needed for export by 50% and costs by 20% by 2015.

In an effort to strengthen entrepreneurship and the internationalisation of SMEs, a programme was launched, co-funded by the EU structural funds under the action ‘Internationalisation and competitiveness of SMEs’. In total 746 projects have been selected with a total budget of 143 million Euro.

In the context of the Economic Adjustment Programme, steps are being taken to tackle many of the structural barriers and regulatory failings that have traditionally restricted business. Efforts undertaken in a number of areas are starting to show results, which were reflected in Greece’s improved ranking in the World Bank’s ‘Doing Business’ indicators.

Greece is up from 100th place in 2012 to 78th, which is proof that the efforts made to improve the business environment are starting to bear fruit. In particular, there was progress in reducing the time required to get construction permits; more transparency for and protection of investors; and an improved process for resolving insolvent firms.

The government has also adopted ten measures in the areas of starting a business, registering property, dealing with construction permits and protecting investors.

Well-known deficiencies in the business environment have been addressed over recent years. Important measures have been taken to ease the creation of companies and to simplify licence procedures and investment authorisations. The time needed to set up a business is now below the EU average (11 days in Greece against the EU average of 14). Starting up a company and registering property remain expensive, and the cost and time for exports and imports need to be further reduced. It is still four times more expensive to start a business in Greece (% of income/capita) than the EU average, and it is more costly to register property.