Fotis Fitsilis

POPULAR ECONOMICS
A reference guide in times of crisis The Greek case study

First published in 2013 by Fotis Fitsilis

Fitsilis, Fotis Popular economics: A reference guide in times of crisis The Greek case study Includes bibliographical references Layout and design by Olga Gianniadi

ISBN 978-960-93-4446-3 ISBN issued by the National Library of Greece Copyright Fotis Fitsilis 2013 All rights reserved

Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the copyright owner. The scanning, uploading and distribution of this book via the Internet or via any other means without the permission of the publisher is illegal and punishable by law. Please purchase only authorized electronic editions and do not participate or encourage electronic piracy of copyrightable materials. Your support of the authors rights is appreciated.

CONTENTS

INTRODUCTION ....................................................................................................................... 4 PART A: GLOBAL FINANCIAL CRISIS ...................................................................................... 5 1. Is it a European crisis or a crisis of the Euro?..................................................... 6 2. The collapse of the Eurozone ............................................................................. 9 3. The debt economy ........................................................................................... 12 4. The Dollar, the Euro and Greece ...................................................................... 15 PART B: CASE STUDY - GREECE ........................................................................................... 18 5. 6. 7. 8. Management of public companies ................................................................ 19 Privatizations ................................................................................................. 23 Research and economic growth .................................................................... 30 The recovery of the Greek economy ............................................................. 33

SOURCES ................................................................................................................................ 37 About the Author .................................................................................................................. 41

INTRODUCTION
This is a complex world with labyrinthine economic dependencies. Few claim to understand them, yet we all suffer (well, not really everybody) from the aftermath of the 2007 financial crisis that shook the world's economy. Almost instantly people started to talk about "sovereign debt", "leverage ratios" and Memoranda of Understanding without fully understanding why. A middle-class citizen is not supposed to fully comprehend the details of the monetary policy of its Government, still one must vote for one or another. A democracy is as strong as its educational level and the independence of its people. With knowledge comes the ability to choose wisely between available options to invert the effects of the crisis and turn them into a chance for a better future. This book is based on a series of articles that were posted between 2011-2012 in the local newspaper "Neos Agon" of my home town Karditsa in central Greece. It seeks to clarify some difficult economy terms and provides simple answers to contemporary problems. You don't need to obtain a degree in economics to read it. It is written for everybody who wants to take a glimpse at higher-level economics, without the strange economic terms that became overnight part of our life, hence its title "Popular Economics". While highlighting the most important dimensions of the global financial crisis (part A), we use Greece as a case study to see the effects of the rapid economic downturn in a modern economy, but also to study ways to escape recession (part B).

PART A: GLOBAL FINANCIAL CRISIS

1. Is it a European crisis or a crisis of the Euro?

The Euro is the most powerful European symbol. Its failure would shake the faith of Europeans in the basic idea that lies behind the European Union. If the Eurozone breaks apart, the project of the European Union, which took decades of political efforts and sacrifices to reach todays magnitude, will go many years back. Judging by the initial appeal of Greece, Ireland, Portugal (and later Spain and Italy) for a support mechanism for the Euro, it is obvious that things have become very serious for the Eurozone. If along the way some other country needs support, it is doubtful that the current support mechanism will be able to correspond, without affecting the strong economies of Central Europe, France and Germany. Let us examine briefly how we got here. The debt crisis we are experiencing was primarily created by what economists call financial leverage. According to a simple definition, the financial leverage is a process of utilizing borrowed money to multiply gain. It is also about excessive borrowing, mainly on the part of the banks. The loans that initially aimed at creating growth, were given unsparingly to businesses and consumers, creating distorted conditions in markets such as housing, stocks, bonds etc, situations that are often referred to as "bubbles". The leverage procedures are not always harmless. When a company uses great leverage in funds, it may have significant profits, when markets move upwards. On the other hand, it is particularly vulnerable even to small market fluctuations. It is important to mention that Lehmann Brothers displayed on its balance sheet a leverage factor of about 31! They utilized funds 31 times bigger than they really had! Greece still suffers from the shocks of the global economic downturn from 2007 and on. The Greek economy is mainly a service economy, with chronic structural problems and a permanently negative trade balance. The accumulated deficits gradually led to a large public debt, unable to be served by the powers of the Greek economy alone.
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When 50 years ago Canadian economist Robert Mundell published his work on optimum currency areas, he could not have imagined that his theory will play an important role in the formation of the Eurozone. As basic conditions for the proper operation of the currency areas Mundell named the following: Freedom of capital movement and Freedom of movement for workers within the single economic space.

Additionally, former German Chancellor Helmut Kohl has added a third. The need for political, and hence economic, integration, which, unlike the first two, never became reality. In order to compensate the lack of a general economic policy on a European level, the Stability and Growth Pact (SGP) was created. The SGP is a political agreement that lays out the rules for budgetary discipline to the Member States of the European Union. According to the SGP Member States must keep their public deficits under a 3% GDP to deficit ratio. Until now, this rule has been violated almost 100 times by everybody in the European Union and this with almost no consequences. The inability for common coordinated action of the Member States magnified the effects of the economic crisis driving the Eurozone to a breaking point. Such economic practices mainly affected weaker Member States just like Greece. After the outbreak of the crisis in 2007 it was increasingly difficult for Greece to borrow money from the international capital markets on affordable terms (level of interest rates). This led to a signing of a Memorandum between Greece and its lenders, which is basically an agreement of strict economic and financial policies in return of cheap loans. Following the signing of the Memorandum in 2010 there were three possibilities for the Greek economy.

A. The Memorandum becomes a success In this case, in accordance with the provisions of the Memorandum, from 2013 onwards, Greece should come out of the recession, with its deficits to zero and a regenerated economy. The country would come back to the growth track.
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Unfortunately, the policy mix was poorly balanced, unsuitable for the purpose and was entirely rejected by the citizens. A second Memorandum tried unsuccessfully to correct things and a third is in the planning.

B. The Memorandum fails and Europe seeks a central solution The chronic structural problems in the countries of Southern Europe generate deficits that lead to large public debts. It has become obvious that the accumulation of debts cannot be continued for an infinite time. If the targets of the abovementioned Memorandum for Greece are not met (something that is evidently true at the moment) European leaders will be forced to seek a comprehensive solution to the problem. The establishment of an independent European Monetary Fund (the European equivalent of the IMF) and the creation of European bonds, so called Eurobonds, may be part of the solution. Only a comprehensive restructuring of the European economies will lead to a long-term stability in the Eurozone.

C. The Memorandum fails and the European Union cannot offer a central solution It is an ominous prospect. With no major reforms economic and social indicators in Greece will hit the bottom. If additional funds cannot be raised from the international capital markets, an exit from the European currency seems inevitable. The consequences will be severe, not only for Greece but for all countries in the Eurozone. There are politicians and analysts that foresee a turbulent future for Greece. They are virtually betting on an unstructured Greek default. But nothing should be taken for granted unless it happens. We should not forget that the decisions concerning the future of the Greek and European economy are not purely economic. These are primarily political decisions. They are decisions that will determine the future of the entire European Union for decades to come.

17 April 2011
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2. The collapse of the Eurozone

The recent developments in Europe regarding the future of the Eurozone are not reassuring. Both the turbulence in the Franco-German axis and the open conflict between Great Britain and Germany, have a negative effect at the cohesion of the European Union. At the same time, Member States, such as Hungary, are openly expressing their disagreement to the prospect of entering the Eurozone. In Greece there are voices arguing in favor of leaving the Eurozone. Consequently, a simple question rises. Is it reasonable for Greece to keep the Euro as its currency? In fact, the consequences for Greece leaving the Eurozone would be extremely severe, both for the country and for the entire European Union. In the following article, I will attempt to capture the most important of them.

The consequences for the European Union The European Union will suffer from the deconstruction of the Eurozone, because: a) An exit (also called Grexit in our case) from the Euro is not foreseen by the EU Treaties. In contrast, the Lisbon Treaty contains a voluntary withdrawal clause (Article 50), explicitly recognizing the possibility for a Member State to choose whether to remain in the EU or not. From the above, it can be concluded that an exit from the Eurozone is indirectly connected to an exit from the European Union, which would probably mean the beginning of the Unions end. b) Europe without one of its strongest symbols, the Euro, will significantly lose its influence in global politics. The same, however, is also true for the largest countries in the EU (e.g. France and Germany).

The consequences for a strong European economy Strong economies will pay a high price if the Eurozone collapses. Let's look at the consequences in a sample case, e.g. of Germany.
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a) 40% of Germany's exports are directed to Eurozone countries. The main reasons are the lack of quotas, elimination of exchange rates and monetary stability offered by the common currency. The reintroduction of the Deutsch Mark would probably be followed by its rapid appreciation against the Euro. German products will be sold up to 40% more expensive (calculation of UBS), resulting into a shrinking of the German export industry. b) The collapse of the Eurozone would put an immense burden in the German economy. Calculations vary between 14% and 25% of the German GDP only within the first year. Comparatively, the rescue of the troubled economies in southern Europe would cost just a small fraction of these nightmarish figures. c) The decline of shares in the stock exchange is expected to put most Banks in trouble, only to be bailed out with new billions from the German tax payers. d) The creation of national currencies will automatically trigger a transferring of funds towards the strong countries monetary unit, particularly towards the Deutschmark, as the European citizens would have wanted to exchange their national currencies to a stronger and more reliable currency. This will lead to strong inflationary pressures, which the Germans generally despise, as it evokes to them the dramatic period of the Weimar Republic (1919-1933), short time before the rise of Nazism in Germany.

The consequences for a weak European economy Proportionally, the greatest impact from a collapse of the Eurozone will be recorded in the economically weaker southern European countries like Greece, Portugal and Spain. a) As seen above, an exit from the Euro is not foreseen in the treaties. Instead, an exit from the EU is possible, a process which, however, requires considerable amount of time (up to two years), in which investors will have all comfort to withdraw their funds and their investments from the respective country (disinvestment).
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b) During the establishment of the Euro the national debts of all countries in the Eurozone were automatically converted into Euros. In most contracts, an inversion of this procedure is not foreseen, while particular attention is to be paid to the legislation that regulates national debts. Lengthy legal battles are possible to arise between countries and their lenders, a perspective that will further tarnish their image. Like many sovereign countries, Greece was retaining its national debt under national law. This was changed in 2010, following the loan agreements for 110 billion Euros according to the first Memorandum between Greece and the Troika. c) Weak countries will have to pay off their debts having a new devalued currency, which obviously makes payments impossible. d) When a country changes its currency there are always winners and losers. To the latter we count the savings of the middle-class people, whose deposits will automatically lose value due to the devaluation of the currency. This may lead to severe social unrest. e) The most common phenomenon observed in a state of bankruptcy is a massive demand of cash from the banks, the so-called bank run, and the attempt to move capital abroad. This massive capital outflow will possibly give the final blow to the banking industry. The European course The crisis in the Eurozone has plunged the European Union into the most difficult phase of its history. The number and magnitude of the consequences that would follow the dismantling of the Eurozone would be devastating for every European economy. This is why immediate measures need to be taken, in order to restructure the national economies of the troubled EU member states. The Greek society is undergoing this painful transformation having already felt the effects of the global economic crisis. Its cohesion will be once again put into the test. As time passes nothing will remain unchallenged. Not even the founding Treaties of the European Union. 11 December 2011
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3. The debt economy

All nations of the world have something in common. They have debts. The entire global debt exceeds the staggering amount of $ 40 trillion (1 trillion is 1000 billion). But to whom they owe? The answer can be simplified as follows: every single country is indebted to everybody else. The accumulation of huge debts coupled with disproportionately slow economic growth in southern Europe led to the debt crisis we face today.

Why does the state borrow money? Sovereign states primarily borrow to boost economic growth. In other words, they borrow money from international or internal capital markets to invest in public infrastructure, knowledge and expertise, thus creating conditions to increase the Gross Domestic Product (GDP) with obvious benefits for all their citizens. Some states borrow money to maintain and equip huge armed forces while they prepare for a war or simply while they are in a constant state of high tension with their neighbors (see the parade example for Greece and Turkey). In a direct analogy to the size of the debt crisis that many states in the Eurozone are facing, the following historical example exists. After the Second World War the public debt of the United States of America (USA) reached 120% of the GDP. A massive public investment program created by the US, including a significant extension of the transport network, investment in education, research and technology, resulted 30 years later (in 1970) to a public debt just 40% of the GDP. Additionally, the US became the point of reference for science and technological innovation, a position that they still hold today.

A general rule for the public debt One could think that constant borrowing cannot go well in the long run. Ultimately, a state is not able to spend more money than it earns. However, what is true for
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households and businesses does not necessarily apply at the level of entire countries. There is a general rule that we may keep in mind when considering public debt: a state is able to take on new debts, e.g. 4% of its existing debt, when the growth rate of its economy is 4%. In this particular case the debt (always as a percentage of the GDP) remains constant. If the growth rate is less than 4%, then the overall debt will be increased. The above rule shows the importance of growth in order to tame the accumulation of debts. Having this in mind, there are three ways to reduce public debt as a percentage of the GDP: a) By reducing the states budget deficit, so that borrowing needs, as a percentage of public debt, are lower than the growth rate of the national economy. b) By pursuing higher economy growth rates than the borrowing needs, expressed as a percentage of public debt. c) By combining the above. The pressure of the capital markets Capital markets are always "impatient" because they think in terms of monthly and quarterly results. On the other hand, states should use strategic (that means longterm) planning for their future development. Sovereign states, as opposed to households or businesses, may alter their political agenda, changing spending priorities for infrastructure, education, research, etc., thereby directly affecting their financial results. In other words they create growth. States that prefer reductions in salaries and pensions delay the building and repairing of roads and rails, block sound investments with meaningless bureaucracy and high taxes, cannot hope to achieve sustainable high rates of economic growth. Capital markets may exert great pressure on sovereign states for immediate deficit reduction through a reduction of costs and an increase of direct and indirect taxes.

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The natural road of creating growth, which is a lengthy and arduous evolutionary process, is thus neglected. The importance of growth It is sometimes useful to borrow from capital markets. Indeed, without debts, the global financial system could simply stall! When a state needs to enhance its growth prospects it borrows money. These loans can be paid by the anticipated revenues of the growing economy. The alternative would be to increase taxes or reduce social benefits, options that would surely negatively affect the purchasing power of citizens and reduce social cohesion. In the Greek case, aggressive budgetary cuts followed the by pressures of our lenders proved to be extremely short-sighted. They strangled the internal market and led to a long and severe recession. Even if Greece finally achieves a balanced state budget, the living standards of its people will have declined dramatically and many doubt if this method will prove viable for the economy in the long run. A strategy for economic recovery must equally give importance to reducing the deficit and achieving economic growth. Little else is left while Greece is facing deep recession for a fifth consecutive year. It is therefore absolutely essential to achieve growth by any possible means necessary: lowering taxes, privatizing public companies, easing and facilitating Direct Foreign Investments. Even in the eleventh hour, there is still time to save the Greek economy.

18 September 2011

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4. The Dollar, the Euro and Greece

The ongoing global economic crisis is best understood when knowing our monetary history. In particular, the study of the creation of the United States (U.S.) dollar and its comparison with the other major monetary union, that of the euro area, reveal valuable information and offer conclusions about the evolution of the European currency in the future.

The birth of the U.S. dollar The United States of America began as 13 independent colonies, each with its own currency. Massive inflation and different cultures, customs and traditions among the colonies led to large divergence in the real value of the individual currencies. After the American Revolution and the Declaration of Independence, in 1776, the U.S. decided to establish a central government and chose a central currency that was called Continental Currency. The individual currencies were exchanged against the new currency at different rates and the first unified U.S. currency, the U.S. dollar, was released in 1793. However, the government quickly recognized that individual States, the old colonies, had to be relieved from the burden of the debt they carried. The new federal government absorbed their debts into a U.S. national debt, thus allowing the States to make a new beginning. By doing so, the federal government guaranteed the consistency of the new country. Additionally, by maintaining control of the new currency, it was able to indirectly control the debt through the mechanisms of devaluation and production of new money.

Comparing dollar to Euro At first sight, one single European currency (Euro) in a large common market of approximately 500 million people is strong enough to directly compete with the dollar. However, monetary theorists and politicians with foresight (Robert Mandel,
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Helmut Kohl and others) have long warned that without political integration, and hence central fiscal policy, the euro was doomed to fail. The current situation seems to justify their concerns, at least temporarily. In contrast to the creation of the U.S. dollar, the 17 member states of the Eurozone created a common currency without absorbing the national debts into a common debt. Thus, in just 10 years, disparities in production and consumption, especially between north and south Europe, led into a deep debt crisis in the Eurozone, which is exacerbated by the ongoing crisis in the global financial markets. In a global economy that constantly produces deficits it is unlikely that the continued procrastination and failure to take important decisions on both sides of the Atlantic, may sooner or later lead to a major global recession.

Are Eurobonds the solution to the problems of the Eurozone? There is no easy answer to this seemingly simple question. Different European member states use different approaches. Just note, without further analysis, that we left out of the equation the emerging economies of Asia, India and China, which will likely define the new rules of the global economic game in the years to come. Many economists have already proposed to restructure the Eurozone debt. This could take the form of consolidation of member states debts by issuing bonds (so called Eurobonds) via the European Central Bank or another central body. The issuing of Eurobonds would mean that Eurozone members would be able to borrow at a uniform interest rate. Southern European countries would obvious benefit from this development, but Germany and France would have to borrow at higher interest rates, which translate to additional costs in their budgets in the order of double-digit billion Euros a year. Issuing Eurobonds does not mean anything, if this measure is not accompanied by aggressive development policies across the Eurozone and radical reorganization of the banking sector. Apart from a constant flow of public and private investment funds, from north to southern Europe, it is necessary to design and implement a pan16

European development program with the help of national governments, the European Investment Bank and the European Central Bank, in a final attempt to revive the troubled economies.

Conclusions With its entry into the European Common Currency, Greece (and Portugal, Spain and Italy) lost its ability to exercise monetary policy. The question whether it was right or wrong is purely philosophical. This discussion should have preceded its membership. Nevertheless, within the European Union, fiscal and development policies remain the responsibility of national governments and through them there is still a possibility to control public debts. Although great sacrifices have already been made to become a member of the Eurozone, Greeks are asked to do even more, even in a direction that seems to be leading nowhere. The Franco-German axis, the "soul" of Europe, seems to be consumed in non-productive "minor effort tactics", instead of tackling the problems that led to the debt crisis in the Eurozone. Greece has found itself in the eye of the hurricane. There is no other way out of it but to display willingness and determination to reduce deficits and gradually resolve the chronic structural problems of its economy. However, truth be told, Greeks begin to understand that they do no longer hold the keys of their economy.

8 May 2011

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PART B: CASE STUDY - GREECE

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5. Management of public companies

The economic crisis has turned upside down all areas of public administration in Greece. Publicly owned or controlled companies are not excluded from the frame of the attempted changes. Changes to their operation are based on two main pillars: Organizational restructuring and model of management. This article examines the need for changing the administrative model in public companies. First, the entities dealt with will be defined. Then the basic differences with their counterparts in the private sector will be examined. Finally, ways to control the administration's acts and omissions we be studied.

Definition and characteristics According to a recent recording from 2010, there are approximately 1000 public companies. This number does not include about 1100 companies funded by the decentralized state, e.g. municipalities; however this number has decreased significantly with the latest administrative reform. Public companies mainly operate as limited companies, legal entities under public law or private legal entities. As regards the types of public companies, these may be utilities, banks, social security organizations etc. The public nature of these companies is mainly assumed through state participation in their share capital (over 50%) or through appointment of their administrative body (e.g. board of directors). A private company usually aims to improve its products and services for its customers, while reducing operational costs, in order to increase its turnover and, ultimately, its profits. In theory, the goals of public companies may correspond to those set by private ones. Reality, however, shows that during the last three decades Greek public companies mainly acted as the long hand of the Government in its development and social policies. The result was the accumulation of massive debts, which the state budget had to absorb.

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Differences between public and private sector management Running a company is a difficult task. But when it comes to a public company, it results to additional degrees of difficulty. Many managers believe they can, in one way or another, implement in full the management principles and methods from the private sector. Notable private sector managers have tried their hand at a public company and have failed miserably. This can be attributed to the fact that they failed to take into account chronic problems and the specific internal conditions of public companies. Freshly appointed managers are often taken by surprise once they realize the true dimensions of their work. In the private sector the management has a free hand in the strategic planning of a company following some general guidelines of shareholders. On the other hand, the management of a public company has to take into serious account several internal and external parameters, among others: The frequent changes in the political leadership of the relative Ministry. The companys organizational and structural maze. The requirements of the powerful unions. Lengthy recruitment procedures that cannot cover extraordinary or specialized needs. This means that the management must aim at constantly changing targets having a static and unmotivated staff at its disposal, thus reducing the effectiveness in the implementation of decisions. The two cornerstones of human capital management are reward and punishment. Reward, when the outcome of an employee is higher than expected and punishment, which in an extreme case can result in job loss, when the performance indexes are negative. In most cases, the management of public companies has its hands tied both ways. There is no possibility of individual rewarding towards achieving specific objectives (bonus), while no penalties can be practically set. Increases in wages are horizontal, resulting in huge operational costs, which of
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course are not accompanied by a corresponding increase in the productivity of all employees. Controlling of public companies Depending on the type of the public company various forms of control have been implemented by the central administration. The most important are: Ministerial control. Ministers appoint the management of public companies. Therefore, they are politically accountable for their actions and can terminate the managers term at any time. As required by law nr. 3429/2005, financial oversight of public companies is conducted by the Interministerial Committee of Public Companies and Organizations. This committee approves and amends operational plans drawn up by every public company, although, unfortunately, rarely is an effective assessment performed. The same committee may impose sanctions on companies and replace their management. At the highest level the control of public companies is conducted by the Committee under Article 49A of the Rules of Procedure of the Hellenic Parliament. The so-called "public utilities commission" issues an opinion on the suitability of senior managers of public companies. The same committee may call the managers of public companies to special hearings (Article 49B).

Synopsis The management of public companies is too serious issue to be ignored in the attempt of restructuring the state. Practices from the past that resulted in the appointment of unsuitable or indifferent managers should remain there. Today more than ever it is necessary to implement management methods applied successfully in the private sector, such as management by objectives, SWOT analysis, total quality management etc, always with the necessary adaptation to the requirements of a public company.
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It is comforting to see that within Greek public companies capable and experienced staff is still to be found and mobilized. However, uncertainty about the future of many of them and the lack of meaningful incentives, make it difficult to manage them effectively. The new managers will have to perform an extremely difficult job without having the proper tools. Whether our country will be able to look into the future with optimism depends largely on their success.

9 April 2012

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6. Privatizations
Talks about privatization had a constant presence in the last decades in the public debate and it is easy to understand why this issue has generated intense political controversy. Privatization is the transfer state property of ownership to private companies or individuals, partly or completely. The state property can be a public company or a real estate. Here we will present the benefits of privatization, certain problems that are related to it, as well as its general principles. Finally, we will examine two examples of countries that have successfully implemented large-scale privatizations, Germany and Slovakia. In Greece the debate on privatization was intensified after the signing of the Memorandum of Cooperation in 2010 between the Greek Government and the so called Troika, which consists of the European Commission (EC), the International Monetary Fund (IMF), and the European Central Bank (ECB). Back then it was agreed that a percentage of the profits from privatization would be used to reduce public debt. There are various estimations of the amount of money that could be drawn from privatization actions. Both Government and Opposition presented privatization plans in the order of 50 billion Euros, but without presenting technical details of the project. Almost 2 years later, little progress has been made. Nevertheless, there are certain categories of public companies or public owned land that is crucial to remain under state control. These could be companies, borderlands or certain islands sensitive to the national security.

Benefits of privatization If designed properly, privatization can lead to substantial increase in productivity and competitiveness. It is important to mention that benefits are not limited to the immediate financial compensation following the awarding of a privatization contract to the highest bidder. Often investors proceed with additional investments in order
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to modernize production facilities. However, the most significant benefit comes from the increased efficiency of the states economy as a whole, when unproductive public companies turn into competitive businesses that operate according to the rules of market economy. This is why one can read in the literature that the direct economic benefits of privatization are just one third of the total long-term benefits. The remaining twothirds come out of the multiplier effect that privatization causes to the national economy. Beyond political considerations, one way to assess specific privatization cases on a technical level is a so-called cost-benefit analysis that compares the total expected benefit from a privatization against the cost of its implementation. In order for such an analysis to be complete, both the social dimension and the social dividend resulting from privatization has to be captured.

Negative consequences and obstacles Careful planning is essential, especially during the phase of creating the privatization body (a committee or a special purpose company) and its staffing. Ignorance of the rules of the domestic and foreign markets and lack of transparency will most certainly lead to questioning these choices in a political and social level, thus resulting in long delays. The management of the privatization body will be required to provide specialized solutions to a variety of problems, the most important being the following: a) Unclear legal status, b) Ownership issues, c) Reactions from the unions, d) Accusations for mismanagement. Proper design of the body, its operating rules and solutions to the above-mentioned problems will largely determine the success of the privatization program in Greece.

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In Greece the respective body is called the Hellenic Republic Asset Development Fund. Despite its foundation in 2011 and the recent change in its management, no real progress has been demonstrated yet.

General principles of privatization In my opinion, the four most important principles of a privatization program are: First. Partial or total involvement of private equity The change of ownership alone is not a panacea. It must be accompanied with extended restructuring of the organization, along with a complete rearrangement of its strategy and objectives. Even for companies where the majority of the shares remains to the state, there is a potential for increased competitiveness with private participation in the shareholder scheme. Second. Timing Timing is one of the most critical factors for success when privatizing an organization. In times of political instability, a lot of investors are reluctant to invest and, even if they do, the price they are willing to pay is far lower than the market value due to the actual investment risk. Third. Independence and control of the privatization body The political independence of the privatization body is vital for its regular operation. Its operating framework will have to be approved by the National Parliament, in order to allow for a democratic legitimacy of his actions. At the same time, the body must inform in detail both the Government and the Parliament, about its achievements in the privatization procedure and its future plans. This information is crucial because of the usually large volume of legislative acts and regulations that have to be rapidly promoted by the Government. Ultimately, the transactions of the privatization body have to be closely monitored and controlled by chartered accountants. Fourth. Transparency
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Transparency in the operation of the privatization body is of paramount importance for a smooth privatization procedure. Without strict conditions of transparency, the management of sensitive and high-risk privatization projects will hardly reach high levels of performance and each decision will be disputed. Citizens should be able to know at any time the state of the privatization program.

Case studies When it comes to privatization Greece does not have to reinvent the wheel. In the following, we present examples of two countries that have implemented large privatization programs, Germany and Slovakia. Although none of them is similar to Greece, however an analysis of the privatization procedures could prove useful and offer important conclusions.

a. Germany The agency that undertook the privatization of an entire former state (East Germany) was founded in 1990 and named Treuhandanstalt, which roughly translates as "Foundation Trust". The Foundation was governed by a five member Board of Directors, whose actions were controlled by a management council. It is of particular interest that the management of the institution was granted with certain level of legal immunity, in order to proceed with the work of privatization. The Foundation was dissolved in 1994 and the privatization program continued through a series of specialized bodies, some of which still operate today. The Foundation tried to privatize 14,600 businesses with over 4 million employees and 24 million acres of land. Until 1994 around 8000 companies changed hands, but more than 2.5 million workers lost their jobs. This led to massive protests and social unrest and the assassination of the first president of the Foundation, Detlev Karsten Rohwedder. The immediate profits from this series of privatizations amounted to 60 billion Deutsch Marks (approx. 31 billion Euros), while losses were in the order of 300 billion Deutsch Marks (approx. 154 billion Euros)! This is why both the German
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Government and the Board of Directors of the Foundation were accused of waste of assets and mismanagement. Overall, 1800 cases were disclosed regarding financial scandals associated with the buying and selling of state assets. However, the German Council of Economic Experts, often referred to as the Five Sages of Economy, an independent evaluator of the economic development in Germany, commented in 1994 that the Treuhandanstalt had a decisive role in shaping a new business landscape in the new German states, without the need for continuing financial assistance and support from the central Government.

b. Slovakia Privatizations in Slovakia were undertaken by the National Property Fund (NPF), which was founded in 1991 and dissolved in late 2005. The senior bodies of NPF were the Board of Directors (9 members), the Executive Council (11 members) and the Supervisory Board (7 members). The privatization process was divided into two segments. In the segment of smallscale privatization, small businesses (industries, hotels, etc.) were sold in auctions. Domestic entrepreneurs had primarily access to this procedure. If there was no domestic investor, a second round with the participation of foreign investors was initiated. Large-scale privatization included the majority of state owned companies and real estate. Both auctions and coupon privatization were used, the latter to promote citizen participation in state assets. It is worth noting that, in order to restore the confidence of international markets in the Slovak economy, the government called a well known international nongovernmental organization, Transparency International, to monitor the auction of mobile-phone licenses. The process took lots of publicity and helped to promote a positive image of Slovakia in the world. The results of the Slovak privatization program are indeed impressive. While by 1990 99% of the Czechoslovak economy was state-owned, 20 years later and after the division of the state into Slovakia and the Czech Republic, over 90% of the state property in Slovakia is privatized and 95%
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of its (Gross National Product) GDP is generated by the private sector. Minor exceptions can be found in a few banks and in some areas of transport and communications. The massive privatization program in Slovakia also led to social unrest and, like in Germany, significant financial scandals were brought in connection with it. This firm policy for twenty years seems to bear fruit for this small country with a population of 5,4 million. In 2010 and 2011 the growth of the GDP was in the range of 3-4%.

A model privatization process A further analysis of these examples divides the process of privatization into five stages: Stage A. Selection of public companies and state owned real estate assets (in short assets) to be privatized and performance of cost-benefit analysis for each case. Stage B. Classification and ranking of the assets and preparation of the bidding process. Stage C. Collection of offers and pre-assessment. Short-listing of investors. Stage D. Folder submission with feasibility studies for the proposed investment. Stage E. Bid evaluation and contract signing.

Summary Regardless of the volume of privatization and the specific process that will be chosen, it is necessary to understand that the main benefit from privatization is not to be found in the price that the highest bidder will pay for the transfer. The added value of privatization comes from the competitive operation of the company and its future profitability, which generates revenues for the state in the form of taxes and new jobs.

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Nevertheless, one must be realistic. Even if the potential for raising significant funds exists, few countries have managed to privatize with maximum efficiency even a small part of state property. To focus on the Greek economy, privatization must be carried out as part of a broader restructuring that includes drastic decrease in government spending along with measures to develop the private sector.

3 July 2011 and 17 July 2011

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7. Research and economic growth

Linking entrepreneurship with research and innovation is a challenge for every developed or developing economy. In the European Union this was expressed with the Lisbon Treaty, which originally aimed to make Europe the most competitive economy in the world. Subsequently, the 7th Framework Programme for Research and Technology (2007-2013) contains numerous actions to pursue the long anticipated connection of the real economy with innovative research. Although the design of the research programs and the transfer of their results to the real economy have not yielded the expected output, it is necessary to continue the effort, as the creation of innovative products and the development of more effective production processes seem to be the only way to recover from a Europe-wide deficit of competitiveness relative to many Asian and American countries.

Organization of research efforts in Greece One may wonder about the position of Greece in the global research map in difficult times. The available funds, both in absolute numbers and in percentages, are limited in comparison to the European average. First of all, when it comes to research, Greeks are lacking self-awareness and the necessary determination. The Greek research policy needs to identify the areas of research interest, in which an investment of the scarce resources is worthwhile. For the time being, the Greek research map is fragmented. This dispersion of research areas neither favors economies of scale nor supports collaborations among domestic academic and research institutions. A new organizational structure is required to create a nation-wide network of laboratories, without thematic overlays. Simultaneously, it is crucial to establish liaison offices for the transfer of research results to the related companies. The promotion of partnerships between enterprises, research institutions and universities will have multiple benefits for all stakeholders.
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Meanwhile, the design of a ten year research roadmap could have a beneficial effect in conflictual and fragmented landscape that has resulted from the successive changes in the national framework for academic institutions. The National Council for Research and Technology, that was reactivated recently after years of inaction, may determine the strategic directions for research in Greece.

Attracting young scientists Despite limited resources, Greek scientists have displayed considerable research successes in the past. This is unfortunately not due to the national strategy. It is the remarkable activity of single researchers or institutions. One must not forget that a large number of Greek scientists live and work abroad. Sporadic actions to attract them back home have not been fruitful. On the contrary, our best minds leave the country, because of the continuous economic downturn. The reorganization of research on a new and stable basis has the potential to persuade young scientists to come to Greece and, simultaneously, to stem the brain drain effect.

Connection with the production A new national research strategy should focus on agriculture, materials science and computer science. The shift in research for production of agricultural products is necessary, as the rural economy in Greece is expected to miss a significant part of its funds because of the new Common Agricultural Policy of the European Union. Lots of experts from various disciplines are reluctant to turn to agricultural research. Yet a simple look in international science journals is enough to understand that in this area a real revolution is in progress. Satellite monitoring of agricultural production, robot machines and new agricultural products of high nutritional value are just a few technological novelties to be mentioned. The aim should be twofold: a) Cultivation of new agricultural products with high demand in the worlds markets and

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b) Increasing the added value of agricultural products by applying vertical manufacturing principles.

Conclusion Is it possible for a country, plagued by economic crisis, to display significant research presence? My answer is yes. Universities and research institutions are likely to undergo painful restructuring, but this may result into higher research output. Linking research to production should be the main goal of a new research policy. The design and production of innovative products with high added value for the global market will certainly have a positive impact on the national economy.

27 November 2011

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8. The recovery of the Greek economy

Against the recession there is a simple recipe: growth. Everyone is talking about it. But only a few bother telling us how it can be achieved. Here we will try to describe in plain words the real condition of the Greek economy. Where we are and how we got here. An honest assessment is always a good starting point. Only in this way will we be able to initiate the recovery of the Greek economy. We will start considering a number of factors that affect economic growth, so called growth indicators.

Work and Productivity According to Eurostat, Greeks work on average more hours per week than any other Europeans. This made a huge impression to the citizens of Europe and explains why Greek citizens do not feel like they are responsible for creating the economic crisis. However, if we observe the corresponding indices for labor productivity, we can see that Greeks are on the 18th place out of 27 European Union member states. Greeks work a lot, though unproductively. In order to understand better this point, let us try to give a definition of the term 'productivity': we define productivity as the amount of work (in hours) required for the production of a specific output (product or service). An increase in productivity depends, among others, on improving the skills of the workforce, on advances in technology, on new forms of organization and on an effective public administration. So, to improve productivity, it is essential to use the resources and production processes efficiently. Harder work is less important.

Competitiveness and growth In November 2011 Time magazine published an article by Stephen Gandel with the tricky title The deregulation myth. The author analyzes official data from OECD, IMF and the World Bank and comes to a striking as well as surprising result: The states with the highest growth rates do not necessarily display the highest indexes
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for competitiveness! To calculate the competitiveness index, one has to consider various indicators, such as the number of regulatory acts for entrepreneurship, the level of taxation, the time for setting up a business, etc. For example, the most business friendly countries/zones were found to be Singapore, Hong Kong, New Zealand, US and Denmark. And yet, the highest growth rates were displayed by countries such as China, Indonesia, Brazil, Argentina and Russia. Consequently, the flow of capital and foreign investment is not discouraged by political instability or complexity of the business environment (up to a reasonable margin). So, apparently, the factors that determine the attractiveness of a modern economy need to be sought elsewhere.

Growth indicators In the respective indexes the US may maintain top positions, but in reality US economy lacks significantly in competitiveness compared to countries such as China, Taiwan and South Korea. This is also true in technological sectors, where the US has been for decades the world leader. The reason is not obvious at all, because, especially in technological products, wages are just a small fraction of the total product cost, which additionally includes the cost for research and development, promotion, distribution, etc. Beyond low wages, Far East countries offer a broad range of accompanying infrastructure and services to facilitate industrial production. We name them here growth indicators. So, in just a few years these countries succeeded in gathering the biggest part of the world's electronics production. These growth indicators are: a) Stable tax environment, b) Organized industrial areas, c) Dense networks of suppliers, d) Intermodal transport,
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e) High degree of specialization, f) Sufficient number of technical staff, g) Flexible working schemes etc.

What happened in Greece? The Greek entrepreneurship has found itself at a turning point. One could say it undergoes a deep transformation. Already in the 90s a lot of enterprises diagnosed the approaching dangers of globalization. In order to survive, they moved their production facilities to countries with low labor and tax costs, mainly in the Balkans. At the same time, they took advantage of the fact that Balkan countries were virgin markets. Greece is not only unattractive to foreign investors, but it also suffers from disinvestment. High wages cannot be the only reason. Moreover, Greece has not managed to sufficiently implement even one of the above mentioned growth indicators. Perhaps the painful wage cuts enforced by the Troika will show some results in labor intensive sectors such as manufacturing and tourism. However, in a modern and technologically advanced state it is most uncertain whether austerity measures will be able to create sustainable growth. The gradual entering of Balkan countries into the European Union and the consequent increase in the living standards of their citizens will eliminate the most important factor that made them attractive to foreign investments. Greece should prepare the ground for the return of many Greek companies by starting to implement as many growth indicators as possible. Doing this will encourage even more domestic and foreign direct investments.

Summary Greeks work hard and have a strong will to succeed in restructuring their economy, but they are lacking proper organization and modern production methods. That is
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why Greeks abroad stand out and thrive in competitive multinational societies. At the same time, the absence of a long term strategic plan for the development of the Greek economy is evident. Greece needs a new vision. Where do we want to be in 10 years from now? A shadow of the glorious past or an example for everyone to follow? There is no need to reinvent the wheel. It has been done before. Take Argentina for instance. After its bankruptcy in 2001 it figured at the top of global growth rates in 2011. With a plan, persistence and patience, Greeks can do it.

19 February 2012

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SOURCES
Is it a European crisis or a crisis of the Euro? The Economist Online, "They're bust. Admit it.", 31.3.2011,

http://www.economist.com/node/18485985

Michael Sauga, The Fundamental Problem with Efforts to Save the Euro, Spiegel Online, 30.3.2011, http://www.spiegel.de/international/europe/castles-in-the-sky-thefundamental-problem-with-efforts-to-save-the-euro-a-753509.html

Robert Peston, Markets call time on Iceland, BBC News, 4.10.2008, http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/10/creditors_ call_time_on_iceland.html

"Financial leverage", Wikipedia, http://en.wikipedia.org

The collapse of the Eurozone Nikos Mousis, "European Union: Law, Economics, Politics," Papazisis, Athens, 2011 Yannis Varoufakis, Drachma?, 18.11.2011, http://www.protagon.gr/?i=protagon.el.8emata&id=10309 David Bcking, Der Preis des Ausstiegs, 29.11.2011, http://www.spiegel.de/wirtschaft/soziales/0,1518,800461,00.html

The debt economy Panagiotis Petrakis, Is there hope for growth in the Greek economy?, http://blogs.in.gr/blogger/post/?aid=1231115922

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Economist, The global debt clock, interactive overview of government debt across the planet, http://www.economist.com/content/global_debt_clock

Sebastian

Dullien,

Warum

Sparorgien

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Schuldenschlamassel

verschlimmern, http://www.spiegel.de/wirtschaft/0,1518,780530,00.html Anna Miller, Der Sinn der Schulden, http://www.stern.de/wirtschaft/news/weltwirtschaft-in-der-krise-der-sinnder-schulden-1715316.html

The Dollar, the Euro and Greece Yannis Varoufakis, Too little, too late, 22.7.2011, http://www.protagon.gr Mark Mazower, interview in Kathimerini newspaper, The crisis in Greece began in 1980, 17.7.2011, http://news.kathimerini.gr Martin A. Armstrong, The coming Greek default, 15.6.2011,

http://armstrongeconomics.files.wordpress.com

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http://www.hellenicparliament.gr/Vouli-ton-Ellinon/Kanonismos-tis-Voulis/ Law 3429/2005, "Public Companies and Organizations (D.E.K.O.)., http://www.et.gr Services and Agencies Registry of the Hellenic Administration,

http://www.gspa.gr/

Privatizations

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Rudolf Autner, The national property fund and privatization in Slovakialessons learned, 2006, http://pasos.org/237/the-national-property-fund-andprivatization-in-slovakia-lessons-learned/

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Miklo,

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Slovakia

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1991 -1995,

http://www.internet.sk/mesa10/PRIVAT/GLOB95.HTM Christian Wolf and Michael G. Pollitt, The Welfare Implications of Oil Privatization: A Cost-Benefit Analysis of Norway's Statoil, March 2009, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1260280 Hellenic Republic Asset Development Fund, http://www.hradf.com/gr

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http://cordis.europa.eu/home_en.html General Secretariat for Research and Technology in Greece,

http://www.gsrt.gr/ Greek National Documentation Centre, http://www.ekt.gr/

The recovery of the Greek economy Eurostat, 2012, http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/themes Office for National Statistics, UK, December 2011, http://www.ons.gov.uk/ons/index.html Heather Stewart, "Who works the longest hours in Europe?", Journal Guardian, UK, 8 2011, http://www.guardian.co.uk/news/datablog/2011/dec/08/europe-workinghours
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Charles Duhigg, Keith Bradsher By, How the US Lost Out on iPhone Work, New York Times, 21 January 2012

Stephen Gandel, "The Deregulation Myth", Time, 14 November 2011, http://www.time.com/time/magazine/article/0,9171,2098583,00.html

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About the Author

Fotis Fitsilis has studied electrical and financial engineering in Germany and holds a PhD degree in Material science. He has worked in Germany, Greece and Serbia. He utilizes the internet and all available digital social media, in order to inform and trigger people to learn more about things that have the dynamics to change their lives to the better. He writes about popular science, economics, modern agriculture, democratic institutions and contemporary geopolitics.

For a detailed publication list visit http://www.scribd.com/ffitsilis or http://fitsilis.wordpress.com

Contact Fotis @ Linkedin, Facebook and Twitter http://gr.linkedin.com/in/ffitsilis https://www.facebook.com/ffitsilis @fotisfitsilis

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ISBN 978-960-93-4446-3

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