Total reboot: How to fix Greece's economy

AP News
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Posted: Aug 04, 2015 11:35 AM
Total reboot: How to fix Greece's economy

ATHENS, Greece (AP) — After so much pain, Greece must now figure out how to get its economy back on its feet.

The scale of the country's financial problems is mind boggling — a full quarter of the economy evaporated in the past six years and business activity is now plummeting further. Government cuts needed to qualify for a new bailout will hurt incomes for years to come.

The advice to Greece from economists is simple: start with the basics.

Have a steady government and invest in established sectors like tourism and agriculture. In the longer-term, tackle the more difficult but fundamental problems such as tax avoidance, high public debt and complex business laws.

It won't be easy, but Greece has no option if wants to ease its people's economic misery.

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STABILITY

The first, most important step is making sure the country has a steady government that is committed to avoiding a disastrous exit from the euro.

Investors want to know Greece won't fall into another crisis over whether to leave the euro — which would cause huge disruption to the economy — and that the rules of doing business won't change unexpectedly.

Investment in Greece last year in everything from roads to new offices equaled just 12 percent of economic output, largely a symptom of a lack of confidence in the country's stability. Only three of 124 countries ranked by the World Bank invested a lower share.

Greece's current government offers the starkest example of the risks of political uncertainty. It came to power in January vowing to undo a series of laws and to challenge creditors. After months of high-stakes talks raised fears Greece might fall out of the euro, the economy went into reverse: rather than grow this year, it is expected to contract between 2 and 4 percent.

Investors pulled out tens of billions of euros from the country and the banks had to be shut to avoid their collapse. Limits on money withdrawals are costing Greece an estimated 1.75 billion euros to 2.8 billion euros ($1.9 billion to $3.1 billion) weekly.

The outlook for political stability is not particularly good. Political parties, including the ruling Syriza, are in turmoil and there is speculation Greece will head into another general election in November. The hope is the government that emerges from those elections will prove more stable.

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INVESTMENT

Because so much uncertainty remains, economists say Greece should focus in the short term on making targeted investments in industries it already has a presence in.

Agriculture last year contributed almost 6 billion euros to the country's 179 billion euro economy but could yield more with some basic modernization and better marketing.

Take olive oil. Although Greece is the third largest olive oil producer in the world, it exported 60 percent of its output to Italy in bulk, giving its neighbor the opportunity to earn 50 percent more on the price of the final packaged product, according to a 2012 report by consulting firm McKinsey & Company.

The fishing industry is another sector that Greece could develop quickly and enjoys a strong competitive advantage in, given its huge shorelines.

"You have the groundwork already laid out and there's no need for large investment," said Panayotis Alexakis, professor of economics at the National & Kapodestrian University of Athens.

Tourism, which produces almost a quarter of Greek economic output alongside retail trade, but could be improved further.

Though the number of visitors this year is forecast to hover around last year's, experts say the country could find ways to increase revenue.

It could, for example, extend the tourism period into winter by developing more golf courses — a reasonable move in a country blessed with so much sunshine.

Turning Greece's main ports of Piraeus and Thessaloniki into regional cruise ship hubs should be another key target for the tourism sector, said Christos Agiakloglou, professor of economics at Piraeus University.

The ports also hold promise in becoming Europe's gateway to global imports by expanding and upgrading their container terminals. Through Greece, goods can enter the European Union as many as 20 days faster than if they were offloaded in the continent's main container terminal in Rotterdam, in the Netherlands. China's Cosco shipping company manages two container terminals at Piraeus port and is reportedly looking to clinch a majority stake.

Greece's huge cultural endowment can be spun into a money-maker beyond tourism. The universities and museums, for example, can attract more foreign students with courses in English.

The McKinsey report identified Greece's pharmaceutical industry, second only to tourism in economic output, as a "rising star" that could boost growth. The health care industry could cater to a large regional market with hospitals receiving patients from neighboring countries such as Bulgaria.

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FUNDAMENTAL CHANGE

Beyond a stable government and targeted investments, Greece also needs to fundamentally renew the way its economy runs if it wants avoid more financial crises.

Many of those reforms are what its creditors are demanding already. Some can be achieved easily, with a change in law. Other require a generational shift in attitudes.

The quickest ones to make include:

-Cutting red tape to make it easier and cheaper to open a business.

-Making the legal system more efficient so that it doesn't take months, even years, to settle a business dispute.

-Opening up closed professions, such as pharmacies, to greater competition.

-Bolstering the banking sector with new bailout cash so that the government can gradually lift the limits on cash withdrawals and companies can get loans at affordable rates.

The longer-term, more difficult objectives include:

-Healing public finances, a process that will mean convincing Greece's creditors to ease the terms of its massive debt burden. At around 320 billion euros, or 180 percent of GDP, public debt is considered unsustainable. Even the International Monetary Fund, a key creditor, says so and suggests lowering the interest rates and repayment rates on Greece's bailout loans.

-Tackling rampant tax avoidance. This involves cracking down on the common practice to not declare everyday transactions like the sale of a coffee or the work of an electrician.

-Eradicating a culture of corruption in which public sector jobs are handed out by politicians in exchange for votes.

Nicolaos Eriotis, a professor at the National & Kapodestrian University of Athens, says corruption was at the heart of Greece's problems, when previous governments hid the true scale of public debt. And it has kept the economy from modernizing and creating an environment where honest work pays off.

"Irresponsibility destroyed this country," he said.

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Paul Wiseman in Washington contributed to this report.