GREECE: A Case of Massive Flaws in EU Governance

The real issue about the new situation in Greece is that it is a microcosm of massive flaws in the way European political economy has moved in the last two decades at both the level of the European Union and the Member States. Neither in Brussels nor in Athens does anyone yet seem to understand that.

In what is being seen as a capitulation, Greece negotiators agreed to a list of measures even stricter than those rejected by the country's voters in the referendum. In return, Greece will receive up to EUR 86 bn in new bailout aid, on condition that measures are implemented.

Key Required Reforms

1. Streamline the VAT system and broaden the tax base to increase revenue;
2. Implement upfront measures to improve long-term sustainability of the pension system as part of a comprehensive pension reform programme;
3. Safeguard the full legal independence of ELSTAT, Greece's statistical office
4. Adopt the Code of Civil Procedure, which is a major overhaul of procedures for the civil justice system, aimed at significantly accelerating the judicial process and reducing costs;
5. Implement the EU Bank Recovery and Resolution Directive, the BRRD, with support from the European Commission;
6. Greece's reform measures need to be seriously strengthened to take into account the strongly deteriorated economic and fiscal position of the country during the last year.

That means Greece will need to:

1. Carry out ambitious pension reforms and specify policies to fully compensate for the fiscal impact of the Constitutional Court ruling on the 2012 pension reform and to implement the zero deficit clause or mutually agreeable alternative measures by October 2015;
2. Adopt more ambitious product market reforms with a clear timetable for implementation of all OECD toolkit I recommendations, including Sunday trade, sales periods, pharmacy ownership, milk and bakeries, except over-the-counter pharmaceutical products which will be implemented in the next step, as well as for the opening of macro-critical closed professions (e.g. ferry transportation). On the follow-up of the OECD toolkit-II, manufacturing needs to be included in the prior action;
3. On energy markets, proceed with the privatisation of the electricity transmission network operator (ADMIE), unless replacement measures can be found that have the equivalent effect on competition, as agreed by the Institutions;
4. On labour markets, undertake rigorous reviews and modernisation of collective bargaining, industrial action and, in line with the relevant EU directive and best practice, collective dismissals, along the timetable and the approach agreed with the Institutions. On the basis of these reviews, labour market policies should be aligned with international and European best practices, and should not involve a return to past policy settings which are not compatible with the goals of promoting sustainable and inclusive growth;
5. Adopt the necessary steps to strengthen the financial sector, including decisive action on non-performing loans and measures to strengthen governance of the HSF and the banks, in particular by eliminating any possibility for political interference especially in appointment processes.
6. Develop a significantly scaled up privatisation programme with improved governance; valuable Greek assets will be transferred to an independent fund that will monetize the assets through privatisations and other means. The monetization of the assets will be one source to make the scheduled repayment of the new loan of ESM and generate over the life of the new loan a targeted total of EUR 50 bn of which EUR 25 bn will be used for the recapitalization of banks and other assets and 50% of the remaining euro (i.e. 50% of EUR 25 bn) will be used for decreasing the debt to GDP ratio and the remaining 50% will be used for investments. This fund would be established in Greece and be managed by the Greek authorities under the supervision of the relevant European Institutions. In agreement with Institutions and building on best international practices, a legislative framework should be adopted to ensure transparent procedures and adequate asset sale pricing, according to OECD principles and standards on the management of State Owned Enterprises (SOEs);
7. Modernise and significantly strengthen the Greek administration and put in place a programme, under the auspices of the European Commission for capacity-building and de-politicizing the Greek administration. The Greek government commits to reduce further costs of the Greek administration, in line with a schedule agreed with the Institutions;
8. Allow the lender Institutions to work on the ground in Athens to assess progress in implementing reforms. The government needs to consult and agree with the Institutions on all draft legislation in relevant areas with adequate time before submitting it for public consultation or to Parliament