Is the EU a community of states or just a trade organisation structured to stimulate demand in favour of the stronger economies? That existential question can provoke much discussion, but the relationship between the EU and Greece in the years ahead may provide the real answer. Greece in many ways is different from the rest of the EU, not least because it missed out on the beginnings of the industrial revolution that swept through western Europe, having been under the Ottoman Empire for 400 years.
It still has a lot of catching up to do, which is why its relationship with the EU is so crucial. Remaining within the EU is an existential issue for Greece, even if remaining within the euro-zone may not be. Most Greeks appear committed to remaining within the euro-zone and the EU, but as the Syriza government’s relations with the EU become more fractious with each debt repayment crisis and greater austerity, the future looks gloomy.
This is not the first time Europe has been frustrated by Greece. As the Greek entrepreneur Philip Vracas points out, in the early days of Greek independence from the Ottoman empire the resources of the country were as stagnant as they were under the Turkish domination: “The interest on government loans was not paid; nothing was being done to develop the economy except for a few roads near Athens.”
Then, during the Crimean War in the 1850s, Greece’s ruler, King Otto (a Bavarian imposed by Britain and France) tried to wrest Epirus, Thessaly and Crete from the Turks. Britain and France took alarm, blockaded Piraeus and landed troops to maintain the neutrality of Greece.
“This, it appears, killed the last remnant of European sympathy with the Greek people, whose country was regarded as a bankrupt state without the capacity for prudent administration,” Vracas adds. Greece actually defaulted on its debts in 1893 – despite a change in leadership with a pro-British Danish prince (George I of Greece) replacing Otto – having overspent on infrastructure. In contrast, joining the euro-zone enabled Greece to borrow at rates close to those of Germany to finance generous pensions and a bloated public sector, rather than investing for the future.
However, there is a road to recovery and growth, says the Greek American investment manager John Calamos, CEO and founder of Calamos Investments. “Greece can achieve prosperity through a rekindled focus on private sector development, entrepreneurship and job gains,” he says. It is certainly in the interest of the EU to encourage the development of the private sector in Greece. But how should that be done?
Calamos finds the insistence on further austerity, including tax rises during a recession, bizarre. “All the evidence indicates that overall tax takes tend to increase when tax rates are reduced as it stimulates the economy,” he says.
In the case of Greece, which appears to suffer from endemic tax evasion, improving tax collection could be more important to the government’s finances than increasing tax rates. While Greeks may be wary of privatisation, it should not be thought of as a loss to the country but rather a mutually beneficial and profitable relationship. “The private sector provides an environment where entrepreneurship thrives, hard work is rewarded and sustainable jobs created,” Calamos adds.
As Greece’s former finance minister Yanis Varafoukas complains, euro-zone leaders were about to demand a fire sale of Greek assets to repay debt rather than take the opportunity to restructure Greece’s economy.
What needs to be done to develop the private sector in Greece? “Greeks need to get out of the habit of looking at what other people are doing wrong and look at what we, as Greeks are doing wrong. We need to focus on what we can do, and do it right,” says Yannos Hadjiioannou, a partner at London headquartered private equity and advisory firm Archipelago Investment Partners.
Hadjiioannou continues: “The Greek private sector has a share of the responsibility. In the good years prior to and following Greece’s accession to the single currency, companies raised huge amounts of cash by floating on the stock market. A substantial part of that never got reinvested back into the economy. That shows a lack of discipline. That is because most of the enterprises are family businesses that were never that outwardly focused and had never reached out further than the Balkans.”
Hadjiioannou is frustrated at the inability of the private sector to grow out of a family business mentality with the confidence to explore further afield: “We need a more extrovert culture, which hasn’t been available for some time. We also need the right balance between education and the classical Greek idea of ‘paideia’, which can be thought of as the development of a wider community spirit, which is still lacking in Greece.”
There is a striking contrast between the Greek private sector and Germany’s Mittelstand, the hugely successful small and medium-sized companies (SMEs) that have provided the backbone to Germany’s economic success. Another telling comparison, says Hadjiioannou, is the SME sector in Italy’s north, which has undergone various transformations from embroidery to car parts, retaining the strong links and support between them.
Perhaps the EU should focus less on austerity for Greece and more on how frameworks that support SME networks elsewhere can be applied to the country. A key element for Germany is the decentralised banking system, with mutual savings Co-operative banks, whose key asset is proximity to the Mittelstand. In contrast, the private sector in Greece is faced with a small number of large Greek banks that will need to be recapitalised before any new lending can hope to occur.
There has always been suspicion between the state and the Greek people, and this needs to change, says Hadjiioannou.
Syriza has certainly provided a clean break at the political level but the biggest obstacle to the flowering of Greece’s private sector may be its own government. “It is very difficult to start a business in Greece. It can take years just to get licences and approvals. In other parts of the world, cities and states encourage investment. That is not the case in Greece,” says Calamos. Yet, as he points out, 99% of all businesses in Greece are small enterprises, and more than 35% of civilian employees are self-employed, far higher than the euro area as a whole. “This data underscores the far-reaching impact that small-business-friendly policies could have on the country.”
Aside from agriculture, Greece’s strengths are clearly in tourism and shipping. The educated workforce could also open opportunities in leading-edge technologies. Greece has set up an incubator, Corallia, for high-tech startups specialising in microelectronics, biotechnology, telecommunication networks and space*, attracting interest from venture capital in Europe and the US. The clearest opportunities may lie in exploiting existing strengths further.
“I see Greece as the Florida of Europe,” concludes Calamos. “We have looked at a few private equity investment opportunities in Greece, but the legal framework and the regulatory environment does not give an investor any confidence. You need a government that encourages you to invest.”
Perhaps more tragically, the future of any country lies in its young people and with a youth unemployment rate hovering at about 50%, the danger for Greece is that its most valuable exports may be its educated young people. For small countries, losing productive young workers to emigration is not a pleasant prospect. That is why developing a vibrant private sector should be a priority. If the EU can help to achieve that, it would be proof indeed, that it is a community and not just a trading bloc.