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IPE special report May 2018

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Joseph Mariathasan: Can the private sector provide salvation for Greece?

Developing the private sector should be a priority if Greece wishes to retain its young educated citizens, write Joseph Mariathasan

The UK may be on a path towards Brexit, but the rest of the European Union (EU) has yet to resolve the underlying tensions that still threaten to tear it apart. 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. Whilst 52% of those voting in the UK referendum decided on leaving, it looks unlikely that a majority in Greece would vote to do so, despite the burdens of being stuck inside the euro-zone.

Greece in many ways is very different from the rest of the EU, not least because, having been under the Ottoman Empire for 400 years, it missed out on the beginnings of the industrial revolution that swept through Western Europe. It still has a lot of catching up to do, particularly in the creation of a private sector that generates wealth and employment, which is why its relationship with the rest of 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. The majority of the Greek population appears to be committed to remaining within 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 increasingly gloomy.

Why is the private sector in Greece still so underdeveloped? Yannos Hadjiioannou, a partner at London-based private equity and advisory firm Archipelago Investment Partners, argues that 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, a number of companies raised huge amounts of cash by floating on the stock market. A substantial part of that never got reinvested back in the economy. It showed a lack of discipline, he argues, resulting from the fact most of the enterprises are family businesses that were never that outwardly focused and had never reached out further than the Balkans.

The contrast between the private sector in Greece and Germany’s mittelstand, the hugely successful SMEs that have provided the backbone to Germany’s economic success, is striking. Another telling comparison, says Hadjiioannou, and a great business case study is the SME space in Italy’s north, which has gone through 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 the frameworks that support the mittelstand in Germany and the SME space in Italy can be encouraged in Greece.

A key element for Germany is the decentralised banking system, with entities such as sparkassen (mutual savings banks) and volksbanken (cooperative banks), whose key asset is being near to local mittelstand clients. In contrast, the private sector in Greece is faced with a small number of major Greek banks with balance sheets destroyed by non-performing loans, which would need to be written off and the banks recapitalised before any new lending could hope to occur.

Apart from agriculture, its strengths are clearly in tourism and shipping, but its educated workforce does open up opportunities even in leading edge technologies. For example, Greece has set up an incubator, Corallia, for high-tech startups specialising in microelectronics, biotechnology, telecommunication networks and space, which has attracted interest from venture capitalists in Europe and the US. Where the clearest opportunities may lie, though, are in exploiting its great strengths much further.

Perhaps more tragically, the future of any country lies in its youth, and with a youth unemployment rate hovering around 50%, the danger for Greece is that its most valuable exports may be its educated young people. That may be acceptable for a US state, where depopulating Montana or even Puerto Rico as people seek work in California is nothing to worry about. But, for small countries within the EU, losing their most productive young workers to emigration is not a pleasant prospect. That is why developing a vibrant private sector should be a priority for Greece. If the EU can help to achieve that, it would be proof, indeed, that it is a community and not just a trading block. The UK never required that from the EU, but that is another story.

Joseph Mariathasan is a contributing editor at IPE

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