April 17, 2012 / 7:30 PM / 7 years ago

EU report to show rocky road ahead for Greek recovery

BRUSSELS (Reuters) - Greece must liberalize its labor market and business environment and focus on its public finances and credit flow to companies if it wants to make a positive impact on its economy this year, a draft European Commission document showed.

A stray dog is seen in front of a row of pensioners during a protest against the government's austerity measures in Athens December 15, 2011. REUTERS/John Kolesidis

The European Union’s executive arm will publish on Wednesday a series of ideas on how the contracting Greek economy can return to growth, which the country badly needs to be able to service its huge debts.

In the report that runs to more than 40 pages, however, officials list a litany of problems facing the Greek economy, whose recovery is key for the future of the euro currency.

“Greece suffers from a lack of capacity to implement policy, manage public finances, collect taxes, open markets to competition, make public procurement work efficiently and innovatively, pay suppliers, or offer timely judicial review to its citizens,” they write in the document seen by Reuters.

Elsewhere they seek to strike an optimistic note.

“Greece can build on its many strengths - such as its shipping sector, its tourism potential, its universities and generally well-educated work force as well as its location as a potential logistics and energy hub in South Eastern Europe,” said the document obtained by Reuters.

Greece, which remains shut out of the financial markets, will get emergency financing until 2014 from the euro zone and the International Monetary Fund if it implements an agreed reform plan.

The Commission draft stressed that before Greece can return to growth, it has to regain control of its public finances.

Greek public debt is around 160 percent of gross domestic product (GDP) but with great austerity, a debt restructuring and reforms, Athens is expected to be able to bring that down to below 117 percent by 2020.

The Greek government should focus on spending cuts rather than tax hikes to shore up its finances, as this will reduce the negative impact on the economy and leave more domestic and foreign savings available to finance business, the document said. Improving its tax collection is also seen as vital.

CREDIT FLOW

Another priority was restoring the flow of credit to the economy as Greek banks curbed lending because of a large outflow of deposits, the paper said. To help change that, Greek banks are to be recapitalized with money from EU loans by September.

Small and medium-sized enterprises (SMEs) are key drivers for economic growth and employment because they represent 99.9 percent of all companies in Greece, with micro-enterprises representing 96.5 percent.

Yet six out of 10 firms saw a deterioration in their earnings in 2011 compared to 2010, and 150,000 jobs were lost there last year. A Greek survey showed that 60,000 such firms would close and a further 240,000 jobs would be lost this year.

“More than 4 billion euros is available to provide liquidity, working capital and guarantees for lending to SMEs, and a further 1 billion euros will be made available through the newly created SME Guarantee Fund,” the Commission said.

“Yet this funding is not always finding its way to the real economy. The Greek authorities and Greek banks should undertake stronger efforts to monitor the disbursement of existing schemes and overcome together the obstacles to their effective implementation,” the document said.

Finally, to help boost growth, Greece should liberalise business, now entangled in bureaucracy and corruption, as reforms in the production and service sectors could add up to 13.5 percent to Greek GDP over the long-term.

The Commission noted that Greek nominal labor costs in the business economy should fall 15 percent over the next three years to restore its cost-competitiveness.

Greek exports could get a quick boost by cutting red tape, which prolongs the average time needed for export clearance to 20 days on average from the EU average of 10 days.

“This is estimated to result in total export value which is around 10 percent less than it would otherwise be,” the Commission said.

Bidders for Greek public contracts wait nearly 1 year, twice as long as the EU average, for contracts to be awarded. Procedures are inefficient and resource-consuming, and each triggered on average two appeals, it said.

“This situation penalizes suppliers to the public sector and increases costs. It prevents the acquisition of supplies and services needed to perform public services, and prevents the completion of works funded by the EU structural funds,” the paper said.

More gains could come from deregulating sheltered professions and modernizing the electricity and gas sector, which is dominated by a few inefficient state-owned quasi-monopolies.

Greece should also remove administrative barriers and improve poor management in its transport sector, which is key to making better use of tourism.

Athens also needs to thoroughly overhaul its public administration.

“Complexity and opacity at all levels create opportunities for corruption that undermine citizens’ confidence in the system and corrode its effectiveness,” it said.

The Commission said the European Union was ready to help Greece with money and know-how, noting the total financial assistance to Athens of about 380 billion euros, or 177 percent of Greek GDP, was unprecedented.

“The success of this process ultimately depends on Greece,” it said.

Reporting By Jan Strupczewski; Editing by Hugh Lawson

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