Greek Entrepreneurs to the Rescue

The Greek dimension of the EU sovereign debt crisis is by now well known to all.  Investor anxiety over excessive national debt throughout the EU led to demands for higher interest rates from several governments with greater debt levels and current account deficits.  This in turn made it difficult for some governments to finance further budget deficits and service existing debt.  Unable to pay for its public debt, the Greek government turned to the EU for financial assistance.

The first bailout package was approved on May 2010, which provided the Greek government with a three year €110 billion loan.  On February 2012, the lending troika (EU, IMF and ECB) eventually agreed to provide a second bailout package worth €130 billion.  This second package included an agreement with banks to “voluntarily” accept a 53.5% write-off of (some part of) Greek debt, the equivalent of €100 billion, to reduce the country’s debt level from €340bn to €240bn or 120.5% of GDP by 2020.

So far, all the reforms forced upon Greece center on how to reduce the government’s budget.  These reforms include decreasing the minimum wage for public (and therefore private) sector employees by 22%, cutting benefits to pensioners and health-care recipients, reducing the government payroll by laying-off 150,000 public sector employees by 2015, privatizing government companies, and opening-up some industries that were closed to competition.

For now, Greece has been brought back from the brink of bankruptcy.  Though safe for the time being, the country could find itself struggling to meet the strict conditions outlined in the second bailout agreement if key structural reforms don’t take place.  It’s not too late for the crisis to serve as an opportunity.

From Crisis to Opportunity

It is obvious to all that Greece needs a new set of rules that will allow for the smooth transition from the informal to the formal economy, through the simplification of processes and the deregulation of markets.  The country will need a simple and fair taxation administration system that would be more efficient and would create a friendlier business environment.  Also, Greece will need to simplify judicial services and enforcement of rules and laws. Furthermore, it will need to apply quality control on goods and services, eliminate organizations with overlapping mandates and rationalize the public sector.

The most recent OECD Economy Survey of Greece for 2011 also argues that the authorities should continue this vigorous reform process and their efforts to convince markets of their capacity to implement fundamental economic adjustments.  Overall, the Greek government should:

• Continue deficit reduction to halt and then reverse the rise in public debt, by strengthening tax collection and ensure fair sharing of the burden and the benefits of reforms.
• Boost privatization and the development of public assets to reduce the debt burden and associated debt-servicing costs.
• Reinforce structural reforms in the labor and products markets to enhance competitiveness and raise welfare and incomes.

What these reforms have not included was a growth strategy.  The country desperately needs to switch from deficit reduction to economic growth, and pursue reforms that will promote entrepreneurship that generate new business ideas.  With Greece under the continuing threat of bankruptcy, the country desperately needs to generate sustainable growth and lift competitiveness if it is to ever pay down its debt and disengage itself from a chain of international bailouts.

A New National Growth Model

According to McKinsey’s ‘Greece 10 Years Ahead’ report, published in November 2011, Greece needs a new National Growth Model.  Primarily, this new growth model requires that the economy becomes much more outward, focusing on foreign markets both for producing export goods and services and for importing foreign capital.  Along with traditional tradable sectors like tourism, agriculture, and manufacturing, business services should get a large share of resources and investments.

Fundamental to this new growth model, according to McKinsey, is transitioning the funding of the economy from public debt to private sector equity and debt.  This will require higher levels of foreign and domestic investment.  Therefore Greece needs to construct a business-friendly environment that will attract local and foreign investment to generate new jobs and the economic growth required to gradually reduce the country’s reliance on debt.

According to the World Bank, net inflows of foreign direct investment (FDI) in Greece were last reported at $2.25bn in 2010, down from $5.3bn in 2008.  In 2008, when the global recession started, net inflows of FDI in Greece were 1.55% of the country’s GDP.  By comparison, 2008 FDI net inflows in Israel were reported at $10.8bn (or 5.38% of Israel’s GDP), according to the World Bank.

Greece will desperately need more foreign investment if it is to achieve any meaningful economic growth.  Already, foreign investors from China, Germany and elsewhere are looking for bargains in the Greek economy, including in the tourism industry (which accounts for a third of GDP) and in the shipping business (which is very lucrative and growing quickly).

However, for a country like Greece, which lacks a major export sector that would allow it to raise capital, there is only one way to get new money into the economy: direct transfers.  Be it for entertainment (tourists), education, or health-care, direct transfers of money by foreigners visiting the country and spending locally could be the only way to jump-start the contracting economy.

Risk Takers Needed

In order to achieve this Greece will need risk taking entrepreneurs.  According to an article by Joshua Chaffin of the Financial Times, many Greek entrepreneurs believe that the growth of the state over the past 30 years and its all-embracing nature may have blunted young people’s appetite for risk.  For many students, due to their parents cuddling and risk-aversion (“every parent wants their children to be safe”), the dream remains a cushy government job with a regular pay-cheque – not a business career.

However, Greeks are not that risk-averse, and per capita they have the largest number of small and medium size enterprises (SME’s) than any other EU country.  Half the economy is dominated by SME’s while the other half is ‘safely locked’ under government control.  In comparison to other EU countries, Greece has the highest concentration of SME’s.

Furthermore, the Greek diaspora is prosperous and legions of Greeks have thrived working abroad.  While the government may be broke, private wealth is still plentiful.  Just consider that by some estimates, the Greek treasury is deprived of €50 bn each year due to tax evasion.  This coincides with the estimated €60 bn that have been withdrawn from Greek banks since the crisis began at the end of 2009.

One of the positive unintended consequences of this over-protective, risk-averse, obsessed with higher education parents is that Greece has an abundance of young people with college educations – English speaking, highly educated young adults with degrees in science and technology, medicine and health-care, and of course hospitality and tourism.

The ‘Silicon Island’ of Europe

In theory, Greece should be able to duplicate at least some of the success of Israel, another small Mediterranean country that has managed to become a technology powerhouse.  By investing in research and development (R&D) Israel was able to leverage its educated workforce, its financially affluent and well-connected diaspora, and its strategic location to become of the better technology exporters in the world.  All of the underlying elements are present in Greece as well.

According to the ‘Invest in Greece’ Agency, Greece offers a favorable environment for Information and Communication Technologies (ICT) investment, with strong market fundamentals, availability of superb talent pool, leading R&D activity, a welcoming ITC ecosystem, and rewarding public and private sector projects.  The availability of ICT talent and its required low compensation (by comparison to other places) should make Greece a particularly desirable destination for international information and communication technology firms.

The specific model is something along the lines of ‘Sophia Antipolis’, the ‘Silicon Valley of the French Riviera.’  This science park is set in the hinterlands of Nice, attracting information technology and communications companies whose researchers and engineers community from nearby hilltop villages and picturesque harbor towns.  It is no coincidence that technology innovators and entrepreneurs have made California their home – location, climate, and quality of life play a major motivating factor.

On the other hand, Greece needs to restructure its higher education (currently one of the ‘closed sectors’ of the economy) and create ‘University Innovation Zones’ (modeled after Free Trade Zones).  With the right regulatory reforms and with some government assistance, foreign Universities and research companies could be encouraged to set-up campuses in Greece, an ideal location for students to study and innovate.  These will be University towns, where student’s innovators, venture capitalists and producers can come together and start up technology driven companies that will be protected from the rest of the market.

Of course, you need start-up capital and a government commitment to either not interfere with the information technology sector, or provide the regulatory and legal framework that would accommodate the creation, attraction, and growth of technology information/services driven companies, and international research and education institutions.  Usually, the hardest part is the people, and not the infrastructure, and Greece definitely has the people.

The ‘Florida of Europe’

Another objective for Greece coming out of the sovereign debt crisis would be to cater to the health-care and retirement needs of Northern Europeans.  Greece has an army of well-educated doctors and nurses, most of whom are practicing their medicine abroad (because of the closed nature of the industry at home) as well as a very pleasant environment (physical and lifestyle) for retirement.

Healthcare, like higher education, is a sector under severe government control and ‘financially’ very inefficient, thus contributing negatively to the government’s debt.  However, all this government subsidization of the healthcare industry has created a large number of well-educated, well-trained doctors, nurses, professionals and academics.  The challenge should not be to ‘dismantle the system’ so it’s not a financial burden to the government; rather it should be to harness the people and grow the clientele – to import patients and elderly and profit from providing services to them.

Therefore, Greece should aspire to be the ‘Florida of Europe’, where the young go to attend college and stay for the summer to enjoy the weather and the beaches, and the old go to retire and receive quality healthcare and nursing coverage.  Transforming the healthcare (and education) sectors to cater to the retirement needs of other Europeans will not be easy, but the current crisis presents the once in a lifetime opportunity to fundamentally restructure the way the society and the economy operate.

If You build it They Will Come…

The next 8 years will not be easy for the Greek people.  Bankruptcy might have been averted, but if the economy does not grow the government will be in need of new money in no time.  Temporary solutions focusing on tourism and exports could keep the country limping for a while, but only a fundamental restructuring of the economy focusing on technology innovation, education, and healthcare services can provide lasting growth.

If the Greek government can create the necessary infrastructure for ICT start-ups, for higher education growth, and for retirement healthcare, then Europeans will come and invest in Greece.  If the right conditions were present, who wouldn’t want to run their ICT firm from a Greek island, or retire by the Greek coast?