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Talk by the CEO of NBG, Alexandros Tourkolias, at the International Hellenic University

24/10/2012 - Views & News


Talk by the CEO of NBG, Alexandros Tourkolias:

at the International Hellenic University,

Thessaloniki 24-10-2012


Kick-starting investment in Greece: the preconditions for success

The reversal in the sharp slowdown in economic activity—now in its fifth year—and a gradual transition to a new growth model require a recovery in investment spending from its current extremely low level.

To effectively transform the productive base of the economy and create new jobs we need to see a recovery in private investment coupled with normalization of public investment activity—which has been severely dented as a result of efforts to reduce the budget deficit—and inflows of foreign capital.

Unprecedented contraction in investment spending in the midst of uncertainty

Our country is experiencing a painful adjustment period that is having an unprecedented impact on society at large, living standards, and the structure of the economy. Fundamental problems and imbalances that had accumulated over a long period were compounded by the weight of the global financial crisis, which exposed the weaknesses of the Greek economy, making it a highly vulnerable target within the battered edifice of the euro area. The economy was plunged into the deepest recession of the past six decades, in an environment of extreme uncertainty—despite resorting to the support mechanisms of the EU and IMF. The reluctance to push forward with critical reforms, the lack of coherent direction among our partners in the EU, the successive implementation of painful and largely unimaginative austerity measures, together with the skeptical, even hostile, international environment only served to fuel the recession.

Consequently, investment spending has been the most hard-hit component of economic activity. As a rule, fixed capital investment shows the greatest sensitivity to the economic cycle as compared with the other components of GDP. Thus, fixed capital investment tends to contract rapidly during periods of economic slowdown—at a faster pace indeed than consumption and imports—while it displays a sharper increase in periods of economic recovery.

In addition, the adjustment of investment to macroeconomic conditions usually occurs earlier than other components of GDP, both in times of recession and recovery. This is what happened in Greece in recent years, where the contraction of investment began in 2007 and escalated in the three-year period 2009-11, decelerating at three times the rate of the other components of GDP (which had started to contract almost a year after investment). The result was that investment spending declined to its lowest level since the Second World War (13.5% in the first half of 2012, from an average of 19.7% in the period 1960-2009), and now stands at 30% below the euro area average.

The slowdown observed in the Greek case has surpassed any cyclical adjustment, and now looks more like disinvestment, being tantamount to a direct reduction in the capital reserves of the economy and reduced ability to foster production and generate new jobs. Accordingly, sustainable economic recovery presupposes the re-accumulation of capital at rates which, alongside growth in employment, can sustain a healthy rate of growth in GDP in the medium term and thereby ensure, among other things, sustainability of the public debt.

The domestic business sector has suffered severe blows over the past four years, though other sectors that engage in direct or indirect investment spending (government investment programmes, household investment in homes, and agricultural investment) have also been afflicted by the sharp slowdown in the economy. The rapid contraction in demand, uncertainty about the country’s prospects, reduced liquidity, and the collapse in confidence have led to the shelving of all investment plans, further fuelling recessionary pressures and accelerating job losses.

Meanwhile, international investment capital, which had approached the country with caution even during the phase of strong growth following Greece’s entry in the EMU, in essence struck the Greek economy off the global investment map.

We should not forget that private investment decisions require the commitment of capital over a long-term horizon, while the sustainability and ultimate return on any investment depend directly on the economic environment and the state of play of key macroeconomic variables, as well as the policies implemented by the government. Accordingly, in times of macroeconomic instability and uncertainty businesses are reluctant to take the plunge and invest their funds, as forecasts regarding returns and potential risks—key components of any business plan—become increasingly difficult to make. The escalation of the Greek crisis is a typical example of extreme deterioration in the investment climate, where widespread instability—and even talk of a euro exit—has caused practically all investment decisions to be shelved indefinitely.

Revival in investment activity will foreshadow stabilization in other sectors of the economy, and signal the exit from recession

International experience shows that the people taking business and investment decisions are the first to react to nascent but clear signs of improvement in economic outlook. Investment activity is the area of domestic demand that moves swiftest in response to changes in economic outlook, stimulating growth when the private sector believes that the level of uncertainty has fallen below a certain threshold, while nascent signs of stabilization in individual sectors of the economy start to evolve into credible indications of recovery and strengthening confidence. If international capital is attracted to the local market, this can be taken as the surest indication that we have reached that crucial turning point at which the economy embarks on a trajectory of sustainable growth.

Accordingly investment is the area of activity which, when conditions allow, shall serve as the starting point for the virtuous cycle that will transform the outdated and shaky economic structures of the past into a healthy economic growth model for the future. The process is neither automatic nor the product of random developments, but the result of painful adjustments and long-term strategies that have already been deployed in parts of the private sector, supported by the progress in fiscal consolidation.

The failure to attract foreign investment—already evident before the financial crisis broke out—should provide us with valuable lessons in mapping out a new sustainable strategy for the revival of investment spending

The sharp contraction in investment that accompanied the escalating financial crisis was only to be expected, given the exceptionally adverse macroeconomic environment and extreme uncertainty. Greece’s failure to attract productive capital from abroad, despite the favorable macroeconomic environment created by the country’s membership of the EMU, should give cause for greater concern and more probing analysis. Although growth in domestic investment spending was among the highest in the euro area in the period 2000-2009—an average annual growth rate of 9.7% as compared with 5.3% for the euro area as a whole, backed substantially by the construction industry—the structure of investments has proved insufficient to ensure a sustainable balance between domestic supply and demand, thus leading to a growing dependence on imports.

Domestic fixed capital accumulation turned out to be only superficial, as in practice it proved ineffective in strengthening and broadening on a sustainable basis the domestic production base, such that it could match the structure of domestic demand. As a result of this mismatch the external imbalances multiplied.

I should stress that foreign investors are much stricter and less partial judges of the overall attractiveness of an economy than domestic investors, whose business decisions are traditionally coupled, to a large extent, to progress in domestic demand. Given that global flows in investment capital take place within a highly competitive environment, where the potential destinations for investments are assessed in light of their current as well as their anticipated attractiveness, the strengths and weaknesses of an economy cannot remain undetected for long.

Remarkably, of the host of ratios that track the macroeconomic trends of the Greek economy—alongside the sovereign debt and budget deficit ratios—none was better at providing such early and clear signs of the imbalances and upcoming risks as the stagnation in foreign direct investment in the Greek economy coupled with the persistently widening gap in the current account deficit. Greece’s failure to attract productive capital in a period of abundant liquidity, low cost of money, strong risk appetite and high levels of investment capital flows into advanced and, above all, developing countries, reflected the low attractiveness of Greece as an investment destination.

Recall that euro area countries presenting similar economic stories to Greece, such as Portugal, were able to attract foreign investors, while smaller-sized new EU members (such as Slovenia and Bulgaria), which started out from particularly low levels, were able to overtake Greece within 10-15 years.

The continuous process of rating and ranking an economy in respect of its attractiveness as an investment destination indicates the significant challenges and opportunities that are opening up. A country’s position in the global investment rankings is not static, but a dynamic process. Generally speaking, no economy is doomed to investment marginalization; likewise, however, no economy is assured, indefinitely, of a place among the elite investment destinations. Political resolve and strategy, decisions or omissions, deeper structural factors (such as the quality of general and business education), and even circumstantial factors play an important role in investment destination rankings.

Ireland provides a good example. From a country with problems associated with economic instability, high levels of debt, and unemployment that persistently drove significant numbers of its people to seek their livelihood abroad until the early 1980s, it was transformed into a highly attractive investment destination.

In the case of Ireland, the mapping out of a forward-looking strategy to generate the necessary synergies in sectors with comparative advantages coupled with a favourable international environment served to create a virtuous cycle that boosted per capita income to 20% above the euro area average. Ongoing investment in education ensured a well-qualified and efficient workforce without pay excesses. Moreover, the attractive institutional framework and, above all, the stable and attractive tax regime, combined with the constantly developing transport and telecommunication networks created the right basis on which to grow investments. Once these investments began to unfold, the benefits were manifold. The growth of extensive business networks, interaction with higher education and research, and further consolidation of government policies and national infrastructures fostered a growth cycle that made the Irish economy resilient and attractive, even today after the major shocks inflicted on it by the problems in the banking system.

Similarly, countries on the economic margin of “Eastern Europe” with weak infrastructures, limited resources and poorly developed business culture have succeeded in playing a role in the international allocation of capital. These include not only relative large countries, such as Poland and the Czech Republic, which due to their economic size and their proximity to the core euro area economies enjoyed obvious advantages, but also the Baltic states, Slovenia, and Slovakia, which have demonstrated that it is possible even for small economies to attract investment capital, reaping enormous benefits for their economies.

In several cases, such as in the case of Slovenia and Estonia, developments are going hand in hand with a rapid improvement in living standards and increase in per capita income and belie the over-simplistic assumption of a labour market that is “doomed” to third-world conditions so as to attract investment.

The need to squeeze labour costs is usually a product of other strategic inadequacies in attracting investments. Poorly designed or fragmentary policies, instability, corruption, lack of an overarching strategy, and inability to grasp the comparative advantages of a country usually lead to the crude solution of over-compressing labour costs in order to mask other failings. It is worth pointing out that countries with very low labour costs are less attractive to international investment than countries that present greater competitiveness by effectively putting in place a broad set of genuine and market-friendly structural reforms.

The painful adjustment of the economy in the midst of deep crisis should be seized as an opportunity to place the country back on the global investment map, with brighter long-term prospects

In the case of the Greek economy the scale of the crisis and the range of structural reforms provide a unique opportunity to place the country on the global investment map on better terms than in the past.

The Greek economy is undergoing a period of rapid restructuring under the weight of the deep recession and policies aimed at enhancing the attractiveness of the Greek business environment. The road is painful and entails a significant social cost, as changes designed to improve market flexibility, boost productivity and allocate resources on a more rational basis, have only been implemented gradually and with considerable delay against a highly recessionary backdrop.

Under these conditions the social cost is ballooning, while in the medium term the benefits for the Greek economy are becoming obscured from view.

There is no doubt, however, that the ongoing changes in the Greek economy are already transforming the economic environment and forging a process of business restructuring, both of which comprise an important precondition for the revival—in the next stage—of investment activity.

  • The undoubted progress in fiscal consolidation, which is being effected through substantial sacrifices on the part of the Greek people, is securing manifold benefits for the economy, which will start to grow when the country moves back to a primary surplus in the next two years. To begin with, it reduces uncertainty regarding the sustainability of the economy and enhances the credibility and attractiveness of the economy, removing the main causes that led the country to the epicentre of the global crisis. Also, it gradually eliminates the basic source of distortions associated with the excessive presence, and interdependence, of the state in the business sector—sometimes, indeed, overstretching the limits of genuine entrepreneurship—while also reducing the absorption by the public sector of vital resources, releasing them for more efficient use by the private sector. In other words, conditions are being created for business growth founded on a more healthy and sustainable basis.
  • Examples of successfully deployed strategies in other countries should be adopted selectively and on our own initiative, irrespective of our obligations vis-a-vis the Memorandum of Understanding. We need to stay several steps ahead of developments by designing and implementing a comprehensive strategy to enhance entrepreneurship and attract investment capital to Greece. The policies implemented must address chronic problems (bureaucracy, state interference, corruption, tolerance of conditions that distort competition) and secure favourable prospects for business planning. A stable and competitive tax regime adapted to the needs of the economy—which is comprised of a host of small businesses and sole-proprietorships—but also to the state of play in peer economies is an essential intervention that will generate significant benefits in the medium term.
  • International experience shows that governments are best at attracting investments when they focus on their role as “enablers” (i.e., defining strategy and enabling action thereon) rather than interfering or acting as quasi-entrepreneurs. By simplifying licensing procedures, speeding up evaluation and approval of investment proposals, and providing targeted incentives to industries that present obvious comparative advantages, they can contribute to a rapid improvement in the investment climate. It is notable that Ireland, even within the context of a particularly arduous fiscal consolidation effort over the last three years, never contemplated compromising the stability of its tax system or the structure of incentives for research, development and investment in key sectors of the economy. The high priority sectors for the Greek economy are familiar enough and, on the back of falling valuations,  have started to gradually attract the interest of foreign investors.


Tourism (in the broadest sense of the term), energy (RES and power networks), transport and transit services (as part of a more significant transit role for Greece within the region as a whole), healthcare and pharmaceuticals are all areas in which Greece can boast a competitive advantage. While some of these industries have been hit by the slump in domestic demand, the lack of effective planning, a cash-strapped state that struggles to meet its obligations, and the tight liquidity conditions in the banking system, they nevertheless continue to be attractive propositions for investment capital. We should note the recent cases of direct investment in the country by foreign multinationals (e.g., the acquisition by Dufry of Hellenic Duty Free Shops, and the acquisition by Diamond Resorts International of timeshare contracts in five major tourist resorts). In the network and infrastructure sectors a leading example is COSCO’s investment in the upgrade of its facilities and capacity for handling freight traffic out of Piraeus, leveraging the potential of the port with significant investments, while it also looks ready to make new investments in the sphere of logistics and transport. Last, the presence of leading global energy players (e.g., Gazprom) in the tender for expressions of interest in the privatization of oil and gas companies testifies to the attractiveness of the sector. This interest from abroad, as well as the first major business moves to emerge, should be a source of encouragement, although uncertainty remains high. That said, there is still some way to go before the domestic business environment becomes truly competitive.

Foreign investment capital has the potential to accelerate decisively the economic recovery by providing know-how, capital and managerial experience. Given the current conditions of tight liquidity, the synergies that could be developed with the input of new capital are of vital importance, particularly for channelling funds to large investment projects that will have a significant beneficial feed-through effect for other sectors.


  • The acceleration of the privatization process will generate multiple benefits. It signals the government’s resolve to radically overhaul the country’s growth model; it secures precious resources in the drive to reduce the debt; and offers fertile ground for investment—even primary investment—in wholly unexploited areas of public assets (e.g., tourist development in real estate assets).
  • The anticipated funds from the National Strategic Reference Framework together with money committed by the EIB amount overall to circa €14 billion through 2014-15, a vast sum when compared with the current extremely compressed scale of investment spending. Rational use of these funds in the form of carefully targeted investments can give a substantial impetus both to large-scale investment undertakings (e.g., roads, infrastructures and so on) as well as to the investment activity of the numerous small businesses that make up the backbone of the Greek economy.
  • Last, the radical changes in the labour market are serving to enhance flexibility to levels similar to those of our competitive peers, and have already brought about a correction in the inordinate growth of labour costs in Greece vis-a-vis the euro area average. Accordingly, the country’s position in terms of cost competitiveness has already returned to reasonable levels, on a par with those of Portugal and the more recent members of the euro area.

Research into the key factors that make a country attractive for international investment capital typically cites labour costs as one of the main influencing factors, although this almost always takes second place to the aforesaid structural features of the business environment.

To sum up, I want to emphasize that the restructuring of the business environment, which is already underway, will be an arduous process accompanied by major challenges, but also by opportunities. The social cost is substantial, while recent business decisions (some large and outward-looking Greek companies have transferred their administrative and financial activities abroad) reflect the negative impact of the protracted recession and uncertainty on business planning. At the same time, however, it is clear that there is interest from overseas in sectors of the Greek economy that clearly present a competitive edge, while the activity of Greek business players is gradually increasing. If investment activity is to gain momentum, it is crucial that uncertainty is reduced, confidence in the stability of the economy restored, and a comprehensive strategy drawn up and implemented, so that the business environment becomes more attractive and the key areas for action in enhancing the competitiveness of the Greek economy can be mapped out. The time available for completing these processes is running out, given the severity of the recession, and accordingly investment has to be kick-started here and now. The developments of the coming week are likely to play a decisive role in shaping the prospects of the Greek economy, determining the pace and the terms by which Greece pursues economic recovery and a new place for itself in the international competitive arena.