Shrinking the Greek State

Another bailout won't work unless Athens unleashes the private sector.

Europe's financial mandarins are hashing out another a bailout package for Greece this week, and once again the question is, who's going to pay for it? Since no one seems to want the inevitable—a significant write-down of the value of Greek debt—the International Monetary Fund and EU member states will likely cough up more money. Athens will be expected to contribute too, but how the Greeks do it matters as much as the amount they raise.
Privatization is a good place to start, since Greece's super-sized state is largely what got the country into fiscal trouble in the first place. The Socialists took office in 2009 and haven't sold a single company for fear of putting public-sector employees out of work and upsetting Greece's famously obstreperous unions. Yesterday, the telecommunications workers went on strike.
The push for Athens to act is gaining steam among creditors, which include the IMF, EU, central banks and private banks. To date, Athens has promised to sell stakes in telecommunications company OTE, the postal bank, major ports, a water company and more, and even named banks to manage the sales. That's a good, if late, start: Athens aims to raise 50 billion euros in total over the next five years.
The plan won't plug Greece's gaping debt hole. Analysts at London-based Independent Strategy estimate the country's sovereign debt will reach around €345 billion by the end of this year, or some 153% of GDP. That figure has caught the attention of critics like credit-rating agency Moody's, which noted Greece's "large debt burden" when it downgraded the country's sovereign debt three notches on Wednesday.
But privatization isn't good just for the capital it raises; it also injects competition into the economy, spurs innovation, reduces waste and will eventually help Greece grow its way out of debt, which is the only way the country can ultimately escape its fiscal crunch.
From that perspective, Athens should worry less how much capital the sales raise and more about how fast and efficiently it's done. If the past is any guide, corruption will likely be a concern. Europe's elites have floated the idea of helping to manage the privatization program—a move Greek politicians have denounced as an assault on their national sovereignty.
Greece's latest bailout will also likely contain more promises of "austerity measures" and revenue-raising plans ranging from tax hikes to better tax collection. Eking revenues out of a sickly economy may be the standard IMF remedy, but it's no way to encourage investment, consumption and ultimately, growth. Asian nations like Thailand learned this lesson the hard way during the 1997-98 financial crisis.
At some point, either Greece will have to face the fact that it's broke or its creditors will have to accept the idea of bailing it out ad infinitum. Greece's creditors aren't willing to face the hard choices in this bailout round, which means they are hoping to inflate their way out of debt, or else muddle through until the European economies, including Greece, can get back on their feet again.
This is a risky gambit, most of all for Greeks themselves. The real "bailout" their country needs is economic growth, which only private enterprise can provide. The sooner they get some, the better their chances for a real rescue.