01 Jul 2015

George Serafeim on Greece

George Serafeim

Prime Minister Alexis Tsipras is right that the old political establishment corrupted Greek institutions and left the country bankrupt, and that the programs imposed by creditors have unfairly impeded the Greek economy through harsh austerity measures.

But he is wrong in his assumption that the approach he has followed for the past six months will help the Greek people. Greece is now closer than ever to an exit from the European Union. As of today, capital controls limit the ability of pensioners to reach their pensions, employees to receive their salaries, and businesses to purchase products from their suppliers.

But there is a right way forward to secure the country’s membership in the Eurozone. Regardless of what many of Tsipras’s critics say, more than 70% of Greek citizens want their country to be part of Europe. But to do this, the government needs to reach an agreement with creditors as soon as possible. Every day that goes by, it is getting closer to going back to the drachma or striking a worse deal with its creditors.

As the economic health of Greece deteriorates, the need for new loans and harsher austerity measures increases. Greece cannot count on other nations to pay its debt through debt forgiveness. In 2012, other countries provided loans on attractive terms with below-market interest rates, extended maturities, deferral of interest payments, and rebates on interest. This is why the present value of Greece’s debt is actually a fraction of its face value.

To reach an agreement, Greece needs to build trust and confidence in its ability to become competitive again. Its European partners need to trust its leaders to reform their country and create a more inclusive economy for the prosperity of all people, not just the politically connected or the business elite. Necessary steps to ensure this include the promotion of transparency in government affairs through the adoption of high-quality standards for government accounting that will improve the management efficiency of assets and liabilities while reducing corruption. A finance minister who will lead this challenging reform needs to communicate clearly, consistently, and specifically regarding the financial condition and future targets of the country.

It’s essential to build trust among investors to become fiscally independent from other governments and the International Monetary Fund and put the last six years in the book of history as lessons of what not to repeat in the future.

A citizen of Greece, George Serafeim is the Jakurski Family Associate Professor of Business Administration. He has done research most recently on corporate responsibility, integrated reporting, and sustainable investing. His work also looks into equity valuation, corporate governance, and corporate reporting issues in enterprises around the globe.

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