Why Germany should invest in Greece

When people sink deep in debt, two things often happen. They renegotiate with creditors. And they retool themselves to make more money. After a historic election Jan. 25, Greece now has leaders ready to do both.

Much of the postelection drama will likely center on whether the new prime minister, Alexis Tsipras of the leftist Syriza party, can persuade other eurozone countries, specifically Germany, to reduce Greece’s outsize debt. The future of European unity rests on the outcome of this confrontation, experts say. If Greece is forced to drop the euro, Italy and Spain may follow.

Yet even with debt relief or an exit from the eurozone, Greece will still need to retool to be more competitive. Like much of Europe, it has an innovation deficit.

For all of Europe, the rate of productivity – a good measure of innovation – has been slowing. Fewer than half of companies in the European Union innovated between 2010 and 2012. “A new injection of confidence and creativity is necessary to get Europe back on track,” says Carlos Moedas, the European commissioner for research, innovation, and science.

Despite some reforms in taxes and spending, Greece has only begun to create the conditions for its people to be better inventors and entrepreneurs. Too many businesses remain hampered by bureaucratic baggage. The herculean task, in other words, lies more in removing red tape than reducing red ink.

Mr. Tsipras says he wants a new growth model that “creates innovation.” He will need to hurry. Many young scientists and inventors have already left. The government also needs to better support existing research centers, such as those in Crete and Thessaloniki.

Greece still fares well on an EU “innovation index.” Since the financial crisis in 2008, the number of publications of Greek scientists in scientific journals has increased. So has the number of patents issued each year. And Greece has improved its World Bank ranking in “ease of doing business.”

One prominent Greek-American investor, Marina Hatsopoulos, says the country’s entrepreneurs are “scrappy” and “resilient.” With the economy now slightly growing and with high unemployment, it has a rich talent pool for hire. “This generation can change Greece’s trajectory,” she says. “In 10 years, Greece can be a burgeoning start-up economy like we have seen in Israel.”

In the renegotiation of EU support for Greece, the focus should be on how to retool it for innovation. No amount of debt relief can substitute for investments in new ideas.