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Swimming upstream
Sixth Annual Review By Robert McDonald December 2005 -- The New Democracy government elected in the March 2004 elections spent its first semester finishing preparations for the Olympic Games and its second concentrating on its programme of so-called 'fiscal housekeeping'. It is only in the past six months that it has really got down to the business of implementing its electoral programme. Its primary concern has been how to square the circle of balancing the budget while, at the same time, ensuring that fiscal policy does not damage growth prospects. During the first four years of this decade Greek gross domestic product (GDP) forged ahead at annual average rates of 4.4%, while the average in the 12-member states of the Eurozone languished at 1.3%. This raised the prospect of the Greek standard of living -- which stands at about three quarters that in the EU -- rapidly approaching par. But with the elimination of the increased demand that had been generated by the Games, the Greek growth rate dropped back to just 3.6% this year while in the EU-12 it stuck at 1.3%. (Next year the forecasts are for 3.8% and 1.9% respectively.) That is to say from having grown at a rate nearly three and a half times that of the EU-12, the Greek rate is now going to be only double which pushes back the prospect of parity by over a decade. The rules of the Eurozone require member states to keep their budget deficits below 3% of GDP. The Panhellenic Socialist Movement (PASOK) governments, which took Greece into the EMU, used numerous accounting devices to secure such levels. The incoming ND administration thought it could reveal just enough of these to blacken PASOK's reputation as good economic managers. Within weeks of taking office it declared that the deficit in 2004 would stand at 3.2% of GDP and not 1.2% as PASOK had projected. The exercise went badly wrong. Eurostat, the agency that keeps national accounts for the European Commission, had been after the socialists for years to keep more transparent books. Once ND admitted that the EMU budgetary threshold had been breached, Eurostat undertook an in-depth review of Greek accounts, which left the 2004 deficit standing at 6.6% of GDP and revealed that Greece had actually never qualified to be a Eurozone member. The European Commission said that there was no question of kicking Greece out of the inner circle of the EU-25 but the Economic and Finance Ministers Council (Ecofin) did place the Greek economy under surveillance under the Excessive Deficit Procedure and gave the ND government till 2006 to get the budget back on track. To try to do this, the ND government has found itself having to resort to devices not unlike those socialists had deployed. First it suggested selling securitisation bonds based on tax arrears. The Commission said it didn't like that idea though Eurostat still has it under review. If it is rejected, the 2005 deficit will stand at 4.3% of GDP. For 2006 the government has proposed a mixture of higher tax revenues through a clamp down on evasion and the application of Value Added Tax on new property sales plus a reduction in public investment spending to well below the 2004 level. This would bring the deficit down to 2.6% of GDP by the time of the EU deadline. Again, however, the target is achieved only through the inclusion of extraordinary revenues, such as higher dividend payments from state-owned banks and extension of concession agreements (monies that arguably ought not to be used to bring down the deficit but to lower the country's staggering debt of over 107% of GDP -- the highest level in the Eurozone). The problem with cutting public investment spending is that this reduces the amount of investment aid that the state can draw down from the co-financed European Community Support Frameworks. The country has absorbed only about 35% of the approximately EUR 27 billion in assistance available under the third CSF (2000 - 2006) and its total allocation for the fourth (2007 - 2013) looks likely to be halved at around EUR 14 billion. [INVgr note: Greece actually managed to secure EUR 20.1 billion in 2007 - 2013 European Union funding at this month's EU summit in Brussels.] Lower public investments will mean lower growth rates, which, in turn, will mean revenue targets will not be met. To offset this possibility, the government has undertaken a policy programme designed to transfer the responsibility for investment growth to the private sector. This includes:
If it works ND could achieve its aim of balancing the books and sustaining growth at one and the same time. But the policy has tremendous political cost. The ruling party still leads in public opinion polls by between two and four percentage points. But the same polls show that up to 60% of the public disapprove of its economic policies. For the moment, the government faces little challenge because of the disarray in the ranks of PASOK as its new leader, George Papandreou, tries to get rid of its old statist mentality to create an open-access, issue oriented party. But voters are fickle and with mid-term local elections coming up in October 2006 the government could feel obliged to resort to populist economic policies in order to secure its grip on the levers of power. These and other issues are included in Swimming upstream, Business File, Special Survey No. 58, appearing in December 2005. The issue also includes extended interviews with the Minister of Economy and Finance, George Alogoskoufis; the shadow Minister of Economy and Finance, Vasso Papandreou; and, Panayotis Thomopoulos, deputy governor of the Bank of Greece, who offers detailed insights into monetary policy issues.
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