Friday, 1 September 2006

Prepare For Extended Elections

ON SEPTEMBER 8 and 9, Prime Minister Costas Karamanlis inaugurates the beginning of the new political and economic year with addresses to the Thessaloniki International Fair. This year's presentation will be politically charged. Local government elections follow a month after the Fair. The prime minister will use that weathervane to help him decide whether to hold early general elections next year. Thessaloniki, therefore, can be seen as marking the beginning of a lengthy campaign season. 

The government has been working hard to shore up the local element of the prime minister's visit. Manolis Kefoloyannis, minister of the merchant marine, announced last week that he would sign off on a 90 million euro expansion of Thessaloniki's container pier as part of a grand scheme to create the Balkans' commercial hub. The development ministry has tabled a bill formally creating an Innovation Zone near Thessaloniki, where EU grants and private venture capital can meet technological talent to create startups. Karamanlis will probably repeat commitments to build the Thessaloniki Metro and a subterranean high-speed road under the city centre. Perhaps most important of all, a visit to Athens by Russian President Vladimir Putin a few days before the Fair is expected to give a final and unequivocal green light to the 13-year-old project to build a crude oil pipeline from the Black Sea to Alexandroupoli (see analysis on page 20). Greece's share in the pipeline would bring revenues of up to $35 million a year.

All these announcements will be important in alleviating anger over the government's failure to contain summer wildfires in Halkidiki. New Democracy's losing of one of the three top municipalities - Athens, Piraeus and Thessaloniki, the country's second most populous - is all socialist leader George Papandreou needs to rebound from a slump of electoral losses in 2004. The actual loss of a few town halls across the country could then be dismissed by the ruling party.

But the Fair is always about the national economy as well. Here, the prime minister can boast a healthy rate of growth - 3.7 percent last year, and 4.5 percent for the first two quarters. Finance Minister George Alogoskoufis considers that growth responsible for a slight fall in unemployment, from 11.3 percent to 9.7 percent by the government's reckoning, over two years. The premier could also stress a drop in the national debt, from 6.9 percent of GDP to 4.5 percent last year, keeping Greece more or less on track to hit its 3 percent target at the end of this year.

But macroeconomic indicators are rather dull to democratic ears. What people really want to hear about is the price of beans in the Laiki, and whether they can buy more of them for the same amount of change this week. Karamanlis is following up on his ten percent tax cut for corporations. Next year he will raise the tax-free threshold for individuals to 12,000 euros, begin to phase in a 5 percent tax cut, and give pensions a slight boost.

He can do these things partly because his tax revenues are improving. They rose 11.5 percent last year, to 11.6 billion euros, partly due to annual wage agreements. But next year the budget will begin to experience the effects of the tax cuts. By 2009, the state will lose almost a third of company tax earnings - about 1.5 billion euros - and many of the country's 8.5 million individual taxpayers. The rising threshold of untaxed income means that 5.5 million are already exempt. That will now rise, and for the remaining taxpayers rates will fall, from 30 to 25 percent.

All of that is good news for taxpayers, particularly salaried employees. What is more troubling is how the government will afford this generosity. It has already been forced to pay for an unforeseen revenue slump last year - probably due to tax evasion - by raising VAT by a percentage point. That penalised the lowest earners because VAT is levied on retail goods bought by rich and poor alike.

There is one major remaining source of revenue - fuel tax - but touching that is unthinkable with oil hovering around $70 dollars a barrel and many Greeks asking for a fuel rebate. Increased borrowing is equally not an option under Stability Pact rules and Greece on probation.
The gamble of this economic policy, therefore, is that it will heat up economic growth enough to make the budget solvent. That is a perfectly legitimate goal, as long as two things are observed. The first is to spread the benefits outside Athens. The Greek countryside suffers from poor job opportunities and poor transport, schools and hospitals. If GDP growth continues to be disproportionately centred on the capital, then the government will not really be running a country but a megacity with poor suburbs. The second requirement is that opening the marketplace and lowering the financial and administrative cost of doing business, both of which Greece needs, should not lead to social and environmental neglect. If, as he stands on his podium in Thessaloniki, Karamanlis can make a case that his policies will favour capital and labour in the right proportion, and that he will also protect the environment, he will continue to win over the Greeks.

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