Friday, 20 February 2009

Greece has to re-earn membership in the euro

After seeing Finance Minister Yannis Papathanasiou's revised three-year stability programme, the European Commission is recommending that Greece do more to save money this year.

Its observations, which have gone to the Economic and Finance Ministers Council for adoption next month, are unforgiving: "The medium-term budgetary framework remains weak, characterised by a poor track record. Fiscal developments in Greece reflect insufficient control of public expenditure, while revenue projections have proven to be systematically overoptimistic."

In other words, Greek budgets are prone to underestimating expenses and overestimating revenues.

The commission thinks that Papathanasiou has made "favourable" growth assumptions and not fully explained how he will lower the budget deficit from 3.7 percent of GDP this year to 3.2 percent next year and 2.6 percent the year after.

It is particularly annoyed that 2007, an election year, bucked a trend of falling deficits for no external reason.

The commission is recommending four things: strengthening revenue and curbing expenditure permanently, improving competitiveness and the trade imbalance, planning a longer-term budgetary strategy and monitoring it more transparently, and dealing with the long-term threats of spiralling healthcare and pension costs due to an ageing population.

If these things are not done, says Commissioner Joaquin Almunia, the markets will punish Greece with high rates of interest.

In fairness to Greece, former finance minister Yiorgos Alogoskoufis worked hard to rein in spending. He managed to bring deficits down from a revised 7.5 percent of GDP in 2004 to 3.7 percent last year - still noticeably above the mandated three percent threshold and partly attributable to an upward revision of GDP in 2007, but a reduction nonetheless.

Yet the commission's criticisms are apposite. Greece's competitiveness remains low compared to the developed economies it is politically clubbed with, which means that it cannot easily generate the economic activity to recover. Its exports are horribly low compared to imports.

Corruption, too, plays a role in the inefficiency of public finances. Transparency International's latest survey in Greece estimates that 13.5 percent of households spent three-quarters of a million euros in bribes last year, compared to 12.3 percent of households and 639 million euros the year before.

Papathanasiou announced on February 19 that he would curtail 'elastic' expenses such as overtime, freelance work and out-of-office expenses for the state sector by ten percent. The health ministry's reduced pay rises for doctors and nursing staff last week, in comparison to what he promised last December, was just the beginning of an expected tightening in public spending (see article on page 9). Public pay rises this year are also expected to be parsimonious and the civil servants' union, ADEDY, is planning a one-day pre-emptive strike on February 24.

Papathanasiou is likelier than not to agree to further public spending cuts when he meets his peers on March 10, as the commission has recommended. This seems reasonable. New Democracy has done a rather opaque job of public hiring, resulting in a net increase in civil servants by more than 55,000 in 2004-2008, to reach more than half a million. To put on the brakes now may be a little late, but necessary.

Pasok is highly critical of the government's approach. Fiscal discipline is the last thing to think about in a time of recession, it says. Its economic crisis platform contains some laudable measures. Some of the best would deal with the liberal regime under which banks were offered a 28 billion euro bailout.

Pasok would ask bank underwriters to cough up money to make banks solvent before digging into the public pocket, and would strengthen the state's role on the boards of banks who took public money to make sure it reached the consumer rather than the executive. It would also freeze repossessions this year for individuals and businesses having trouble making ends meet, setting up a refinancing fund for them.

New Democracy has moved closer to Pasok's spirit since the platform was announced. The government last week tabled a legal amendment forcing banks to pay dividends in shares rather than cash, helping to ensure that liquidity won't be squandered. And Papathanasiou's reversal of a tax hike for the self-employed is something Pasok had said it would do, too.

Pasok also has some good suggestions for the labour market. It would subsidise social security contributions for the under-30s, removing a major disincentive to private employers.

But some Pasok measures smack entirely of populism, such as cheaper power (long a socialist obsession) and a series of handouts to the underpaid, farmers, poorer pensioners and those having trouble heating their homes.

The truth is that state finances don't have a great deal of leeway for the more populist kind of spending. Pasok is right in forcing bankers to be more accountable about the public handouts that will become increasingly necessary to them after first-quarter results start revealing the extent of their vulnerability next week. But Greece also needs to correct a long track record of overspending for political reasons and over-indebting future generations as a result. The commission is telling us that we have now oversold our future as well as our present, and the markets are proof of that.

The euro shields Greece from money market speculation and IMF supervision, but it is no longer disguising Greece's weak fundamentals in bond markets, meaning high borrowing costs. Some quarters have claimed that under the direst circumstances a European Central Bank bond could be in the offing, which would greatly benefit Greece now that it has reached pre-euro bond spreads with the German bund. Europe's message is clear: If we want the euro to continue to lend us its strength, we have to lend it ours.

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