Friday, 27 March 2009

The EU is being kind to Greece

The Greek economy finds itself between a rock and a hard place. On the one hand, a recession makes it necessary to spend state money to keep people off the dole and out of crime; on the other, the country's already high level of debt and commitments to the rest of the eurozone forbid further borrowing.

In late February, Prime Minister Kostas Karamanlis announced a public hiring freeze in all but two ministries and a ten percent cut in discretionary spending by ministries. He also said health procurements would be computerised to reduce waste and a thousand loss-making state enterprises would merge or close.

Earlier this month, Finance Minister Yannis Papathanasiou said nearly half a million public sector employees would receive no raise this year, while earners of more than 5,000 euros a month in the private sector would receive a one-off levy beyond income tax.

Papathanasiou recently told the Reuters news agency that Greek borrowing costs would come down after these measures, along with a one-point tax reduction, take effect over 2009. But the European Council of leaders and the bloc's finance ministers remain unimpressed. They have given Greece six months to add greater austerity.

That may sound harsh, but the sentiment is understandable. Although it only accounts for about 2.5 percent of the eurozone's GDP, Greece is increasingly being seen as an example of the eurozone's weaknesses. "The option of defaulting, leaving the euro and devaluing a new drachma might appeal. It would make exports more competitive," opined Charles Grant in The Times on March 26. He may have meant it in good faith, but anyone wanting to attack the euro or resist joining it will naturally cite Greece to rustle up bad publicity.

That is poor payback for Europe, which has pumped money into Greece for well over three decades. In return, it has seen little but foot-dragging in liberalisation of the economy.

The Hellenic Telecommunications Organisation (OTE) finally partnered with Deutsche Telekom last year after 16 years of gradual privatisation. Yet the government's 25 percent remaining stake is managing to hold back a full rollout of its ADSL network to two million subscribers, its CEO now says (see article on page 21).

The Public Power Corporation's generating capacity is both dirty and inadequate. Yet the PPC's powerful union has managed to stall a truly deregulated market in which an independent grid would buy electricity from private generators on a daily basis. Has this led to a national champion we can sell or partner? Not at all. PPC lost 306 million euros last year despite being a virtual monopoly in a sector that accounts for about a tenth of GDP in this country.

It has also managed to kill micro-generation by households willing to invest their own money in solar panels and wind turbines by forcing them to pay social security contributions as though they were businesses generating on a commercial scale. Without those contributions, households could sell enough power back to the grid to recoup their investment in about a decade; as it is the investment is a pure loss, helping to keep Greece a major per capita greenhouse gas emitter.

An 11-year delay preceded deregulation of passenger shipping in 1993, while cruise shipping took even longer. And Greece continues to withstand deregulation of the labour market to make hiring and firing easier, and to defy European directives to liberalise higher education. The result is that the state ends up with control over roughly half the economy - an anomaly in 21st century Europe.

It is hardly surprising that charitable sentiment has dried up in Brussels. Minority interests in every sector have managed to prevent reform and development, while the political system has proven too weak to create new markets that would benefit greater numbers.

Papathansiou's new brief, to bring borrowing below three percent next year and eliminate it completely over the next five is, in fact, reasonable, because Greece cannot begin to face its debt, now close to 250 billion euros, without first freezing borrowing altogether. That we are being given another five years to do what we have already had ten years to do is kind.

That leaves Papathanasiou only two options - to raise money from taxes and selloffs of state property, and cut waste (often a euphemism for corruption).

The government hopes to raise a billion euros this year from the selloff of Olympic, the Thessaloniki water company and other assets; but such windfalls are supposed to pay down the debt. Instead, it seems, they will be poured into current needs.

Raising more money from taxes will also be difficult because the economy is expected to slow. Papathanasiou's obvious options are to raise fuel and consumption taxes.
None of this is easy to navigate politically. As the crisis deepens, capital and labour are pulling in opposite directions. Syriza's Alekos Alavanos, for instance, was as foolish as he was uncompromising about Economic Affairs Commissioner Joaquin Almunia on March 26: "The Greek government cites the recommendations of the European Union. We say, return the recommendations to sender and tell him to go home." On the same day the American Hellenic Chamber of Commerce was asking for competitiveness-enhancing measures through its new president, Yianos Gramatidis. He asked for "a reduction of tax rates even beyond what has been announced, even to 12.5 percent, and a further raising of the tax-free threshold".

The EU says do both: reduce deficits and pay down debts, but also spend money to boost the economy. In Greece's case the onus on cost-cutting would not be so great if we had focused on economic development, as the EU asked us to. Now we have to do both.

Friday, 13 March 2009

Success for Olympic at last

The sale of Olympic Airlines to Marfin Investment Group marks New Democracy's first major state sector success since the 2005 voluntary redundancy scheme that turned OTE's balance sheet around. It is also the battered conservative party's first major political success since Greece's veto of Fyrom's Nato entry in May last year.

Following an overnight liquidation, Marfin will spend 62.4 million euros buying Olympic's logo, slots, flight operations and technical support base. It will separately purchase ground handling operations if current talks with Swissport do not end in agreement. Marfin has also pledged an investment of 70 million euros to turn Olympic around.

The government has succeeded in preserving a historic carrier Greeks are sentimentally attached to without resorting to a change of name. It has done this while keeping the company under Greek management and partly through Greek capital, rather than through an overseas selloff in the style of OTE, which went to Deutsche Telekom.

Successfully concluded, the Olympic sale stands in stark contrast to other stalled privatisations. New Democracy's tender processes for the Piraeus and Thessaloniki ports have caused work stoppages for more than a year. The latter has now been cancelled altogether because of the preferred bidder's withdrawal.

But we had come to expect particularly little from Olympic after six attempts to restructure or sell the airline failed over fifteen years. The road to Olympic's privatisation is strewn with the political corpses of Athanasios Tsouras, Haris Kastanidis, Tasos Mantelis, Christos Verelis and Mihalis Liapis. Why did Development Minister Kostis Hatzidakis succeed where five transport ministers failed?

Perhaps the biggest clue for Hatzidakis' success comes from a reading of past failures.

Pasok launched the first restructuring process in November 1994, which the following year produced Olympic's first profit since 1978. Pre-approved by the commission, it foresaw a staff cut, a pay freeze, EU aid and a massive writeoff of 1.4 billion European Currency Units (ECU) by the state. The restructuring worked well until the new administration of Kostas Simitis brought in Haris Kastanidis as transport minister, who killed it with a 20 percent pay hike.

As forecast 1996 profits evaporated into deficit, Kastanidis was replaced by Tasos Mantelis. Mantelis passed a second restructuring law in 1998, which saved money by stiffening work conditions for cabin crew and pilots under threat of worse unilateral action to come if consensus with the unions failed. Labour action proved so determined and prolonged, however, that Mantelis paid for his loss of faith with the unions with concessions that ended up dwarfing savings. The airline posted a 75mn ECU loss for 1999 rather than the 61.4mn ECU profit Mantelis had promised.

Mantelis' final gambit was to bring in foreign management in the form of Speedwing, a British Airways subsidiary. Speedwing was to develop the business rather than cut back on costs. It won over unions with massive voluntary redundancy payments on projected income the commission called "optimistic", but its tenure was cut short by Simitis' third transport minister, Christos Verelis, who ordered Speedwing out in 2000.

In September 2003 Verelis legislated the fourth restructuring plan. From the indebted mess that was Olympic Airways, he created Olympic Airlines with just 1,850 employees. This was to be sold off as a profit-maker, while other bits of the group, such as technical support and ground handling, would be sold separately to pay off old debts and a voluntary redundancy scheme. The Verelis brainchild was launched on December 12 but continued to lose money. The commission, backed by the European Court, refused to accept Olympic Airlines' non-liability for the debts of Olympic Airways.

Transport Minister Mihalis Liapis launched a new, old-fashioned attempt to sell off the airline when New Democracy came to power in 2004. His preferred bidder, Olympic Investors, was stymied by a new demand from the commission in September 2005 that the airline return 540 million euros in illegal state aid since 2002. This was on top of 160 million euros the commission had demanded in illegal aid until 2002.

Finance Minister Yiorgos Alogoskoufis stepped in. In consultation with Energy and Transport Commissioner Jacques Barrot, in April 2006 he published the fifth business plan since 1994. It liquidated both Olympic Airways and Olympic Airlines and sold off a parthenogenesis called Pantheon. This created a greater legal cleavage with the old Olympic by avoiding asset transfer. Pantheon would acquire new takeoff and landing slots exchanged for Olympic's old ones and hire some of the Olympic staff.

The plan ran into three problems. It did not preserve Olympic, to which Greeks felt attached; the commission insisted on shutting down the old company before launching the new one, meaning a loss of market share; and the question of whether redundant Olympic staff would be paid severance left a massively expensive Damoclean sword over Pantheon's head. Pantheon's cleverness created greater problems than it solved.

After the 2007 election, incoming Transport Minister Kostis Hatzidakis seems to have taken a leaf out of everyone's book. Like Athanasios Tsouras in 1994, he got commission approval for his plan first. He launched an international tender process on 17 September 2008, the day the commission gave him the go-ahead. Like Alogoskoufis, he opted for a liquidation rather than Mantelis' failed asset transfer, which carried the debt over too; but unlike Alogoskoufis he made sure the liquidation was an overnight one that kept the airline continuously operational and granted severance to all employees (that is expected to cost 256 million euros this year alone, Hatzidakis says, but running the airline would cost more). Like Verelis, he opted for a salami-slicing of the group and separate selloffs of parts. Like Verelis and Liapis, he did not shy away from direct talks with a Greek white knight who would see the political and sentimental attraction of Olympic, as well as the financial.

Yet the most plausible explanation for Hatzidakis' success, counter-intuitively enough, is the current financial crisis. It alone provides an explanation for all the things we don't yet know about the Marfin deal.

Kastanidis, Mantelis and Speedwing failed because they bought off the unions at too high a price. Why haven't the unions militantly resisted such a swiftly concluded agreement?

What of 700 million euros in waived social security payments, fuel tax breaks, aircraft leases, voluntary redundancy schemes and operating losses the commission wants Olympic to return to the state? This demand, backed by European Court decisions, destroyed tender processes with Axon Airlines, Golden Aviation and Olympic Investors in 2002 and 2005. Yet the commission remains silent in 2009.

In the same vein, who will shoulder the estimated 200 million euros in operating losses the airline will incur between now and when Marfin officially takes over on October 1?

Marfin has not said it will shoulder Olympic's debts. We can only conclude that there will be a taxpayer writeoff at the end of the auctioning process.

Under-the-table government help, decried by Olympic's domestic and European competitors, has been the biggest single difficulty in selling off the airline over the years, but Brussels seems willing to let bygones be bygones. Implicit public financing is the biggest element in the Marfin deal, now made possible by the accepted blurring of the line between public and private money on both sides of the Atlantic.

Friday, 6 March 2009

The economic crisis needs consensus

The question of consensus has struck both European and Greek politics this week. An informal European Union summit aimed to settle major questions of whether, and under what circumstances, the EU should intervene to bail out banking systems and economies in eastern Europe. It also asked what model western European economies should follow to save jobs. The EU remains divided on these questions.

On March 5, Prime Minister Kostas Karamanlis summoned party leaders to seek consensus on how Greece will face the economic crisis. On this level, too, agreement failed.

A forlorn prime minister appeared on national television on the evening of his day of failed meetings to tell the nation essentially what he proposed to the parties: that his government considers saving the economy a national issue, not a political football.

He wants agreement on six points: Keeping fiscal discipline, paying down the debt, eliminating the deficit by cutting public spending, developing weak sectors of the economy and avoiding confrontation with unions over excessive demands.

The emphasis is on restraint, and for good reason. The General Accounting Office revealed on February 27 that Greece's debt stood at a staggering 262 billion euros at the end of the year, 24 billion more than the previous year and 12 billion more than forecast.

Pasok leader Yiorgos Papandreou, to whom this overture was chiefly aimed, said the economy needs to move in a different direction - one of development rather than defence. His party has produced a blueprint that emphasises taking advantage of Greece's strengths - its natural beauty, its history and the potential for renewable energy.

All these ideas are in the right direction, of course, and New Democracy has shown reluctance to pursue any of them imaginatively over five years. Only after the January 7 reshuffle did incoming Development Minister Kostis Hatzidakis declare green energy investments to be a priority. A March 1 VPRC poll published in Kyriakatiki Eleftherotypia showed that a majority of Greeks trust national policymaking over European in every major social and economic area - education, labour, immigration, social security, farming policy and tax policy - with the sole exception of the environment. Here, 56 percent trusted Brussels over 38 percent in favour of Athens. Clearly, New Democracy has disappointed bitterly in failing to clean up the country and exploit its green potential for both tourism and energy.

"Green development befits a country like ours, lacking an industrial tradition but having an abundance of natural beauty and history," said Papandreou in an interview published on March 1.

But to turn down national consensus in a time of global crisis on the basis of a green vision, however laudable, is to miss the point. Karamanlis essentially wants the opposition to stop fuelling unrealistic demands through its labour union representation and to back up the government in showing a well-advised restraint over public spending.

Pasok is refusing for three reasons that have nothing to do with green investment. One, consensus would deprive it of the biggest stick it has to hit the government with and hand it to Syriza; two, it is ahead of New Democracy in the polls and could squeeze close enough to victory to form a coalition government if Karamanlis calls elections; three, Pasok plans to do plenty of old fashioned populist spending on the back of taxes for the rich, so it is in no mood to join New Democracy's parsimonious club.

A GPO poll carried out for Mega television in the third week of February found high disapproval ratings for the way in which the opposition has been behaving with regard to the economy. Two thirds of voters think the communist party (KKE) and Syriza are not being helpful. Not far behind, Pasok garners a 57 percent disapproval rate. True, most voters think the government doesn't have a plan, according to the same poll; but more of them trust Karamanlis on the economy (42 percent) than Papandreou (37 percent).

Polls aside, it is unrealistic for Papandreou to expect that Brussels would treat him any differently than it treats Karamanlis. Both men speak on the strength of their economy and that, as Karamanlis says, has limited powers.

So far Papandreou and the other party leaders have adhered to the tried and tested confrontational style of Greek politics. In a political market that hasn't seen big voter shifts in two decades, parties are more concerned about preserving their base with the expected rhetoric than in reaching out and risking everything.

The sclerotic style of Greek politics is just as culpable as New Democracy's lack of imagination, however. In an interview with this newspaper, London School of Economics professor Kevin Featherstone rightly argues that Greece needs more bipartisan bills of the kind that eluded it on education. He also argues in favour of greater coordination across government departments, greater accountability and transparency. Only in this way will reform be brought into the realm of possibility. Both under Costas Simitis and under Karamanlis we have seen that the system is broken when it comes to the higher functions of long-term policymaking as opposed to business as usual.

The lack of trust across great, open stretches of the body politic and society undermine such consensus and coordination. It is a truism that crisis brings change. Will this crisis unite or further divide us?