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.