The challenge facing Greece's new prime minister

Socialist leader Yiorgos Papandreou will be Greece's next prime minister. His party, Pasok, won 43.92 percent of the vote and 160 seats in parliament, comfortably avoiding the need to form a coalition. He defeated his conservative rival, Kostas Karamanlis, by an astounding margin of just over ten percentage points. Looking devastated, Karamanlis conceded and resigned from the conservative party leadership.

The political challenge for Papandreou is threefold: to balance the budget and pay down the national debt; to make the economy more competitive and reverse the high trade imbalance; and to introduce greater transparency, accountability and meritocracy in public life. He has promised to do it all. Difficult though they are, the tasks cannot be separated because lack of progress in one area would undermine the others.


Papandreou has made strident commitments to transparency (promising to publish all his ministers' acts online) and competitiveness (envisioning a new industry in renewable energy sources and cutting red tape). But such growth-promoting measures are long-term, particularly in the current global crisis, and Papandreou will face an immediate cashflow problem he has not addressed convincingly.

Greece's budget deficit is forecast to be at least six percent this year and remain high in 2010. Papandreou has committed to balancing the budget in three years. Even if he wins an extension, international monitors believe that spending cuts are necessary. In contrast to conservative New Democracy, Papandreou has downplayed the need for those cuts. Yet fiscal discipline is a much higher real priority than it sounded in election rallies.

This is because every euro of income tax currently raised from individuals and corporations (supposed to be approximately 12 billion euros this year) services our public national debt, now estimated at 280 billion euros. In an economy that breaks even, we could argue about how best to spend our resources. But in an economy that absorbs all income taxes refinancing itself every year, most economists feel that we ought to be talking about reducing the cost of government. Otherwise, we may simply be unable to continue to fund our current range of political choices through borrowing.

As Greece's central banker, Yiorgos Provopoulos, put it last April, no economy ever achieved sustainable growth on the basis of high debt because any gains tend to be undermined by the cost of servicing that debt.

So far we have been able to borrow on the strength of high growth (3.8 percent a year, on average, over the last 13 years). But that growth is unsustainable. According to international monitors, our economy is set to shrink by between 1.25 percent and 1.7 percent this year – and those forecasts could worsen when the European Commission delivers its forecast for the 27 EU economies in late October. The drop in growth is partly a result of the international recession (affecting Greece's key tourism and shipping industries) and partly due to structural weakness. For the past decade European Union handouts and consumer spending based on loans have helped drive us forward. The EU will cut its handouts to Greece in 2013, and the credit boom is over. We have enjoyed this prosperity without building a new future.

So with existing growth falling and Papandreou's new growth likely to take a while, economists on both sides of the political spectrum agree that some fiscal discipline is needed to close the gap. The International Monetary Fund (IMF) and the Organisation for European Cooperation and Development (OECD) both think it is time for the Greek state to employ fewer people. As underwriter of the country's 13 major pension funds, more and more of which have started to go bankrupt in the last decade, the IMF and OECD also think we should reform entitlements to fit resources. These two expenditures - social security and the public payroll - claim two thirds of public spending, says the IMF.

These are precisely the areas where Papandreou has said he will not make painful cuts. Pasok says it will affordably maintain a million-man state (22 percent of all working Greeks are in the public sector, and that's just the official estimate) and even provide them with above-inflation pay rises.

Pasok has also announced no plans to continue to consolidate the state. (New Democracy managed to privatise Olympic Airways and complete the selloff of Commerical Bank and the Hellenic Telecommunications Organisation (OTE)). On the contrary, Pasok wants to partly reverse New Democracy's privatisations.

Pasok does offer a few savings in social security. It will bargain down medical suppliers by grouping procurements. But far from suggesting reform of pensions, it promises more handouts. It says it will reverse New Democracy's 2008 bill, which brought up the retirement age for women to that of men as EU law requires, and will strengthen the National Solidarity Fund set up last year by New Democracy to top up pension funds in distress. (New Democracy had promised to review professions deemed arduous and unsanitary, which offer higher benefits and early retirement).

Pasok does say it will save money on defence spending, which in Greece is about five percent of GDP, but it is difficult to see how that can be done without a rapprochement with a recalcitrant Turkey. Pasok also plans to reduce borrowing by managing to collect what is owed in taxes (New Democracy has fallen behind goals by billions of euros each year, so here there is scope for success).

Both parties have stood fast to broad pro-capital (ND) and pro-labour (Pasok) ideological battle lines that were erased a decade ago in the West. Will Pasok be able to continue to borrow without shrinking the state?

Some political observers argue that pump-priming, rather than cost cutting, is what Greece really needs if one follows the American model (President Barack Obama's $700 billion stimulus package) rather than the European model. But following the American model of massive stimulus spending is arguably useless in an economy that has demonstrably been incapable of using billions of euros' worth of European money to create sustainable growth.

The other argument against painful cuts is that Pasok will be allowed to borrow more to kick-start the economy because the entire eurozone is in trouble. The next European Commission (assuming office in January 2010) may therefore be forced to relax the rules of the Stability and Growth Pact that sets strict fiscal guidelines.

But the question here is not whether we can get away with high borrowing without being penalised by the European Union with loss of handout money. That leverage will, in any case, weaken after 2013 as Greece's EU allotment falls. The question is whether borrowing will give us permission to continue to resist change. What Greeks have to satisfy themselves on is whether any political leadership they elect can create a dynamic economy and a meritocracy, safeguarding our children's future political choices rather than mortgaging them, and allowing the public interest rather than special interests to drive policy.


This comment originally formed part of a lecture to students at College Year in Athens and The Fulbright Foundation in Greece.