Thursday, 26 November 2009

Assertion and timidity: Foreign vs. economic policy

The socialist government has started its term with a daring foreign policy and a timid economic policy. On the one hand, Alternate Foreign Minister Dimitris Droutsas has grandly announced Strategy 2014, a revived plan to usher the Western Balkans into the European Union over the next five years, and carried out a whistlestop tour of the region. On the other, Greece is about to re-enter Excessive Deficit Procedure for the third time since it entered the eurozone in 2002 because it refuses to cut general government expenditure. Foreign policy is, in the long term, built on economic performance. One wonders for how long this dissonance is sustainable. What is Greece's power to persuade in Brussels, and what is its credibility with regional allies, when it literally cannot put its house in order?

Papandreou's foreign policy is actually cleverer than it sounds. Greece is using EU membership as a carrot to resolve differences with neighbours, much as it tried to use imminent Cypriot membership to achieve a political reunification of the island more than five years ago. So it is cunning and wise for Greece to take Balkan nations by the hand and say, as Droutsas did at his first press conference on October 22, “We want to be the locomotive for EU entry of all in the neighbourhood.” Translation: We want to make sure everyone enters the EU on the right terms with us. Fair enough. It is the prerogative of every member to veto prospective members, and having good terms with the incumbents is an official requirement. Greece is using the leverage that it has.

Papandreou has lost no time spelling out his terms. On his first official visit to Cyprus two weeks after the election, he told Turkey that if it didn't recognise Cyprus at least commercially, Greece's influence would be apparent when the European Council reports on Turkey's candidacy in December. He and Cypriot President Dimitris Christofias have co-ordinated their recommendations to Brussels, demonstrating unity and effectiveness.

Ten days later, Papandreou also spelled out Greece's red lines to Fyrom's prime minister, Nikola Gruevski, at a private meeting in Brussels. Greece will accept a name solution that qualifies the word Macedonia geographically and applies to all of Skopje's international and bilateral relationships. This is a pre-requisite to allowing Skopje's EU prospects to continue.

But what about the economy?

Papandreou's personal prestige as head of the Socialist International and brilliant past performance as foreign minister ensure a respectable reception in Brussels. This is not the case when it comes to economic policy. Our European partners are fed up with our statistical service lying to them and our incoming governments revising the budgets of their predecessors (the conservatives did it twice after 2005 and the socialists did it this year).

When Finance Minister Yiorgos Papakonstantinou first met with his eurozone colleagues on October 19, the experience was bruising. He revealed that the deficit this year would be not two percent of GDP as originally forecast, not 5.7 percent as revised by the finance ministry after the election, but 12.7 percent.

Eurogroup leader Jean-Claude Juncker said that Greece's revisions had to end or they would cause problems for the credibility of the entire group. “The game is over,” he said in irritation. Finance Commissioner Joaquin Almunia and European Central Bank Governor Jean-Claude Trichet echoed the sentiments. In statements, they have singled Greece out as the eurozone's worst consistent performer.

Papakonstantinou initially presented a budget that would cut the deficit to 9.6 percent of GDP in 2010, later pushing that to 9.1 percent. Our European partners are still unhappy. Their November 11 report explains why: “The budgetary policy by the Greek authorities did not comply with the Council's recommendations (permanent measures, mainly on the expenditure side) and seems insufficient to address Greece’s fiscal imbalances in a sustainable manner.”

The European Commission expects our debt to skyrocket from about 99 percent of GDP now to 135 percent in just two years, unless we take serious action now. It believes we are riding on windfall savings because state arrears to hospitals and the privatisation of Olympic Airways were chalked up to this year's budget. So were the costs of two elections. There is little in the way of permanent expense cuts, it says.

It is unhappy that Papakonstantinou has thrown the weight of budget balancing on income during a year when the economy will shrink by about 0.3 percent. He aims to raise 4.5 billion euros from higher income tax on the rich, on tobacco, on lucrative listed companies (a one-off measure), VAT and other indirect taxes. And the government's insistence on making good on its pre-election promise of giving state employees a 1.5 percent pay rise is, by the strictest standards, irresponsible.

What would make the European Commission happy? It reckons that failure to collect taxes and cost overruns unrelated to the financial crisis accout for half the deficit this year. Correct those two problems and you can theoretically reduce the deficit to six or seven percent next year, it implies. Papakonstantinou's refusal to commit to something so severe is perhaps understandable. Even Bank of Greece Governor Yiorgos Provopoulos, a whistleblower on the deficit, believes we should aim to reduce the deficit by five points over two years. The 2010 budget is consistent with that. But Provopoulos also agrees with the Commission that Papakonstantinou should save twice as much money as he raises. His failure to deliver a sharper cut in expenditures is a worrying sign that even on the stength of its landslide victory, this government is afraid to invest its political capital in painful measures while it can.

Papakonstantinou hopes that he has bought enough goodwill in Brussels by agreeing to start the dialogue on revising social security immediately (it began on November 26). But the General Confederation of Greek Workers (GSEE) has placed such strict preconditions on talks as to render them almost pointless. It will not discuss raising age limits or reducing pensions. So the only useful topics can realistically be financing methods and the revision of the arduous and unsanitary professions regime. GSEE also insists on the withdrawal of New Democracy's 2008 law, a Pasok promise. Brussels' goodwill will partly depend on the resulting social security bill, and you cannot please both Brussels and GSEE.

The world has noticed our failings. Last month, the credit rating agency, Fitch's, demoted Greece's government paper from A to A-, following the skyrocketing deficit and debt figures. A week later, Moody's said it, too, is reviewing Greece's A1 status. Provopoulos warned parliament on November 24 that as the European Central Bank draws to a close its line of cheap credit to eurozone governments and banks, Greece may find it increasingly expensive to borrow. Moreover, it could one day find its paper difficult to sell. The remarks caused uproar, and Provopoulos was accused of spreading panic. Such is the refusal, in some political quarters, to face facts.

Over the long term, the Greek battle is for greater competitiveness. Achieving that will create jobs, lower the public and private sector deficits, and even reduce corruption. In the short term, however, the Greek public sector has simply got to spend less money on itself and on those not terribly competitive bits of the private sector that have made much of their living from a single client. Are there enough people in parliament who believe this to allow it to happen? There certainly seem to be enough voters who do.


  1. Nothing will truly change until and unless the government stands up to the unions who obstruct each and every reform that any government suggests to cure Greece's long-term ills. You can't make an omelette without breaking a few eggs, but successive governments (including this one, probably) are scared of doing just that. Scared of unions, scared of anarchists, scared of KKE, scared of everyone who shouts. To change this would require a government with balls of steel and an effective law enforcement mechanism. As it happens, the latter seems to be one of PASOK's early successes, so we live in hope.

  2. I'm not sure a commitment to admit the Western Balkan countries into the EU by 2014 means anything. Greece is not in charge of the accession process: the European Commission is, and the final decision to allow each candidate entry is based on unanimous agreement by all EU-27 Member States.

    Given that Greece isn't directly paying for the costs of entry (it is still a net absorber of EU funds), and given its near-bankrupt public finances, this diplomatic initiative appears shallow and hubristic rather than visionary.

    It's also not quite clear, given Greece's poor record in protecting its borders, what impact this is going to have on its labour market or economy. In fact, it looks to me like yet another meaningless gesture from the Greek government which, if you view it from the perspective of Berlin or Paris, is more of an irritant than anything else.

    On the issue of the economy: unless there is a radical improvement NOT ONLY in terms of the annual deficit, but of the total public debt, Greece will probably default on its debt payments in the next 3 years. So far, nothing in the programme announcements issued by the government, or the budget draft announced, appears to understand this. Absent real emergency measures, rather than one-off taxes, this country will default.

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  4. What has surprised me most is the utter confusion in the presentation of the new government's policies. For example, in its higher education policy, the new minister (Ms Diamantopoulou) is at odds with her deputy minister. In the area of economic and fiscal policy the new govt espouses one position on Day 1 only to be forced to change its position on Day 2 under pressure from the EC and Ecofin. If this confusion continues then the new govt will implode leaving us with the prospect of an early general election next March. Of course, Mr Samaras, the new ND leader, has ruledthis out as a possibility but if the general social - with virulent union opposition to all reforms in principle - and economic situation continues to deteriorate he may be forced to challenge the new govt sooner rather than later. Next year, 2010, will be one of the most decisive in Greece's post- 1974 history.

  5. Statistical manipulation is not a uniquely Greek specialty, but successive governments here have developed the skills needed to keep many of the black holes in the Greek budget structure off the main radar screen in Brussels. But how many years of this can we accept before we must also acknowledge that senior authorities in the Commission and ECB (some are wise to Athens' practices, being Greek) were simply looking the other way, without deeper interest in discovering the bad news? Why are we to believe that they are now suddenly turning serious about statistical manipulation? Especially when just days after we feel the anger about statistical revisions, we hear the comforting words of protection against possible default from the senior levels in Brussels? What kind of message does this send?

  6. We are still waiting to see whether the debt proposals are credible. I've downloaded the Stability and Growth Agreement on Thursday and am still going through it. Many of the main issues affecting the debt are unanswered, or not stated in the Ministry of Finance's model.

    You can see my original Greek debt forecast (early December 2009) and the initial notes to the present update here:


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