Wednesday, 17 February 2010

Stability plan approved, further austerity in sight

Cracks appear in Greek-EU consensus, and political partisanship stirs at home


Yesterday's ecofin (European Union economy and finance ministers) council definitively approved the Greek stability plan entailing a four percent cut in the budget deficit this year, to bring it to 8.7 percent. But the mood in Brussels is still in favour of further cuts, Greek newspapers report. Ta Nea suggests that Greece is under pressure to save three billion euros above current projections this year, through measures that may include mass layoffs of civil servants and elimination of 13th and 14th salaries which represent Christmas, Easter and summer bonuses.

The latest ecofin council in combination with last week's EU emergency summit have seen Greek-EU relations turn a corner. Whereas Prime Minister Yiorgos Papandreou, Finance Minister Yiorgos Papakonstantinou and the eurogroup until now reinforced each other in pushing for austerity measures, a difference in emphasis now seems to be emerging, with Athens fearing that further cuts in salaries and benefits, and mass layoffs in the public sector, could flatten the already fragile Greek economy. The Stability Plan is up for review on March 16, only a month from now. The government now seems to be weighing the option of an appeal to the International Monetary Fund against carrying out further EU commandments come spring, newspapers report. Kathimerini reports that the European Central Bank is pressing for a 5.25 percent deficit reduction this year, which represents a major revision of the 2010 budget approved by Bryussels. Some observers of the Greek economy fear that it will shrink by more than the projected 0.3 percent, making it necessary to adjust the deficit reduction proportionally to GDP. 

The finance ministry recently reported a good budget performance for January (it has promised a monthly performance review) thanks to an extraordinary tax on companies making more than five million euros in profits in their last tax return. It also reports a 10.6 percent reduction in expenditure, overshooting the monthly target.

Nonetheless, the harshest measures so far, officially announced on February 9, to reduce public sector above-salary benefits by 10 percent, which is effectively a 4-6 percent public wage bill reduction, seems to be inadequate to satisfy Brussels. This and a new tax bill, which includes higher fuel tax, are included in the Stability Plan.

Another qualitative difference this week comes on the domestic political scene. Thus far, conservative opposition leader Antonis Samaras has sounded concessionary on the economy, not wishing to replicate Papandreou's record of undermining consensus, while pitching battles on more ideological issues such as the immigration bill and public order.

That may be about to change. Yesterday the socialist government announced that it would seek a parliamentary committee of inquiry into the figures sent by the National Statistical Service to the European Commission in the years of conservative rule, 2004-2009. The conservative opposition now wants to extend that committee's scope of inquiry backwards to 1981, when the socialists first came to power and began running up high deficits and debt.

It is a stock-in-trade argument in Greek politics to fiddle with the temporal scope of an inquiry. New governments typically want to chastise predecessors, who in turn argue for a massively expanded scope in order to dilute their liabilities. But in the highly inflammable situation the government now faces, this perfunctory argument is no longer perfunctory. It could become the excuse for a parting of the ways, and make Prime Minister Yiorgos Papandreou's job a great deal harder than it already is.

The Goldman deal 
Greece's media have been animated by the revelation by the New York Times last week that the socialist government that put the country in the eurozone in 2001 hid some of its sovereign debt in a currency swap arranged by Goldman Sachs. The Financial Times today explains how the deal worked and reveals that the Greek debt management agency paid 200 million euros in fees for the arrangement:

"Bankers and officials say the swaps were legal, that they were in line with EU accounting rules that prevailed at the time, and that similar transactions had already been arranged between investment banks and other southern eurozone countries including Italy and Portugal. The nature of the Goldman deal was, however, that it remained out of public view and did not show up on Greece’s balance sheet until the following year, when the country’s debt-to-GDP ratio fell from 105.3 per cent to 103.7 per cent."

Comment: The FT's senior analyst, Martin Wolf, draws a distinction between the US deficit, which is a temporary phenomenon in hard times, and the Greek, which requires fiscal tightening. The US can afford to spend its way out of the crisis via stimulus, Wolf argues, while Greece cannot.

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