Wednesday September 17, 2014 Search
Weather | Athens
27o C
20o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
Extra billion could be game changer

 Pouring more funds into the economy while containing expectations should improve conditions

By Dimitris Kontogiannis

The government will have to work hard to find ways to boost public investment spending by at least 1 billion euros next year to contain the sharp decline of real gross domestic product (GDP) to 4.5 percent or below. In addition, it will have to lower expectations regarding the impact on economic activity of some 44 billion euros in pending loans – likely to be disbursed to the country in the next few weeks – to avoid a fresh bout of public disappointment.

The unexpected dive in economic output in the third quarter brought the decline to 6.7 percent year-on-year in the first nine months of 2012, raising concerns that the real GDP may fall by more than the upwardly revised 6.5 percent forecast for the year. The performance of the economy in the last quarter is also important because it will determine the effect of the so-called “carry-over” on next year’s GDP.

Still, the GDP drop in the third quarter underscores both the severity of the situation – highlighted by the surge of unemployment to 25.4 percent last August – and the limitations of economic policy. It is unfortunate that the Greek side did not manage to convince its creditors of the merits of a smoother fiscal adjustment without frontloading the bulk of austerity measures in 2013-2014 when seeking a two-year extension for the consolidation of public finances.

We believe that Charles Dallara, the managing director of the Institute of International Finance (IIF), argued the case for a smoother consolidation more convincingly than others.

Speaking at an event organized by the Hellenic Bank Association in Athens last Wednesday, Dallara referred to the contraction of economic activity caused by a bigger-than-planned fiscal push back in May 2010.

“This new program, in fact, assumes the decline of 4-5 percent [of GDP] in 2013, in part because two-thirds of the further fiscal adjustment required in 2013-2014 is frontloaded to next year. What is needed instead is to ease the pace of the remaining fiscal adjustment to something closer to that of Ireland, which has been moving steadily with annual reductions of 1.5 percent per annum. This is just one-third of what is programmed in 2013 for Greece,” said Dallara.

However, it looks as if Greece has got the worst of all possible extensions. Some 11 billion euros in fresh spending cuts and tax hikes are frontloaded in 2013. Moreover, the government is reportedly being pressed to comply with creditor demands for stringent clauses, waiving further national sovereignty. Of course, this is largely explained by the fact that any fiscal extension requires extra funds, complicating the situation politically in some creditor countries where bailout fatigue has set in and Greece’s image is tarnished.

Nevertheless, the coalition government should not allow itself to become a lame duck. It will have to act in order to stem the sharp decline in economic activity next year, seen at more than the official 4.5 percent in real terms by some analysts. In this regard, the best candidate is public investment spending. Further improvement in net exports could also contribute positively to the GDP but is uncertain due to the procyclical, tight fiscal policies of the eurozone.

For public investment to boost economic activity, spending will have to rise by 1 billion euros or more in 2013 above official projections. It is reminded public budget investment outlays are projected at 6.85 billion euros in 2013, unchanged compared to this year according to the 2013 budget. It is noted this year’s 6.85-billion-euro figure has been lower than the 7.3 billion cited in the supplementary budget submitted last February, as the government turned to investment spending cuts once again in order to attain the budget deficit target.

Although there is no consensus, the effect of each euro in public investment spending on GDP is estimated at a multiple of the amount spent. Some analysts put the so-called multiplier effect on the economy at 2 and others as high as 6. Assuming a multiplier of 3, spending some 1 billion euros could add about 3 billion euros to the GDP. This could make the difference, bringing the GDP closer to the officially projected 183 billion euros in 2013 from an estimated 194 billion in 2012.

Of course, it will not be easy to find an extra billion euros to channel into the economy next year, but it is imperative that the government exhausts all possibilities. Drawing on unutilized EU structural funds and a bigger contribution by the European Investment Bank would definitely help, but the government must also look harder into potential domestic sources, even if this means twisting some arms.

Stimulus by public investment spending is seen as necessary to avoid a potential political and social crisis in 2013 by containing the economic slide to officially projected levels. Undoubtedly, the disbursement of some 44 billion euros in loans will help ease extreme credit conditions in Greek economy.

However, the release of these funds is not a game changer, as some government officials and others think. In contrast, raising people’s expectations about their effect may backfire if the outcome turns out to be smaller than envisaged. So, it is important that the government lowers public expectations to avoid a major disappointment that dents sentiment once again.

Economic reality and high unemployment will test the government’s resolve and unity next year. The fiscal extension, where the bulk of austerity measures are frontloaded in 2013 and 2014, makes the task harder. Boosting public investment spending by 1 billion euros or more is paramount, as is lowering expectations about the effect of the 44-billion-euro loan on economic activity.

Dimitris Kontogiannis is a PhD in macroeconomics and international finance.

ekathimerini.com , Sunday November 18, 2012 (20:42)  
Sports events extend season of tourism
Govt to ask for subsidy return
Shipping sector concentrates but still expands despite crisis
First step toward transformation of Athenian Riviera
Tsipras to meet with Pope Francis on Thursday
SYRIZA leader Alexis Tsipras will travel to the Vatican for a meeting with Pope Francis on Thursday according to reports. Social justice, unemployment, immigration and the Mideast crisis are...
A SYRIZA victory would spark a bank run, PM reportedly warns
A SYRIZA victory in an early general election would cause a bank run, Prime Minister Antonis Samaras has warned according to reports. Given what [SYRIZA leader] Alexis Tsipras said in Thess...
Inside News
SOCCER
Mitroglou rediscovers scoring touch after Fulham let-down
Costas Mitroglou banished the memories of his disappointing spell in England after breaking a 10-month goal drought as Olympiakos Piraeus secured a thrilling 3-2 Champions League win over At...
SOCCER
Mitroglou seals Olympiakoss 3-2 triumph over Atletico
Costas Mitroglou returned to scoring after 10 long months to seal a famous victory for Olympiakos in the Champions League as the Greek champion defeated visiting Atletico Madrid 3-2 on Tuesd...
Inside Sports
COMMENTARY
Loud patriotism
I admit that whenever politicians drag religious faith and worn-out patriotism into discussions I button up. I feel the same way when I see bishops blatantly getting involved in politics. To...
EDITORIAL
In need of a second wind
Greek Prime Minister Antonis Samaras and a few of his ministers have gone to great lengths to see Greece regain credibility in the eyes of its partners. Given that the state mechanism is not...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
RECENT NEWS
1. Tsipras to meet with Pope Francis on Thursday
2. Mitroglou rediscovers scoring touch after Fulham let-down
3. A SYRIZA victory would spark a bank run, PM reportedly warns
4. Davutoglu calls for a two-state solution in Cyprus
5. Mitroglou seals Olympiakoss 3-2 triumph over Atletico
6. Sports events extend season of tourism
more news
Today
This Week
1. In need of a second wind
2. Loud patriotism
3. Davutoglu calls for a two-state solution in Cyprus
4. A SYRIZA victory would spark a bank run, PM reportedly warns
5. Tsipras to meet with Pope Francis on Thursday
6. Greece at bottom of social justice scale among EU28
Today
This Week
1. Greece on standby
2. A Greek God
3. Avramopoulos appointed Commissioner for Migration and Home Affairs
4. Central Athens traffic restrictions back in force on Monday
5. Greece at bottom of social justice scale among EU28
6. EU bank tests may miss trillion dollar risk, study finds
Find us ...
... on
Twitter
... on Facebook
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright 2014, H KAΘHMEPINH All Rights Reserved.