Wednesday April 23, 2014 Search
Weather | Athens
23o C
15o 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)  
Corfu property market puts up resistance to pressures
Major tourism promotion at travel fair in Latin America
Eurostat to confirm the size of 2013 primary surplus
Hundreds of thousands of social dividend applications
Tunnel boring for Thessaloniki metro to resume after two years of inactivity
The two tunnel boring machines that are being used to construct the Thessaloniki metro are to start work again after almost two years, it was revealed on Tuesday. The borers have dug 73 perc...
Greek leftists opt for more suitable Euro Parliament candidate
SYRIZA confirmed on Tuesday, following some two weeks of deliberations, that Thrace-based Roma activist Sabiha Suleiman will not stand as a candidate with the leftist party in the May 25 Eur...
Inside News
BASKETBALL
Reds and Greens stay alive in Euroleague
Easter and home advantage worked wonders for Panathinaikos and Olympiakos who stayed alive in the Euroleague play-offs beating CSKA and Real Madrid respectively on Monday in Greece. Shak...
BASKETBALL
Greens lose badly as CSKA Moscow
Panathinaikos has a mountain to climb in order to reach the Final Four of the Euroleague after losing at CSKA Moscow on Friday for a second time in two days, only this time it was comprehens...
Inside Sports
COMMENTARY
Realitys other side
...
EDITORIAL
Enough barbarity
The events that took place on Santorini on Holy Saturday, when seven people were injured, including an American tourist who sustained life-threatening injuries, after a firecracker was throw...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
RECENT NEWS
1. Corfu property market puts up resistance to pressures
2. Major tourism promotion at travel fair in Latin America
3. Eurostat to confirm the size of 2013 primary surplus
4. Hundreds of thousands of social dividend applications
5. National bond issue already covered
6. Blue chips pave way for third day of bourse gains
more news
Today
This Week
1. Three more arrests made on Santorini over Easter injuries [Update]
2. PM Samaras sees Greek bond yields falling more
3. Athens airport worker dies after being hit by shuttle bus
4. Vodafone sued for 1.4 billion euros by former Greek distributor
5. Warning issued over Evros River overflow
6. Tests confirm Athens cabbie has not contracted MERS
Today
This Week
1. Greece's market return mirrors return of tourists
2. Greece startup leaders say they cant break jobless cycle alone
3. Ground-breaking Good Friday mass signals thaw in Cyprus
4. Mayoral candidates clash over Athens mosque plans
5. Government looks to kick on
6. Greece offers to help find Turkish F-16 lost in 1996
Find us ...
... on
Twitter
... on Facebook
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright 2014, H KAΘHMEPINH All Rights Reserved.