Friday April 18, 2014 Search
Weather | Athens
17o C
11o 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)  
PPC to issue corporate bond of 500 mln
Primary surplus continued by end-March
Eurobank eyes top Core Tier 1 level in Greece
Tourist spending up 17.3 pct
Greece offers to help find Turkish F-16 lost in 1996
Greece officially offered on Thursday to assist Turkey in its efforts to locate and salvage a Turkish Air Force fighter jet which crashed in the Aegean almost 20 years ago. Greek Defense Min...
Talks lined up in wake of ‘shameful’ soccer scenes
The government has pledged to meet with soccer officials after Easter to tackle unruliness in the game following wild scenes at the Greek Cup semifinal between PAOK and Olympiakos in Thessal...
Inside News
BASKETBALL
Former Red Bourousis wrecks Olympiakos´s hopes for a break
Olympiakos tried harder in Game 2 of the Euroleague play-offs in Spain, and Real Madrid was not as good on Thursday as in Game 1, but the Spaniards still emerged victorious on the night with...
SOCCER
Greek soccer turns fishier than ever
Soccer in Greece reached new lows in scenes unseen since the national team’s triumph in Euro 2004, as PAOK and Olympiakos served up a cup semifinal with PAOK emerging as the winner and the s...
Inside Sports
COMMENTARY
The placebo effect and the economy
Among the greatest mistakes made in the years of Greece’s hard landing is that citizens did not get the chance to sense that aside from austerity and pain the economic adjustment program als...
COMMENTARY
Ukraine is a crisis—but not a Cold War
Given Russia’s annexation of Crimea, the imposition of US and European sanctions, and the potential for more escalation in Ukraine, we are witnessing the most important geopolitical events s...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. Former Red Bourousis wrecks Olympiakos´s hopes for a break
2. PPC to issue corporate bond of 500 mln
3. Greece offers to help find Turkish F-16 lost in 1996
4. Primary surplus continued by end-March
5. Eurobank eyes top Core Tier 1 level in Greece
6. Tourist spending up 17.3 pct
more news
Today
This Week
1. Greece startup leaders say they can’t break jobless cycle alone
2. Ground-breaking Good Friday mass signals thaw in Cyprus
3. Mayoral candidates clash over Athens mosque plans
4. Seven arrested over Toumba violence
5. National Bank of Greece plans senior unsecured bond sale
6. Greek current account deficit widens in February
Today
This Week
1. Bomb explodes outside Bank of Greece
2. Samaras sees no need for third bailout
3. CCTV footage from Nigrita Prison shows signs of inmate torture [Video]
4. Car bomb explodes outside Greek Central Bank building, no one hurt [Update]
5. Greece's market return mirrors return of tourists
6. Parties start announcing candidates for European Parliament elections
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2014, H KAΘHMEPINH All Rights Reserved.