High growth targets

Government promises near-miracles in its new stability program

By Demetris Nellas - Kathimerini English Edition

“The difficulties the economy is facing are serious but temporary and they will be overcome,” Economy and Finance Minister Giorgos Alogoskoufis told reporters yesterday, as he presented Greece’s Updated Stability and Growth Program for 2004-2007.

The program, an updated series of forecasts about Greece’s main economic indicators, has one main goal, that is to ensure that the budget deficit will drop below 3 percent of Greece’s gross domestic product (GDP) in 2006, as agreed to earlier this year with the European Council of Finance Ministers (Ecofin). Any other result would invite EU sanctions because, first, Greece is neither France nor Germany to openly defy the European Commission and bend the Stability and Growth Pact rules to its liking; second, because, unlike the other two, it does not have the excuse of near-stagnation of growth. On the contrary, Greece’s economic growth has consistently outpaced the European Union average over the past six years at least, even leading the EU in 2002 and 2003. Third, and despite those favorable circumstances, Greece did next to nothing to lower its immense public debt. On the contrary, it slipped from being the third most indebted country in the EU — behind Belgium and Italy — to first place.

Alogoskoufis will, of course, never acknowledge that he is partly to blame for Greece’s predicament through his now notorious “audit” of public finances. He and Prime Minister Costas Karamanlis have consistently, and vociferously, defended the audit, saying that they brought new transparency to the lies and obfuscations of their predecessors. But, as Eurostat itself acknowledged, a large part of the extra deficit found by the revision came from applying different accounting methods to recording expenditures on armaments and social security fund reserves. The way the government itself proceeded with the revision, initially announcing a higher deficit for 2003, yet still under the Stability Pact limits, leaves it open to the charge that it did so not in the interests of transparency, but to strike a political blow against its opponents.

Whatever the motives, Greece is now saddled with a huge 2004 budget deficit (6.1 percent of GDP and growing), the result of huge budget overruns in the runup to the Olympics — for which one can mostly blame the previous Socialist administration — and a collapse in revenue collection, which is entirely the new government’s fault. As a result, fulfilling the main task of reducing the deficit will take a lot of effort. Hence the announced indirect tax hikes which act as an income redistribution mechanism at the expense of the least wealthy.

As for the updated program, the government has set some very optimistic goals. It forecasts, for example, that growth will average 4 percent in 2005-2007, when the most optimistic forecasts for this year assume 3.5 percent growth. On the other hand, and in order to rein in spending, its cuts focus on the Public Investment Program.

Where will the extra growth come from? Apparently from private investment, the government hopes. However, the incentives it offers in the investment incentives law — legislation on public-private partnerships is still being drafted — may seem too meager to investors.