Country?s economic model must forcibly change

The rapid deterioration in economic conditions has made it clear that changing Greece?s economic model will be more painful than previously thought.

The delays in overhauling and downsizing the public sector, which is key to changing the Greek economic model, will entail even greater economic and social costs than envisaged even six months ago if the government does not convince party loyalists in state-controlled corporations to accept privatizations and vested interests everywhere else to accept competition.

Last June, after a press conference by the so-called troika the representatives of the European Commission, the International Monetary Fund and the European Central Bank we had asked Servaas Deroose, the former representative of the European Commission in the team, why the economic policy program was not front-loaded with structural reforms, such as lifting barriers to entry for ?closed professions,? and privatizations so there would be more time for the Greek people to see the benefits.

We do not remember his exact answer but we do remember that the former representative of the European Commission in the team responsible for overseeing the execution of the policy program defended the program, arguing it would be sufficient to put Greece back on the right track if implemented.

To give him and the head of the IMF mission, Poul Thomsen, credit, they had both raised the specter of reform fatigue at this time of the year so they were fully aware of the impact of the economic program, or memorandum.

It is true Greece had to cut its budget deficit in an aggressive way to win back the confidence of international investors and borrow some 60 billion euros to cover the remaining borrowing requirement in 2012-13.

It is also true the government passed a far-reaching law in the summer of 2010, reforming the country?s ailing social security system. The benefits of this reform on the fiscal front will be realized later on.

However, it is now the consensus that the government has fallen short in implementing the rest of the reforms agreed to with the troika since then.

In addition, the mix of spending cuts and tax hikes aimed at closing the 2010 budget gap has proven ineffective in meeting the initial deficit goal but effective in deepening the recession by putting a bigger burden on the private sector than it should, making it harder to push forward with more reforms.

By all accounts, the government insisted on equal burden-sharing between the public sector, in the form of spending cuts, and that which mostly affects the private sector in the form of tax hikes to slash the budget deficit.

It is indicative of the statist mentality which dominates Greek politics and especially the ruling Socialist party?s old guard.

To some extent, missing the fiscal deficit target in 2010, despite the significant reduction achieved, and the delays in the implementation of the structural reforms have a common denominator: The strong opposition of politicians and trade unionists in ruling PASOK.

But time is on nobody?s side as failure to implement the structural reforms and privatizations promptly will bring about harsher economic conditions and social unrest, and costing the politicians and the unionists their privileges.

Premier George Papandreou has to convince them even at this point to accept the sacrifice of their privileges for the common good or collide with them and publicly seek the help of Antonis Samaras, the president of the conservative opposition New Democracy party, as well as the other political leaders to do so.

He should make clear to his party loyalists who exert power over key state-controlled enterprises like the Public Power Corporation that the alternative will be much worse for everybody in terms of social dislocation, including a further rise in unemployment.

It is also important that the Greek people be informed that the country undertook the policy commitment to complete a 50-billion-euro privatization and real estate development program in the informal EU meeting on March 11 in return for extending the bilateral loans and cut the interest rate by 100 basis points.

So it is nothing new when our partners demand we carry out this program.

Moreover, it is necessary if we want to reduce the public debt and grow out of this mess by promoting economic growth, since privatizations lead both to a more efficient allocation of capital and usually bring about more investments.

They should also be informed that divestures of this type under the current unfavorable conditions will not produce the kind of proceeds the country could have hoped for under normal circumstances but this should not stop the privatization process because the cost of default would be much greater for all.

It is unfortunate that one year after the economic policy program was put in place, the Greek people see no light at the end of the tunnel.

Mistakes and delays have cost a lot but they will look very small compared to future ones if the rationalization of the public sector stalls and vested interests succeed in derailing competition in output and input markets.

The change in Greece?s economic model will be more painful and abrupt than estimated a few months ago, but there is no doubt the alternative is much worse.

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