IOBE urges longer adjustment period

Greece needs to extend the period of its fiscal adjustment if it is to avoid a deeper recession and higher unemployment, an economic think tank said in a report on Thursday.

In the report, titled ?The Economic Dilemmas of the Country,? the Foundation for Economic and Industrial Research (IOBE) argues that without the massive amounts of foreign capital inflows, which total the staggering amount of 480 billion euros, or 240 percent of GDP — including bailout aid and EU structural funds — Greece would face a number of very unpleasant prospects.

?Without this money, Greece will be forced to withdraw from the eurozone and return to the drachma,? IOBE said. This would entail a drastic devaluation — with a commensurate impact on salaries, pensions and the external debt, a currency crisis and an inability to import basic necessities such as medicines, oil and raw materials, an exacerbation of inflation and the black market, and a deepening of the recession.

The report notes that Greece had already entered a recession when the first bailout package was agreed in the spring of 2010.

?The development model based on extensive external borrowing, more hirings and salary increases in the inefficient public sector had failed, and this failure was the chief cause of the recession.?

However, IOBE stresses that the economic policy mix followed in the last two years was not the most appropriate, as it did not pursue the right reforms, particularly in the case of privatizations; additionally, the political leadership and citizens remained passive spectators of the effort to extricate the country from the crisis, while the troika underestimated the recessionary effects of the fiscal adjustment as the dominant forces in the eurozone today ascribed full priority to the elimination of fiscal deficits.

Besides the rolling back of the period for fiscal adjustment, IOBE also recommends that the new Greek government reaffirms the people?s desire to remain in the eurozone, and proposes for inclusion in the program quantitative targets, deadlines and measures for reducing unemployment, particularly among the young. Additional moves would be a proposal for the immediate allocation of European investment funds to a small number of large infrastructure projects, with no Greek contributions; a proposal for an immediate disbursement of 6.5 billion euros from the second bailout loan of 130 billion so that the government can pay its accumulated debts to the private sector; and joining other eurozone members in asking for a change in the economic policy mix so as to target growth as well as fiscal adjustment.

Finally, IOBE urges the next Greek government to commit itself to the speedier implementation of structural reforms agreed with creditors, with a view to boosting competition in the economy, as well as of the privatizations program in order to attract investment and repay public debt.

Separately, the Finance Ministry on Thursday reported a 15 percent drop in public revenues in the first half of May. According to sources, the development has prompted instructions for a freeze in income tax and VAT rebates.