Investment is key to exiting crisis

In meeting the budget deficit target, speeding up structural reforms and improving debt dynamics the current coalition government has the opportunity to boost the country?s extremely low credibility abroad and significantly reduce the likelihood of a Greek exit from the eurozone in the next few months. At the same time however, unless it also redoubles its efforts to revive public and private investment spending, it also runs the risk of losing the war against recession and unemployment.

We referred last week to the under-reported good execution of the general government budget in the first half of the year, arguing its extrapolation points to meeting the 2012 overall deficit goal of around 14 billion euros from 19.6 billion in 2011.

This is so because the Greek budget gap tends to shrink or at least remain the same in the second half, barring general election years. New figures for the state budget — the largest component of the general government accounts — spanning the January-July period were also encouraging.

Undoubtedly, attaining the budget deficit target in 2012 is a step in the right direction but it is not enough. Agreeing on a credible package of spending cuts equal to 11.5 billion euros to help meet the deficit targets in 2013 and 2014 may be a challenge for the three parties that comprise the coalition government, but it is necessary to send another positive signal to the country?s international creditors.

Of course, it may not be pretty when the time comes for the unpopular package to pass in Parliament since a few coalition party deputies may decide to vote against it or abstain. This is more likely in the case of the Democratic Left party and secondarily PASOK, and less so for conservative New Democracy.

Nevertheless, chances are the package will go through. That is because they know how high the stakes are at a time when some politicians and decision makers in the eurozone are silly enough to believe that pushing Greece out and breaking up the single most important economic experiment in modern history is the best way to deal with the flaws of the euro area.

One would also expect the coalition government to push ahead with some long overdue structural reforms, such as the overhaul and recapitalization of the Greek banking system, and one or two high-profile privatizations, such as the postal service (ELTA), to send the message abroad that this time the right noises are being accompanied by actions.  

Assuming all of the above take place and the right arguments are presented, Greece will have a greater chance of convincing its European partners to extend the implementation of the economic program by two years through 2016.  

All of the above actions may go some way toward buffing up the country?s tarnished credibility abroad but will do little in the short run to stabilize the economy, which has been in a virtual free fall for the last five years. As a matter of fact the new round of austerity measures will hurt the weak economy even more and probably take the unemployment rate higher by the end of the year. It is noted the jobless rate rose to 23.1 percent last May with the ranks of the unemployed in the private sector swelling to some 1.15 million.   

So the coalition government may find itself in the awkward position of being praised by the country?s international creditors for delivering on the fiscal front but reaping discontent domestically because of the continuous economic slump, threatening its cohesion.

At this point, the market consensus has revised its estimate for the contraction of the real GDP to more than 6.0 percent and even 7.0 percent compared to an upwardly revised official forecast of 4.9 percent last March.

Even worse, more and more economists are penciling in a deeper than initially projected recession in 2013 to more than 3.0 percent, or even 4.0 percent in some cases. These forecasts assume no extension of the current economic program and will likely improve if the country manages to get the green light from its eurozone partners.

So it is imperative the government intensifies its efforts to attract foreign direct investment and more importantly mobilize domestic private businesses to invest. Since businessmen and the market in general are discounting future events, Greece has a lot to gain if it manages to convince the business community it will stay in the eurozone.  

To this end, fiscal discipline and the implementation of reforms, especially privatizations and the recapitalization of the domestic banking system, will help along with a good review by the troika and some positive statements by politicians in eurozone countries and others.

But the Greek economy needs a boost in the short term and nothing could do it better than putting EU structural and cohesion funds to work by reviving priority projects throughout the country.

The same holds true with the large highway projects where the government, banks and construction consortiums will have to find a mutually acceptable solution to restart them and put up to 10,000 people back to work.   

The right noises and the positive signals that something is finally moving in Greece will have to translate into concrete action in the next few weeks.

We have every reason to believe the coalition government will deliver, given that the country?s future in the eurozone is on the line, and get a positive review from the troika.

However, it is equally important the government does not fail the test of stabilizing the economy at some point next year because otherwise it risks winning an important battle but losing the war.

Reducing the country risk by adhering to fiscal discipline and reforms is very important but so is the need to mobilize and leverage EU funds to boost investment spending.