Urgent need to tap EU funds
Greece is not likely to escape the debt trap if it does not manage to stabilize its economy and get it growing again. Extending the fiscal adjustment by two years without being asked to take additional restrictive measures should help in that direction. However, the government seems to be less aggressive in using the only other weapon left at its disposal to shore up the economy: the allocated large EU transfers and investment subsidies.
Prime Minister Antonis Samaras?s meetings with German Chancellor Angela Merkel and French President Francois Hollande over the weekend centered on Greece?s will and ability to honor its commitments under the second Memorandum of Understanding (MoU) on specific economic policy conditionality as the only way to stay in the eurozone.
In public statements and interviews in the German and French media, Samaras outlined the Greek case for being given a breather via a two-year extension of the fiscal consolidation.
Some had already criticized the rush to put the issue on the table before the new government was able to deliver on some of its promises and gain some credibility. Although this criticism sounded reasonable, it did not pay sufficient attention to two aspects according to our understanding: time and political considerations.
As far as time is concerned, the government will have to unveil its 2013 budget in October. This is also the month of the crucial European Union summit in which Greece is going to be evaluated.
If the view in the government is that the economy will not be able to sustain new austerity measures amounting to about 8 billion euros or 4 percentage points of GDP next year after more than 40 billion in 2010-2011, the extension issue should have been raised promptly in hope they could avoid including all these measures in the 2013 budget.
Second, it is known that the two other smaller parties in the coalition government, namely Socialist PASOK and moderate Democratic Left (DEMAR), were pushing for the renegotiation of the second MoU, which was the main plank in the coalition?s platform. So, the premier had to raise it sooner or later.
Of course, nobody knows what will come out of it at the end of the day although the consensus-building nature of EU decision-making points to a compromise solution of some sort, assuming Greece has delivered on the package of spending cuts equal to 13.5-14 billion euro and some other reforms by then.
Still, by raising the extension of the fiscal adjustment program as a means of stabilizing the economy the coalition government looks like it suffers from the so-called ?Papaconstantinou syndrome.? This refers to the policy of Giorgos Papaconstantinou, the finance minister in the PASOK government who signed the first MoU in May 2010 with the international creditors, to pay less attention to growth enhancement policies and focus primarily on fiscal consolidation while kicking the can down the road.
Although attaining the budget deficit targets is of the utmost importance from the viewpoint of the country?s creditors and Greece itself, it may pay more for the government to shift its focus on initiatives to boost growth. This is more so since the 7-month budget figures confirm that the country will most likely attain this year?s deficit target and even do better.
Privatizations slack
However, clouds hanging over Greece?s future in the eurozone till mid-October at best leave little hope the country will be able to put its privatization program on track this year and attract some serious private investment.
The same is true for purely domestic private investments since the recapitalization of the banks is lagging well behind schedule, depriving healthy companies of funds to invest. Moreover, the chronic slump of the Athens bourse does not allow listed companies to proceed with rights issues or other capital raising schemes.
Therefore, it is right to conclude that the only realistic way for Greece to boost investments and economic output when consumption spending is due to decline further and exports are an unknown factor is to speed up the absorption of EU funds. This is also the only way for the government to avoid the ?Papaconstantinou syndrome.?
It is known that over 20 billion euros in structural and cohesion funding has been allocated to Greece for the 2007-2013 period and some 21 billion through the Common Agricultural Policy (CAP). While more than 15 billion euros has been paid via CAP so far, the unused capacity as far as structural and cohesion funds are concerned is still quite large. So, one would expect government resources and efforts to focus on speeding the absorption of these funds to boost investments and the economy, and especially since the funds are used to finance public investment projects at a rate of 95 percent, with Greece having to put the remaining 5 percent. This way they also help minimize general government spending.
All-in-all, the coalition government should mobilize all available resources to help speed up the transfer of EU funds allocated to Greece since this is realistically the only way to prop up investments while the country?s future in the eurozone hangs in the balance. This would also avert the ?Papaconstantinou syndrome? and put the extension of the fiscal adjustment program on the back burner for a while.
