ECONOMY

Following the path of least resistance

The Greek coalition government seems to have made the choice of sticking to structural reforms with a fiscal impact while avoiding more austerity measures in its bid to achieve an ambitious primary surplus next year and reduce political risk. Whether the country’s creditors accept it or not remains to be seen. However, behind this strategy to boost the economy, others see an agenda to limit the restructuring of the public sector and minimize job losses there. Only time will tell which side is right.

Finance Minister Yannis Stournaras could not have been more specific when he told CNBC the Greek economy should be allowed to breathe and automatic stabilizers to work. It was another way of saying: Greece should not take any more austerity measures to help the economy recover and the 2014 budget target will be met by the automatic increase in revenues without government intervention.

It is an argument supported by European Commission estimates that point to a cyclically adjusted primary budget surplus equal to 6 percent of GDP or higher in 2014. In other words, the general government revenues would have exceeded expenditure, excluding interest paid on public debt, by 11 billion euros or more if the economy grew at potential. Of course there are different estimates of Greece’s real potential GDP rate, but most range between 2 and 3.5 percent per annum.

This will certainly be difficult to achieve when the economy is projected to contract by 4 percent or slightly less this year. On the other hand, the primary budget surplus target for next year is about 2.7 billion, or 1.5 percent of GDP, after an estimated surplus of 300-800 million euros in 2013. The latest government estimate is around 700 million euros. So, the bar for the primary surplus goal may be lower than it seems at first sight if the economy recovers. The official forecast puts real GDP growth at 0.6 percent next year but some argue it may end up higher if no new restrictive fiscal measures are taken, pointing to the Greek economy’s historic tendency to overreact during recessions and booms.

This is not an impossible scenario and we don’t think there should be a problem if the primary surplus of the general government ends up at 2.4-2.5 billion euros in 2014. Although there is an economic rationale behind this approach, some locals see a political agenda of limited reforms in the greater public sector. This idea is supported by the fact that a number of ministers, deputies and some of their close family members are employed and paid by various state entities in addition to the massive appointments made by politicians over the decades in exchange for votes.

However, one should not also underestimate the strain on the cohesion of the coalition government caused by important legislation pertaining to the execution of the adjustment program. This is the case because a few PASOK deputies who sense they may not be re-elected are trying to distance themselves from unpopular measures such as the new real estate tax by threatening to vote against it even if it brings the government down. Moreover, a number of conservative New Democracy deputies also object to the same or other austerity and structural measures detrimental to their constituencies. One of them, a former minister, is widely rumored to be awaiting the opportunity for a heroic exit from the ND camp, waving the populist flag.

Undoubtedly, this complicates the political situation and makes the coalition government, which commands 154 votes in the 300-seat Parliament, look more vulnerable. It is therefore easy to understand why the government wants to avoid taking additional austerity measures next year, when the municipal elections and the elections for the European Parliament take place, especially those actions affecting special interest groups such as the personnel and retirees of the armed forces and the police.

By focusing on structural reforms with a fiscal impact, estimated at 1.3 billion in 2014, and perhaps some additional cuts to the public investment budget and military procurement, which have no political cost, the administration wants to avoid risking its own future and remove political uncertainty which could hurt the expected recovery at a time when Greece will be holding the EU presidency. There is no doubt the coalition government would like to have the Eurogroup decide on debt relief measures before next May’s elections to be able to convey a message of hope to the people and try to contain the far-right Golden Dawn party.

Unfortunately, the lack of a new government in Germany, which calls the shots in the eurozone, complicates things. This does not mean a new German government would have made things easier for Greece, at least as far as the debt relief measures are concerned. The reason for this is because it has to take into account the potential benefits to the anti-euro AfD party of any decision by the Eurogroup providing debt relief measures to Greece prior to May.

There is no doubt Greece is not and never will become a little Germany. This is not bad, neither for Greece nor Germany. The government wants to avoid taking more austerity measures to meet the ambitious 2014 primary surplus target set at 1.5 percent of GDP because they have the potential of bringing it down. Instead, it says it is committed to structural reforms to close the fiscal gap in 2014 but is mainly counting on economic recovery to do a good deal of the job.

Whether this is part of an agenda to protect the baby of the Greek political class – the public sector – remains to be seen. The ball is now in the court of the lenders and their representatives but this game may last for a while.