The Greek economy is rebalancing but the political system is pursuing policies which may undermine the desired economic outcome. This is largely stemming from the distribution of the costs of the bailout program in society and across geographical areas. Unless the unequal distribution of the program’s costs is addressed, the likelihood of a success story turning into one of failure should not be underestimated.
Fiscal consolidation is progressing and Greece is likely to register a bigger primary budget surplus next year. Even if the creditors’ representatives were right and there is indeed a fiscal gap of 1-1.5 billion euros, budget revenues will still exceed expenditures without interest expenses by at least 1.4 billion euros, against an official estimate for 350 million euros in 2013. Of course, that surplus will fall short of the 2.7 billion euros or 1.5 percent of GDP projected in the bailout program but it is indicative of the magnitude of the fiscal consolidation achieved so far. Readers are reminded that Greece had a 24-billion-euro primary deficit, or over 10 percent of GDP, in 2009.
Many economists and others have referred to the costs of the fiscal adjustment in output and jobs. Many have attributed them mostly to the austerity policies imposed by the troika while others have cited delays in the implementation of structural reforms due to strong opposition by vested interests. There are different ways to look at the costs.
The high unemployment rate of over 27 percent is widely cited along with the even bigger rate among young people. The significant compression of disposable incomes over the last few years is another indicator, pointing in the same direction. Recently, we referred to the massive strain on families as evidenced by the sharp deterioration in the ratio of employees to dependants, including nonworking adults, the unemployed, children etc. At 2.9 or more dependants per employee, Greece has the worst ratio in the eurozone and far worse than its own of 1.5 in 2005-10 according to Renaissance Capital.
In addition, the collapse of property prices, traditionally the main form of savings, the losses suffered by individual bondholders and mutual bond fund investors after the PSI haircut and the sliding bourse have dealt another blow to most people’s incomes.
Although there is a general squeeze and 20 percent of households lacked access to basics like heating in 2012, according to ELSTAT, there are wide discrepancies in the distribution of the economic and social costs of the adjustment program. The costs have become more obvious since the second half of 2011 and especially the first quarter of 2012. This is our conclusion after discussions with accountants and others who have a more global view of the situation.
Although everybody talks about Greece’s six-year recession, the real bite for a growing number of people started in 2011-12. If this is correct, we will see a faster deterioration in the economic conditions for larger social strata in the quarters ahead.
Second, the costs are borne largely by the population in big urban centers – especially in Attica, where Athens is and over 4 million people out of 11 million reside – and less by people in the countryside in general. The cost of living in Athens, Thessaloniki and some other big cities is bigger than in smaller towns and villages: Pensioners getting 800 euros per month can live comfortably in the rural areas but will struggle to make ends meet in Athens, especially if they have to pay rent or support other family members who have lost their jobs.
The government should have taken account of the costs borne by the large urban centers and the rest of the country. However, even if the planners noticed it, they did not show it in designing the new Single Property Tax, which penalizes urban properties, increasing the likelihood of nonpayment. Moreover, many farmers continue to benefit from EU subsidies while nine out of 10 declare income of less than 400 euros per month. So, well-off farmers in Thessaly, Crete and areas of Macedonia and the Peloponnese end up paying peanuts to the state, which is busy further tightening the screws on the bleeding urban population to meet the budget target. That’s on top of the traditional tax and social security contribution breaks awarded to residents of some areas – i.e. some islands.
In practical terms, this means some geographic areas, such as tourist resorts and agricultural areas which export their produce, have not felt the economic crisis as others have. “What crisis? Where did you see the crisis? There is no crisis here,” a taverna owner on an island told us last summer at the same time his colleagues elsewhere were painting a bleak picture. Of course, this is not the only manifestation of the unequal distribution of the costs. The public sector continues to enjoy the privileges of better pay, job security, less work pressure and accountability over the hardworking employees in the private sector. Even today, for example, municipal workers in garbage collection, street cleaning, construction services and so on are mandated to work just 32.5 hours per week.
The uneven cost distribution will likely manifest itself at the elections for the European Parliament in May, benefiting extremist parties. Large urban centers will likely boost extremists, pushing Golden Dawn up over 10 percent of the vote and perhaps 14 percent.
This kind of election outcome could make it harder for the coalition government to implement the adjustment program and may even undermine the rebalancing of the economy achieved. It is therefore important the burden sharing of the costs of the bailout program between urban and rural areas as well as the public and the private sectors is made fairer. Unfortunately, we don’t see it coming.