Economy cannot afford possible ten months on automatic pilot
2004 is supposed to be a special, and possibly great, year for the Greek economy as the time has come for the smallest country ever to host the Summer Olympic Games. Nevertheless, almost two weeks away from the New Year, excitement has given way to skepticism as the unfavorable impact of the political cycle on the Greek economy becomes more and more visible. It is therefore up to the government to either take bolder initiatives on the economic front or shorten the political cycle by seeking general elections earlier than initially envisaged. It is well known that all Greek administrations in power have been more concerned about being re-elected rather than making painful decisions that may alienate voters in an election year. Of course, this is not just a Greek phenomenon. Moreover, one must admit that spending overruns usually associated with the runup to general elections have been less pronounced in the last couple of elections than in the past. Most analysts agree the Greek economy will be able to grow by a respectable 4.0 percent or more in 2004 on the back of strong investment and private consumer spending and a better tourist outlook as the major economies in the EU recover and the Olympic effect takes hold. However, the same people wonder about the medium-term impact of politically motivated decisions on the economy. There are already signs that the government has given up on all projects opposed by major trade unions such as the privatization of the Postal Savings Bank, considered by many a catalyst for more merger and acquisition deals in the banking sector. Instead, it has focused on other projects carrying a minimum political cost, such as having the Army Fund sell a minority stake in General Bank to another interested bank. In addition, there is the impression in the local markets that the government is primarily interested in financing budget expenditure rather than trying to curb it and close the growing budget deficit. In this context, it is no surprise that labor, the self-employed and other professional groups have tried to grab a bigger piece of the pie by demanding unprecedented pay hikes based on EU standards. Given the fact that the major infrastructure projects should be finished by May and elections may be held in April or early May, analysts and businessmen alike worry that the combination of fiscal relaxation and high labor cost growth will put a larger burden on the economy in the fourth quarter of 2004 and 2005 than initially thought. Moreover, there are concerns that a possible change in government may result in the traditional three- to six-month policymaking inertia as all top positions in the public sector are filled by officials belonging to the new ruling party and the new government is being informed of the situation. The period of inertia may be more protracted if the re-examination of public finances and other matters is deemed necessary before any major policy decisions can be made. This may be the case if the conservative New Democracy party maintains its comfortable 8.0 percentage point margin in the polls over the ruling socialist PASOK party. With everything put together, and assuming general elections for Parliament are held in April or early May, the Greek economy runs the risk of being on automatic pilot for the next six to 10 months. It takes no PhD in economics to understand that this will have adverse effects later on even if momentum keeps GDP growth at 4.0 percent or better. Of course, things may get even worse if one side or the other wins by a relatively small margin. Many economic agents will then assume that the new government will not have the degree of freedom needed to pursue a radically reformist agenda. Undoubtedly, the Greek economy can count on huge inflows from the Third Community Support Framework to boost growth in the next few years and possibly on increased tourist receipts and related investments after the 2004 Olympics, provided they go smoothly. It should not escape attention, though, that fiscal slippage, along with increased signs of losses, in international competitiveness clouds the future. The pre- and postelection policy inertia we described earlier simply adds to those worries. Although the Greek GDP is running at a 4.0 percent clip, the general government budget deficit is getting bigger, estimated anywhere between 1.2 and 2.0 percent of GDP in 2003, and the primary surplus is getting smaller, making it harder to bring down the debt-to-GDP ratio despite very low interest rates. Blaming excessive spending attributed to the increased funding needs of the Olympic Games may be correct but it does not disguise unfavorable trends in primary expenditure exacerbated by the political cycle. Unfortunately, little can be done about the soaring euro and its effect on Greek exports to countries whose currencies are tied to the US dollar. The same holds true for unit labor costs, an important determinant of international competitiveness for a number of economists. Generous pay hikes have outpaced healthy productivity gains, leading to strong unit labor cost growth estimated at 3.4 percent in Greece this year versus 2.3 percent in the 15-member European Union, according to the EU Commission. The constant deterioration in Greek unit labor cost statistics compared to the EU is also a function of the political cycle, at least to some extent, and should not be expected to abate next year. All in all, the evolving political cycle does little to check the further deterioration in public finances and international competitiveness in 2004, and perhaps beyond. Although economic growth is still expected to remain robust next year, a protracted pre- and postelection policy paralysis may produce some fatigue in the fourth quarter of 2004, which may be carried into 2005. It is therefore in the economy’s best interest that this period of inertia be shortened by having elections earlier than initially planned for. Otherwise, the current government should ignore the political cost and push ahead with some pending structural reforms to brighten the economic outlook. The latter, however, appears to be more difficult than the
