Inflation has social implications

If we are to believe the pollsters, the economy is top priority among citizens’ concerns in this pre-election period. Contrary to what many people believe, the state of the economy is not a favorable battleground either for the ruling PASOK party or main opposition New Democracy. And if the apparent preference by PASOK’s new leader toward discussing «ideas for the future» is confirmed – avoiding accounting for the work done and any detailed discussion of plans for the next four years – economic issues will be bypassed. For its part, the main opposition New Democracy party has no reason to insist on a detailed description of activities and commitments on the economy. After all, many believe that the recipes for economic policy are more or less given and the results of the election will not make any significant difference in policy. This, of course, is not an absolute truth: The recent crisis in the European Union with the effective violation of the Stability Pact proved that governments do have a margin of options and changes in priorities. The most difficult endeavor in the coming years will be the promotion of structural changes in the economy and those sectors of society that have a direct and serious economic impact. Dealing with the prominent economic problems – the first and foremost being inflation – depends on these changes more than we can imagine. Greece’s high inflation – much higher than that of our direct competitors – is a reference point for all other problems. All estimates point to the inflation rate remaining above 3 percent in 2004, and perhaps in 2005 as well. We may accept the government’s plausible explanation that this high rate is due to the rapid pace of economic growth. But it is also evident that the inroads that inflation is making into the increasingly wider population levels has a negative impact on the most powerful force in the economy, private consumption. The distance separating us from the point where households will have to decide on serious cutbacks and slow down their consumer spending looks very small indeed. And from the moment there is such a change in behavior, the problems of commercial and industrial enterprises will grow dangerously and there will be serious repercussions on public revenue. However, the difficulty for the Greek economy is that cutbacks in consumption do not automatically lead to a fall in inflation. This is because Greek inflation is mainly fueled by inadequate competition in the marketplace, the size of the public sector, the limited mobility of labor and the high and inflexible cost of services. In other words, inflation is one of the Greek economy’s serious structural problems. This is not the case in mature economies. It is also for this reason that inflation is accompanied by an increasing inequality in the distribution of income, which in turn fuels inflation further. The high property prices are a characteristic example of the relation between income distribution and the high-cost consumption model prevailing. The structure of Greek society, the decline in production and the spreading of the urban lifestyle are three more causes making inflation one of the scourges of the economy. The very large middle class, pursuing a very costly consumer model, is facing a social downgrade; small retailers are being particularly hit by the influx of imports which displace domestic production. Finally, the high inflation is already creating serious problems in competitiveness in the country’s vital sectors, such as tourism. The government to emerge from the March 7 election is certain to come under strong pressure for income adjustments. The negotiations for a national pay pact, the Olympic Games, the high public spending requirements and the revelation, at some point, of the debts of public utilities will be only some of the factors at play.