Concern over promises points to expansionary fiscal policies

Less than two weeks away from the national elections, Greece’s two major political parties are trying to woo voters by being long on generalities but short on specifics when it comes to the economy. Although they are ready to highlight tax cuts, wage increases or higher spending on health and education, they usually neglect to refer explicitly to the other side of the fiscal equation, that is the sources of funds. This may be good politics but it is not good economics. These tactics, along with the known constitutional requirements, have made more and more businessmen and other market people rightly concerned about the impact the applied and proposed expansionary fiscal and incomes policies will have on the economy and its competitiveness. Undoubtedly, history teaches that a pre-election policy of being short on specifics, except for those measures approved by everybody in the electorate, has been more fit to promote the interests of a political party than a policy long on specifics asking for economic sacrifices. The backlash which accompanied the revelation that the economic program of the conservative New Democracy party made a reference to a return to an unpopular past law in order to deal with the admittedly serious social security problem proves the above point. With the Greek economy growing at an estimated 4.7 percent next year and an expected 4.5 percent to 5.2 percent this year, high-level officials in both major political parties contend the economy can grow out of its problems with just a little fine-tuning. This perception may be reinforced by the high growth rate of 4.7 percent in 2003 being able to contain the budget deficit-to-GDP ratio closer to the revised government goal of 1.4 percent than many independent analysts thought a month or so ago despite significant spending overruns. Without taking into account new pre-election promises, the estimated cost of announced policy measures, Simitis’s convergence plan (called Harta), the expenditures related to the bad weather and the direct cost of the national elections in March and the elections for the European Parliament in June exceeds the amount of 1 billion euros by a good margin and may go up to 1.5 billion if all pre-election promises are honored this year, according to a well-known analyst at a local bank who wishes to remain anonymous. This may turn out to be the case, especially if the winner is elected by a small margin, because there is the prospect of having a repeat in the spring of 2005, when the Parliament is due to elect a new President of the Republic. Signs of slowdown In reality, things may get even worse because a good deal of the Greek private sector depends on the public sector for payments, contracts and so on, and the latter is known to operate in low gear during pre-election periods. There are already signs that many private sector companies have slowed down because the public sector does not pay on time, making the existing liquidity squeeze in the commercial sector felt even more. This tight relationship between the greater public and a good chunk of the private sector is deeply rooted in history and is well known, but no Greek government has been able to rationalize it, perhaps because it is used to serve their interests. Budget pressure Nevertheless, the combination of excess expenditures and tax collection inefficiencies and delays is going to put more pressure on the budget deficit, forcing the new government to borrow more heavily than initially planned. The Greek State plans to borrow some 30 billion euros this year versus about 29 billion in 2003. This, of course, is not the best course of action for a country which is one of the most indebted countries in the European Union (EU), with its public debt-to-GDP ratio estimated at 101.7 percent in 2003. It will certainly put at risk the goal of bringing the debt ratio below the 100 percent mark this year, since one should expect the primary budget surplus, a key to substantial public debt reduction, to decline as a percentage of GDP for yet another year. Savings possible? Of course, one may argue that a lot of money can be saved by clamping down on corruption and waste in the public sector, slashing military expenditures as relations with Turkey are being normalized and as a possibly reunited Cyprus enters the EU. Moreover, the bleeding of the Olympic Games will come to an end, sparing the budget of tens of billions of euros. All these measures may materialize after all. However, the magnitude of the savings is unknown, as is their impact, especially of expenditures relating to Olympic venues on economic growth. The latter is the pillar on which the rosy scenario of «growing out of the problems» depends and everything may crumble down if it does not hold. Many bankers, analysts and others who discuss different aspects of the above situation appear concerned because they think the new government may not have the political degrees of freedom needed to cure the economic imbalances given that new general elections may be held within a year. According to them, the new administration should take advantage of its fresh mandate and existing economic momentum to tackle structural problems, ensuring the medium- to long-term economic prosperity of the country. Although this is the right thing to do, political realities may force the new government to postpone making painful decisions, entailing a great deal of political cost, and opt instead for the easier route of expansionary policy sprinkled with some minor adjustments. This means, though, that the Greek economy will have to wait for at least another year to be served the medicine, and this may aggravate the existing economic imbalances partly hidden under the mattress of the EU country with the highest GDP growth rate.