ECONOMY

ND’s difficult agenda

The conservative New Democracy party has every right to celebrate its triumph in the Greek general elections. However, the economic challenges ahead are so great that it may fall victim to its own success if it fails to lay out a bold, comprehensive economic program early on and stick to it in order to reap the benefits in the medium term. Undoubtedly, the Greek economy made considerable progress in the last 10 years or so, culminating in its admission into the Economic and Monetary Union (EMU) in 2001. Nevertheless, the socialist PASOK party made a serious mistake in the aftermath of its close victory over the New Democracy party in the 2000 elections. It failed to understand the importance of taking advantage of its fresh mandate and embarking on a series of wide-ranging structural economic reforms that needed some time to bear fruit and carried heavy political cost, at least in the short run. The Socialist government has been proud of Greece’s economic track record, with GDP growth averaging 3.9 percent between 1997 and 2003. It has not, however, managed to convince critics and others who, on the one hand, charge that the dividend of growth has not been shared by many different economic sectors and social strata in general. On the other hand, they question the sustainability of the high GDP growth rates in the future. Moreover, the situation has been clouded by concerns that the budget deficit has greatly widened, to the point of threatening the country’s future economic growth. Interestingly enough, these concerns have been compounded by statements made by senior conservative parliamentary deputies, to the effect that New Democracy will seek to go over the 2003 budget figures in cooperation with Eurostat in order to ensure that they better reflect the reality of the fiscal situation. Something analogous was done in Portugal when the conservatives won the last general elections. They took restrictive fiscal measures which contributed to the economic slowdown and the country’s deepest economic recession since World War II, according to economists. Taking notice of this comparison, senior conservative figures have lately pointed out that their Portuguese counterparts made a mistake in raising taxes to bring the budget deficit below the 3.0 percent of GDP threshold and do not intend to repeat that. Instead, they plan to reduce expenditure by doing away with waste. Serious fiscal concerns Undoubtedly, concerns about the public finances are well founded given the sheer level of expenditure associated with last year’s economic and social package, some generous pre-election campaign promises, including sizeable pension rises to farmers, additional spending associated with compensation to farmers and others adversely affected by bad weather conditions and the expected spending overruns linked to the Olympic Games. This has prompted the Finance Ministry’s public debt management agency to borrow about 7.5 billion euros in the second quarter, 2 billion more than initially envisaged. Fully aware of this, senior conservative officials do not even rule out the possibility that the 2003 general government budget deficit exceeded the 2.0 percent of GDP mark and may have even reached the 3.0 percent threshold, exerting upward pressure on Greece’s already high public debt-to-GDP ratio, estimated at around 102 percent in 2003. This unpleasant development, along with the fiscal relaxation evident in the first quarter of 2004, has had many analysts worried that the deterioration in fiscal balances witnessed in the last two years will continue in 2004. This is more so as the new government will have to devote more energy, time and money in the next few months to preparing successful Olympic Games, meaning it may choose to tackle the thorny problems in the fall. Although nobody can dispute the need for Greece to pass the test of the Olympic Games, it would be a big mistake if the new government chose to wait until fall to set out and implement its strategy on the economic front. Given the conservatives’ big margin over the Socialists in yesterday’s polls, the Parliament will be able to elect a new president of the Republic without early general elections being called in the spring of 2004. This means the new government does not have to pay attention to the political cycle before setting its priorities on the economic front. Even though it is possible that euro interest rates head north in early 2005, increasing the burden of servicing Greece’s huge public debt on the budget, there is reason to believe that the benefits from the expected recovery of the eurozone on Greek exports and tourism will far outpace the costs of the higher interest bill. If these predictions are confirmed, then the new Greek government will face no external constraints on implementing the necessary but unpopular structural economic reforms which will make the country less dependent on EU structural funds to sustain its high GDP growth rates in the future and raise the standard of living of its citizens to the EU average. Greece will therefore have no excuse for not implementing a bold economic program which places more emphasis on structural economic reforms and less on pleasant handouts or other income-enhancing measures decoupled from productivity gains. Input, such as labor, and output, such as electricity and transportation, market liberalization, the real privatization of some state-owned enterprises, the opening-up of the so called «closed professions» to competition, reducing the marginal income tax rates, simplifying the tax code and promoting enterpreneurship are among the most important. Of course, overhauling the country’s ailing social security system should be a top priority in pro-growth economic agenda but senior conservative deputies have already signaled their intention not to touch this hot potato in the next four years. The New Democracy party should be very pleased by the outcome of the general elections. It should not forget, though, that the success of the new government on the economic front depends a lot on its ability to come up with a comprehensive economic agenda, loaded with unpopular structural economic reforms. If it fails to pass this test, it will find out that defeat will be three or four years down the road. As everybody knows, time passes fast.