Privatizations must spearhead front-loaded policy approach
The audit of the public sector accounts seems to produce higher budget deficits as a percentage of GDP than initially estimated, this year’s GDP growth rate is being revised downward significantly, inflation remains stubbornly higher than the EU average and the government, preoccupied with foreign policy issues and the Olympics, appears to be moving more slowly than initially expected in filling key posts in the huge public sector. As if all this was not enough, the Greek Cypriots rejected the Annan plan on Saturday, raising concerns about its impact on Greek-Turkish relations. Whether the state of the economy is the byproduct of past misguided economic policies or an unfortunate turn of events is irrelevant. The newly elected government has no option but to act decisively and fast to ensure the Greek economy is back on the right track or face the dire consequences down the road. Privatizations may be the easiest way out. Realizing that the economy and more specifically, the broader public sector, were in a limbo months before the elections, the business community and the markets were eager to see the new government taking bold initiatives on the economic front to stem the tide. Although most businessmen and market participants recognized the need for the new administration to cope with urgent foreign policy issues early on, they still thought this should not have acted as a deterrent in adopting a front-loaded economic policy approach. Moreover, knowing how the Greek public sector works, they thought the government should move fast to fill key posts in ministries, banks and other state-controlled entities. This did not happen. Instead, the government took its time over replacing high-level executives in the broader public sector, something regarded as having an adverse impact on the functioning of these organizations as uncertainty reigned over who was staying and who was going. Unlike other EU (European Union) countries, the Greek public sector bureaucracy is not accustomed to running things alone and tends to fall behind when it lacks leadership. This view is also shared by departing executives appointed by the previous Socialist government, who admit in private conversations that they were more concerned about their own future rather than taking initiatives in the organizations they headed given the prevailing uncertainty. Wrong moves Businessmen and market participants, some admittedly belonging to the conservative camp, also point out that the government made a big mistake by vowing to slash the compensation received by high-level executives in the public sector early on, perhaps to score some political points. According to them, this discouraged even more people from the private sector from assuming top-ranking posts in the public sector known for its long history of unionism, partisan politics and low productivity. They say this limited the number of options for the newly elected government, forcing it to recruit numerous university professors with no market experience, retirees from the business community and politicians and just a few experienced executives from the private sector to fill important posts. They also stress the new government shot itself in the foot by announcing the abolition of the financial crimes squad (SDOE) early on without having alternative scheme to replace it. This approach undermined SDOE’s credibility and effectiveness, hurting in turn tax revenues as many businesses turned increasingly scornful of the highly unpopular squad. This, coupled with the traditional laxness characterizing the Greek tax authorities during any pre-election period and the spending overruns associated with the preparations for the Olympic Games and increased social expenditure, have further aggravated public finances, forcing Finance Minister George Alogoskoufis to admit that it will not be easy to keep this year’s budget deficit below the 3.0 percent of GDP mark. At the same time, it lowered expectations about this year’s GDP growth to 3.7 percent. Last year’s budget deficit was revised upward to 2.95 percent of GDP by the new government. Undoubtedly, the new government should tell the truth about the state of the economy and prepare the general public for sacrifices, if deemed necessary for the good of living standards in the medium term. After all, it will most likely be judged in three or four years’ time. What it should not have done, though, is to keep delaying taking the plunge by not announcing a comprehensive set of economic measures to deal with the situation. Analysts say that the least painful way to tackle the fiscal problem, attract foreign direct investments and foreign portfolio flows is to sell significant equity stakes in state-controlled companies and hand over the management to strategic investors. But this is not applicable in many cases either because of law or the low value the market places on some state assets. Of course, the fact that two bond issues exchangeable into shares of OTE, the telecommunications incumbent, and Hellenic Petroleum expire this summer offers such an opportunity. However, most would like to see the State sell its stake in OTE after the organization is being restructured and another exchangeable bond issue expires in the summer of 2005. Selling equity stakes in high-flying gaming operator OPAP, the Postal Savings Bank and other enterprises in the portfolio of DEKA, the infamous investment arm of the Finance Ministry, can also contribute to the relief of the budget and help attract foreign funds. There is no doubt that the government is facing a number of constraints in conducting economic policy, most of them inherited. There is also no doubt that it has made things more difficult for itself by making the wrong moves and wrong announcements. Other things can wait, the economy cannot. That’s why it should listen to the business community favoring a front-loaded economic approach full of bold policy initiatives. Given the circumstances, the privatization of state-controlled entities should be a good starting point.
