The conservative New Democracy party triumphed in the Greek general elections in March by promising to implement a program of economic reforms aimed at keeping the economy growing at annual rates of 5 percent or better. It was undoubtedly a feasible and demanding task but may fall victim to important events that have taken place and the Greek political cycle. Under these circumstances, the only way out for the conservatives may be to hold and win new general elections next spring so that a bold, comprehensive, front-loaded economic plan can be put to work to ensure the attainment of ambitious goals for growth in the medium term. In unveiling the broad guidelines of the government’s economic policy on the weekend at the Thessaloniki International Fair, Prime Minister Costas Karamanlis made a commitment to honoring the pre-election pledges on the three-year horizon, citing the country’s huge fiscal imbalances and stating that the government favored a policy of mild economic adjustment rather than the much more unpopular cold-turkey approach. Yet, in doing so, the prime minister, a politically acute person, must have been fully aware that history is not on his side. No one can explain this better than members of the previous, Socialist administration who realized that a continuous streak of 3.5 plus annual growth rates did little to correct the important mistake it made in the aftermath of its narrow victory over the conservatives in the 2000 elections; that is, its failure to go for structural economic reforms at great political cost early in its four-year term. Although one cannot underestimate the role of voter fatigue and corruption in the Socialists’ defeat in March, the impression of inaction on the economic front among market participants, industrialists and others was prevalent. Coming back to the present, one senses some kind of disillusionment among some market people and vindication among others with regard to the government’s economic plan. Even those who hoped the government had opted for a much bolder economic approach early in its current tenure and appeared to understand the importance of political events, namely, the elections for the European Parliament in June, and socioeconomic events, meaning the Olympics, in postponing the announcement of main economic initiatives for September, seem to be skeptical about the outcome. Skepticism This skepticism is compounded by the fact that the budget deficit is projected to surpass the 5.0 percent of GDP mark this year and the public debt-to-GDP ratio is expected to climb to 112 percent, making a downgrade of the country’s creditworthiness by international credit agencies such as S&P very likely by year-end. Moreover, this raises the reliability issue of Greek national accounts data, which may haunt the current and future governments in their dealings with Eurostat and the European Commission in the years to come without being clear whether this massive understatement of the budget deficit and the public debt is the result of mis-reporting or simply stems from a change in accounting methodology. It is clear that the Greek conservatives have played the same fiscal card their Portuguese counterparts played a few years ago but that they have not fallen into the same trap – raising unpopular taxes to close the budget gap and bring growth to a standstill. The Greek government appears to have benefited politically, at least to this point, from its handling of the fiscal issue because it has managed to place the blame for reported widening of the deficit squarely on the Socialists. Further, it has capitalized on that by using the sharp deterioration in public finances to shield itself from criticism with regard to the measured increases in salaries and pensions it plans to pay out to civil servants in 2005. In addition, it can still benefit by showing clear signs of improvement in public finances next year, bringing the deficit closer to 3.0 percent of GDP, given the lack of public investment budget outlays related to the Olympic Games, the potential for cuts in defense spending and the likelihood of budget expenditures growing more slowly than the nominal GDP. Gradualist approach All in all, the conservatives appear to have a political advantage, although many market participants appear lukewarm, although patient, toward the gradual, go-slow approach by the government in economic affairs and its apparent unwillingness to touch on other hot potatoes such as social security and labor market reforms. If past words of senior conservatives, including the premier, on the importance of «bringing things upside down» in the economy in the first six months of a new tenure are any indication of what we have to expect in the future, then no reasonable person should rule out the possibility of Greece’s heading into general elections next spring when the time comes for Parliament to elect a new president of the republic. Undoubtedly, the Socialists do not favor holding new elections and will do everything to avoid it. But this may not be the case with the conservatives, provided some conditions are in place. First, a protracted pre-election period will have to be avoided because it will hurt the economy and may backfire. Second, a way has to be found so that no one takes clear responsibility for leading the country into fresh elections so early. Thirdly and most importantly, the government must feel confident it can win the elections to want them. Still, winning a fresh four-year mandate and knowing economic reality firsthand with all of its people in place would make it much easier to implement a much bolder economic plan to ensure the sustainability of GDP growth well after the inflow of EU structural funds falls off significantly. The government has shown a clear preference toward adopting a gradual approach to dealing with the country’s economic problems. Although sensible, this approach is likely to disappoint the markets before it disappoints the electorate. To this extent, it is not unlikely that the government will discover the economic and political benefits of implementing a much bolder economic plan next year.