ECONOMY

IMF urges pension system and labor market reform

The International Monetary Fund (IMF) has called for a new reform of Greece’s social insurance system and recommended relaxation of the country’s strict labor market regulations and a reduction in hirings for the public sector. In a report handed to Economy and Finance Minister Giorgos Alogoskoufis by a visiting team of experts a few days ago and released yesterday, the IMF casts doubt on the ability of Greece’s social insurance funds to meet their obligations in terms of healthcare and pension costs to the insured. «On current projections, these costs will rise significantly in Greece after 2010, more so than in any other EU country,» it said. «The social insurance reform of 2002, even though welcome and useful in several points, did not tackle the fundamental, long-term imbalances of the system,» it added. The report also recommends public spending cuts, including defense expenditures, and a restriction of public subsidies. Further, it calls for vigilance regarding credit expansion, as an excessive increase in the financing of the private sector may cause problems in the banking sector. During their routine annual visit to Greece last week, IMF representatives met with the boards of the Federation of Greek Industries (SEV) and the General Confederation of Greek Labor (GSEE), the umbrella organization for all employees except civil servants. Sources said the IMF team was particularly insistent that SEV raise the issue of social insurance reform with the government as a matter of urgency. It is also thought to have said that Greece has the most inflexible labor market in the eurozone. At a meeting with Alogoskoufis last week, representatives of the Federation of Industries of Northern Greece (SVVE) did raise the issues of reforming the country’s social insurance system and labor market, but met with apparent reluctance from the government to open the issues, at least at present. In response to questions, the SVVE representatives said that if the government does not address the issues, they will. Regarding the content of the IMF report, Alogoskoufis said yesterday the government is not sweeping the problems under the carpet but trying to deal with them. Referring to other matters, Alogoskoufis confirmed that the Greek government has committed itself at the European Union’s economy and finance ministers’ council (Ecofin) to adopting all measures necessary for reducing the country’s public deficit and debt. He said the commitment concerned a reduction in the projected fiscal deficit from 5.3 percent of gross domestic product (GDP) this year to below the prescribed 3 percent limit under the EU’s Growth and Stability Pact. «We are committed to a deficit of 2.8 percent of GDP in 2005,» he said. At the Ecofin meeting in Scheveningen, the Netherlands, on Friday and Saturday, members expressed concern over Greece’s growing deficit and debt, and, with reference to Greece, expressed regret that the country’s fiscal statistics were revised after the election of the New Democracy party government in March, emphasizing that the collection and reporting method of budget data must not vary according to political and electoral cycles. Responding yesterday, Alogoskoufis said Greece is in fact receiving congratulations from the European Commission, Eurostat and international organizations for the credibility of the statistical data it has been issuing in recent months. He also said that Greece is seeking to have the «special conditions,» represented by the high spending requirements for the Olympic Games this year, be taken into account in consideration of its public spending overruns. The initial response by the Commission, however, does not seem to have been favorable. Brussels has given Athens a deadline of up to November 5 to announce corrective measures for reining in the deficit. The government has said the absence of Olympic-related spending in 2005 will be a major facilitating factor in reining in the budget deficit. But the IMF warned that precisely the absence of Olympic-related expenses will slow economic growth next year, acting as a short-term shock, especially in the construction sector. «While growth should remain strong this year, the outlook for coming years is much less certain. Underlying fundamentals suggest the economy may slow appreciably in 2005,» the IMF report said. Ratings outlook revised In an unfavorable development for Greek economic policy planners, ratings agency Standard & Poor’s yesterday revised Greece’s sovereign ratings outlook to negative from stable, citing a lack of progress in lowering public debt as a reason. S&P also affirmed its «A-plus» long-term and «A-1» short-term sovereign credit ratings on Greece. General government debt is forecast to reach 112 percent of GDP by the end of 2004, against 109 percent in 2003, S&P said, noting that a sustained decline in the public debt ratio would help trigger a move back to stable in the ratings outlook. S&P downgraded Italy’s credit rating in July. A similar downgrade for Greece could lead to an increase in the interest rates at which the government borrows. Timetable for tax breaks Alogoskoufis said the government’s draft bill on taxation, to be tabled next month, will include a timetable for income tax breaks to be implemented gradually over the next three years. He said a similar timetable will be introduced for tax reductions on companies, from 35 percent to 25 percent, as well as the self-employed.