Public sector remains the government’s strongest tool for propping up demand

The high growth rates of the Greek economy in the last two years are mainly due to domestic demand, fueled by card credit and consumer loans, infrastructure projects which were accelerated in preparation for the Olympics and generally expansive public policies. The uncovering of the true status of public finances considerably limits the options of the current government, which must now seek alternative means to support economic development. It seems that internal demand is still seen as a strong instrument in achieving this goal, and it is for this reason that the government does not seem averse to high wage increases, based upon industry-wide agreements. At the same time, as it is certain that new public projects will be fewer in comparison with those in years past, the government is promoting legal reforms which will allow the private sector to participate in financing their construction. Yet the main source of optimism for the government is international developments. Forecasts, according to which European and global economies’ rates of growth are accelerating, also allow for projections of stronger demand for Greek goods and services. As long as brisk domestic demand is accompanied by the positive effects of developments in the global economy, the expansion of the Greek gross domestic product might very well reach the government’s goal, which is set at a little lower than 4 percent. Of course, even this bright scenario has plenty of gray areas. What if, for example, competitiveness falls (not least because of inflation), leading to a slump in external demand? Also, will the current public administrative mechanism be able to absorb European Union investment subsidies, which represent an important support factor for economic and financial activity? The adjustment of public finances, especially after a period of irrational and uncontrolled public expenditure, is a relatively easy choice, and guides governmental policy. Maintaining high rates of growth without dishing out more public funds is the hard part. It is also not possible at this time to bolster economic activity by lessening the tax burden on the economy. The budget cannot withstand an abrupt decline in tax revenues. If fiscal policy is excluded or loses its punch within the framework of governmental policy, options for promoting growth become far more limited. All that is left are institutional interventions, such as eliminating red tape, privatization and initiatives for opening up markets. As government officials have declared, the latter will be limited. Privatization then becomes key to the implementation of next year’s budget. The true challenge indeed concerns the broader state sector.