Low marks across the board

Greece has done little to improve its finances, reduce unemployment or tackle problems, such as a rigid labor market and an indebted social security system, the European Commission says. In the most important of a spate of reports released yesterday, the «Second Implementation Report on the 2003-2005 Broad Economic Policy Guidelines,» Greece gets pretty low marks for its economic performance. It is hardly the only EU member with problems, but it is the only one judged to have made «insufficient» progress, the lowest grade awarded, and which means that «no substantial measures in the right directions have been taken,» in mending its public finances. According to the report, a relatively good effort to implement policy changes has been made by Belgium, Denmark, Ireland, Netherlands, Finland and the United Kingdom among the old 15 EU members. The report acknowledges that the 10 newcomers, all of whom joined on May 1, 2004, have not had sufficient time to tackle reforms but nonetheless singles out Cyprus and Slovakia as having made the most strides in the required direction. Budget and debt Regarding Greece’s efforts to straighten out public finances, the report is unequivocal: «After one-and-a-half years of implementation, Greece has in general made only limited progress in addressing the three policy challenges that were identified in the (Broad Economic Policy Guidelines). In particular, no progress has been made regarding the challenge on the long-term sustainability of public finances.» «Despite strong economic growth, no actions were taken by the government to reduce the debt ratio at a satisfactory pace and to correct the excessive deficit, in response to the (recommendations) adopted by the Council (of Finance Ministers) on July 4, 2004. In cyclically adjusted terms, Greece moved further away from a budgetary position of close to balance or in surplus,» the report says. Extra costs related to the organization of the Athens Olympics and the spending measures announced ahead of the March election have led to a significant increase in the deficit, which also further deteriorated from the lack of revenue. Initially forecast as equal to 1.2 percent of the country’s gross domestic product (GDP), the deficit has unofficially grown to 6 percent and may end up higher. The new conservative government’s decision to change the accounting methods for recording defense expenditure has also worsened the situation, although only temporarily. In the past decade, Greece could claim rising productivity at a pace better than the EU average, albeit from a low base. In the past couple of years, even this relative advantage has vanished. «Labor productivity growth slowed down in 2003 and in 2004 but is likely to pick up slightly in 2005. A series of measures aimed at increasing the incentive to work, as well as measures aimed at improving the qualification of the unemployed are being implemented with the financial support of government agencies. In particular, a legislation which was enacted in 2004 to replace the unemployment subsidies with employment subsidies provides incentives to work for women, young people and the elderly. Also legislation was enacted in 2004 to permit the state, local administrations and institutions of public law to employ certain categories of workers, namely, unemployed women, persons with more than three children, long-term unemployed, with fixed-term contracts. The Ministry of Employment and Social Protection promoted the direct connection of vocational training activities with employment while the Public Employment Services (OAED), which is the basic implementation body of the active employment policies, has been upgraded and reformed. However, there is yet no clear evidence as to the effectiveness of these measures. The youth unemployment ratio is still higher than the corresponding European average, while the gap between men and women is still significant in the unemployment rate,» says the report. Social security Greece also gets low marks in its efforts to reform social security, not a surprising development given that nothing has been done to improve the half-baked reforms that the previous Socialist government enacted in 2002, after concerted pressure from opposition parties and the unions forced it to back down on a far more ambitious reform unveiled in March 2001. The present government has tried to make some marginal changes but, so far, has declared that it will not raise issues, such as the retirement age or years of employment required to get a full pension, as other EU members have done. «The implementation of legislation enacted in 2002 lies at the heart of efforts to reform the pension system, with an emphasis on the introduction of new instruments that add credibility and flexibility to the system. In this legislation, however, the government has not sufficiently taken into account the current trends in public finances and especially the high level of government debt. As the budgetary costs from population aging are expected to significantly rise in the future, the sustainability of the Greek public finances will be at risk if no structural measures are taken,» says the report. «According to legislation recently enacted, provision has been made for the transfer of social security rights when moving from one fund to another and incentives have been provided for the prolongation of working life beyond the statutory limit of 35 years. Distinguishing auxiliary from primary pensions, through the creation of separate auxiliary funds and the consolidation of various funds, remains a major priority and specific steps have been taken in this direction. New measures were adopted in 2004 with the aim of amending various aspects of existing legislation, particularly as far as persons with disabilities, farmers, professionals and civil servants are concerned. Also, considerable effort is being made to combat the evasion of contribution, among others through the establishment of a special force which monitors healthcare payments made by social insurance institutions. There is yet no clear evidence as to the effectiveness of these new measures,» it adds. Business and markets The report acknowledges that Greece has made efforts to open up markets and create a business-friendly environment but notes insufficient efforts in the electricity sector and a declining rate of adopting EU legislation into Greek law. «New legislation to reduce bureaucratic and legal obstacles to setting up a new company has been prepared. Moreover, measures to increase the efficiency of the public administration have been taken. For example, interconnections between various points within the public administration have been created and new ‘one-stop shops’ for citizens have been set up. The government has launched a new tax reform aimed at both a reduction of corporate taxes and a simplification of the tax audit procedure. Finally Greece’s transposition rate of internal market directives has decreased from 96.9 per cent to 94.5 percent, and is still among the worst in the EU 15,» the report says. The report also notes insufficient steps in expanding part-time employment and introducing a more flexible wage bargaining regime. «The private sector is bound by two-year wage agreements negotiated at the national level, setting the minimum wage for general and sectoral agreements. The benchmark wage in the private sector is linked to the announced income policy in the public sector and to inflation prospects rather than to productivity differentials,» it says.