The challenge: Lowering the deficit while avoiding harsh austerity measures

Developments on two fronts this week will have a profound impact on the government’s economic policy this year, as it finds itself in a fine balancing act between the European Union’s demand that it fix its public finances and the need to maintain peace with the labor force. The week’s two major events are, first, the announcement, by week’s end, of the government’s wages policy by Economy and Finance Minister Giorgos Alogoskoufis and, second, the European Commission’s proposal, due to be unveiled today, placing Greece under supervision for excessive budget deficits, according to Article 104, Paragraph 9 of the Maastricht Treaty. The Commission is expected to conclude that Greece will not be able to lower the budget deficit to below 3 percent of its GDP this year, as it promised. The proposal is expected to be approved by the European Council of Finance Ministers (Ecofin) on February 17, with Greece being given until end-2006 to bring the deficit down to levels acceptable for eurozone members. This two-year period, instead of the one year that Greece had actually feared, provides the government with a chance to combine fiscal adjustment with relatively mild policies that will not give rise to protests. Thus, even though placing Greece under Article 104 Paragraph 9, instead of paragraphs 7 (private notification of excessive deficit) and 8 (public warning), is harsher treatment, combining the measure with the two-year adjustment period gives the government plenty of leeway to avoid austerity measures that would be potentially explosive. Of course, the pay rises in civil servants’ wages and pensions that Alogoskoufis will announce will be disappointing compared to the government’s promises when it gained power last March. The rises will be half as much as what the preceding Socialist government awarded in early 2004. However, unions are aware of the economic difficulties and, in any case, the pay rises for civil servants will outpace inflation and will be in line with those in the private sector (3.3 percent), which have the unions’ blessing.

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