Reforms begin, at last
In a sign of increasing awareness of the downbeat sentiment prevailing in the financial markets and the real economy in general, the Greek government has apparently decided to push ahead with some structural economic reforms to turn the tide and demonstrate its will to get ahead of the curve. This represents a long overdue change in economic policy which may entail considerable political and social costs in the short run but may result in significant benefits in the medium- to long-term. However, this does not mean the government is right on all issues. On the contrary, the lack of specialized advice on certain issues may lead to the adoption of solutions that actually maximize the political cost. We have argued before that a pro-active economic policy based on rules is generally more effective in attaining certain economic targets than a reactive policy based on discretion. Of course, pro-active economic policies carry greater risks, especially political ones, because they will have to be formulated on the basis of projections of key macroeconomic and microeconomic variables. On the other hand, reactive policies entail fewer political costs but signal to the markets that the government follows rather than leads events. The fiscal measures, meaning the increase in the value-added tax (VAT) and excise taxes on tobacco and liquor, taken by the government a couple of months ago to help close the huge budget gap, could be easily seen as a reactive policy tool. After all, the whopping size of the 2004 budget deficit and the shaky foundations of the 2005 budget had become clear since the last quarter of 2004, but no measures were taken at the time. The approach to economic policy taken by the conservative government was a surprise to those who happened to know the pre-election views of Prime Minister Costas Karamanlis on the issue. It was a reminder that the conservative New Democracy party won the general election in March 2004, returning to power after some 11 years in opposition. A number of familiar excuses have been cited to justify this approach, starting with the negotiations to find a commonly acceptable solution on Cyprus last spring, the elections for the European Parliament in June 2004, and most importantly, the organization of the 2004 Summer Olympics. Interestingly enough, the rising pessimism engulfing Greek market participants, company executives and employees has not been justified by the economic growth numbers, which remained buoyant through the first quarter of 2005 despite a gloomier economic outlook in the eurozone. Of course, it is not the first time that weaker readings of business and economic sentiment have failed to translate into much weaker Greek GDP growth numbers. Nevertheless, the lack of a clear catalyst this time around means it is more likely that these readings will translate into disappointing economic growth and employment figures. Therefore, it is not a surprise that talk of Greece being a «new Portugal,» beset by fiscal woes and weak economic growth prospects, has started making the rounds abroad. The government’s willingness to deal with some chronic structural economic problems undoubtedly sends the right signal to the markets, meaning the government is willing to tackle them and raise the country’s potential GDP growth rate. But sparing Greece from becoming a «new Portugal» may be easier said than done. For one thing, Greece has not taken full advantage of the huge influx of EU money in the last 10 years or so to pave the way for self-sustained economic growth, and is facing the prospect of a significant reduction in intake during 2007-2013 due to the EU’s enlargement. A step forward So, the agreement between the management and the unions at OTE telecoms on a generous voluntary retirement program for up to 6,000 current employees in exchange for the abolition of the «permanent status» for new hirings can certainly be considered a breakthrough. It is interesting that the agreement has been more criticized for the generous bonuses given to those wishing to depart under the voluntary scheme rather than for its abolition of the civil servants’ status for new employees, which was attacked by the Confederation of Greek Labor Unions (GSEE). This shows that society is more concerned about who picks up the bill than the status of OTE’s new employees, long considered a sacred cow in Greece. In this regard, although the cost of the agreement is higher than it should be, it breaks a taboo and therefore constitutes a big step forward in our view, paving the way for similar deals in the future in other state-controlled companies. Of course, it would have been a much better deal for everybody if OTE assumed the full cost instead of the 80 percent share announced with the state taking up the rest of the bill, handing over OTE shares amounting to 4.0 percent of its share capital to the pension fund TAP-OTE. But the government’s announced legislative initiative to tackle the banking sector’s pension issue in view of the adoption of international financial reporting standards (IFRS), although still vague, lacks the same appeal for a single reason. It accepts the responsibility of partly funding the deficits of auxiliary pension funds of all banks willing to join in the proposed new common auxiliary pension fund, even though the state may have an insignificant equity stake in some of them. Although the proposed pension scheme is a watered-down version of an earlier scheme and attempts to establish some common rules for all pension funds in the banking sector, it looks as if it still favors bank shareholders over taxpayers. Of course, the jury is still out on that since the relevant legislation has yet to be tabled in Parliament. All in all, the government has finally started making the right noises by making structural reforms a priority in setting economic policy. However, structural economic policies are accepted more easily when based on a well-thought-out plan that distributes the costs of adjustment fairly to all parties involved. Undoubtedly, to produce this plan the government will have to rely on experts’ advice, capable of coming up with meaningful proposals, serving the interests of the society. Is this the case here? We will know soon.