Wind of reform blowing at last
Just as the price of oil is heading north in world markets and the euro/dollar exchange rate shows signs of stabilization in the 1.19-1.25 zone, the wind of reform has started blowing in the Greek economy. Long accustomed to government inertia, market participants continue to show signs of disbelief, preferring to stay on the sidelines until the dust settles. Still, despite all the mistakes and misguided decisions, the government appears determined to push forward with economic reforms even without the much-sought consensus of its first 14 months in power. This is a rather welcome development and is bound to be appreciated sooner rather than later by markets. «It looks as if something finally moves in the economy. Don’t you think?» asked a high-level executive at one of Greece’s largest industrial firms, a sizeable portion of whose consolidated turnover comes from abroad. But like others, he prefers to stay put and watch how things unfold in the next couple of months before starting to look at the long-term impact of government decisions regarding the overall economy and the sector his company is in. But it is not just executives from the so-called productive side of the economy who are cautiously optimistic. «I think the government is serious about reforming the Greek economy and some foreigners appear to have grasped that better than us,» says one of the country’s well known brokers. «They continue to load up Greek shares and at some point the stock market will take off and we will be (sidelined) again.» Cautious optimism appears to be reigning in as the government seeks to get the green light in Parliament for OTE telecom’s voluntary retirement program, which opens the way for doing away with the permanent employment status for new hires and the bill to help banks cope with their unfunded pension liabilities under IFRS. The OTE experiment is widely regarded as a test case for other state controlled enterprises, pitting top Socialist unionists against their own political party. At the same time, polls show the majority of the population favoring the removal of the permanent status for employees in entities belonging to the wider public sector, providing the government with a much-needed ammunition to counter critics in other political parties and trade unionists. Of course, the situation is somewhat different in the banking sector. Banks differ with each other in their assessment of the bill while existing disagreements among trade unionists have yet to surface but are likely to do so after the relevant legislation is voted on later this week. While critics charge the bill adds to the deficit of the country’s main pension IKA fund in the long run, it is clear that it is less generous to affected banks than it was in its initial version on their supplementary pension funds. Even the charge, advanced by a senior conservative deputy and supported by the socialist PASOK party, that the main IKA fund is burdened a few billion euro in unfunded pension liabilities in the long-run is debatable given the pay-as-you-go nature of the first pillar. Barring the higher-than-IKA levels of main pension pledged to bank employees hired before 1993, the other potential source of deficit appears to be the same as in private sector’s firms insuring their employees with IKA’s main pension fund. In the latter case, the government guarantees pensions. Even the higher pensions of bank employees hired before 1993 have been supported up to now with contributions higher than IKA’s, so there is an issue but is not one-dimensional. Interestingly enough, the government has opened another front by pushing for legislation to make it mandatory that shops stay open longer hours in a bid to create more jobs. The three-pronged approach of the administration has enraged critics, namely opposition parties, trade unionists, bank employees losing benefits and small shop owners, but appears to be getting a lot of support from the general public in polls. To proponents of economic reforms, this is a good omen, showing the majority of the people sense the need for change to ensure better living standards in the long run. Given the fact that another conservative government fell in the early 1990s by trying to introduce similar unpopular reforms, one would argue that their acceptance this time around perhaps demonstrates a better understanding of the underlying situation. But this may not be the case as the majority of the people do not seem to understand the complex issues. Whatever the case, people favoring change in the business or the marketplace sense a window of opportunity, arguing the government should not let it go. This is more so since Greece faces the grim prospect of getting a much smaller piece of the EU pie during the 2007-2013 period than hoped for before the last EU summit. Without a monetary policy tool, such as its own currency, to address economic problems and having at least two years of restrictive fiscal policy ahead, Greece, like other Eurozone countries, has no choice but to embark on a program of structural reforms. Since the majority of the public wants change, it is rather fortunate for the government given the fact that it has to overcome some unforeseen hurdles, namely the record oil prices. The markets often make mistakes when they discount future events but usually correct them quickly. The Greek government’s strongest ally so far has been the community of foreign institutional investors, which has ignored forecasts for poor GDP growth after the 2004 Olympics, high inflation and a fiscal mess leading to higher levels of public debt explosion, showing an insatiable demand for Greek debt paper and stocks. One may say excess liquidity partly explains this appetite. Whatever the reason, they may end up being the only ones vindicated by the government’s decision to forge ahead with reforms after 14 months in office. The Greek people who appear to support the drive may have to wait though. Unfortunately, the benefits of economic reforms show up many years later as it was the case in the US and Britain in the 1980s.