ECONOMY

Crucial EU budget deal

While most people in Greece are preoccupied with the resignation of the president of the Public Power Corporation (PPC), Yiannis Paleokrassas, British Prime Minister Tony Blair appears to be ready to table today a draft EU budget framework for 2007-2013 which may have a greater impact on the future course of the Greek economy in the years to come. Given Greece’s dependence on EU funds to streamline its public finances and finance growth, a possible EU budget deal, netting the country a sizable amount of money, will definitely strengthen the argument of sustainable high growth rates of gross domestic product in the foreseeable future. Interestingly enough even the unfortunate developments at PPC help to demonstrate the importance of a good EU budget deal for Greece. The possibility of an EU budget deal at the Brussels summit on December 16-17 has failed to capture the attention of the general public. This is so even though failure to reach an agreement is certain to translate into the loss of tens of millions of euros in EU structural programs since more Greek regions will not qualify for the funds starting next year as their per capita income will surpass the minimum level required by EU authorities. It is noted that the bulk has been going to regions with per capita GDP of 75 percent or less than the EU average. Since most regions of the 10 new EU members have per capita GDP of less than 75 percent, this will likely signal the end of aid to many recipient regions in the EU-15 countries, including Greece. It is noted that only Cyprus had higher per capita income than Greece when it joined the EU in 2004. Slovenia also had a higher per capita income when measured in purchasing power units. Greece and Portugal will be hurt the most. According to a EU Commission report, both countries have been the main beneficiaries of EU structural and cohesion funds during the 2000-2006 period. Inflows to each country amounted to an estimated 2.5 percent of GDP, followed by Spain at 1.0 percent of GDP and Ireland at 0.5 percent of GDP. Main beneficiaries Portugal and Greece have also been the main recipients of EU budget funds, which include the Common Agricultural Policy (CAP) subsidies, regional aid and more. Its is estimated that Portugal and Greece receive funds equivalent to more than 3.0 percent of their gross national income from the EU budget, compared to more than 2.0 percent for Ireland and Spain. It is interesting, however, that the bigger portion of EU aid going to Greece and Ireland takes the form of CAP subsidies. The opposite happens in Portugal and Spain, where the biggest chunk of EU money comes in the form of regional aid, that is, structural programs.  All these figures demonstrate the importance of getting a good deal on the EU budget for Greece at the Brussels summit in mid-December. Strange as it may sound, the Paleokrassas case enhances this argument. If the former chairman of PPC can provide concrete evidence to support his claims of entwined bipartisan interests, implicating even top ministry officials in the conservative administration, he will have demonstrated the high degree of corruption at Greece’s largest corporation by assets. In that case, the blow to the current administration and the confidence of foreign investors in the Greek economy may be severe, making EU inflows more important in replacing fleeing private capital. If, on the other hand, Paleokrassas cannot support his claims, confidence will not be undermined so much but will have raised doubts about the ability of the government to pick the right people to run large, state-controlled enterprises. In both cases, this cuts into the heart of the structural reforms needed to be implemented at state-controlled enterprises to make them more efficient and less of a burden on the budget and the economy in general. This is very important since we all know that structural reforms at utilities and other organizations are necessary to ensure sustainable growth at the macroeconomic level, keep a permanent rise in living standards and make the economy less dependent on EU aid. To the extent the reforms are not pushed forward, either because of lack of leadership at the corporate level or the lack of political will at cabinet level, Greece has no option but to rely on outside help to solve its problems because it will not be able to generate self-sustainable growth. Of course, the ideal would be to have the luxury of handsome EU inflows during the 2007-2013 period and use them to soften the impact of some painful economic reforms in the public sector, the social security system and elsewhere. The recent legislation, introducing important reforms for new hirings at state-controlled organizations and utilities (DEKOs), shows the government has the will to push for reforms. At the same time though, the developments at PPC show the appointment of politicians and others to high-level positions with political but not managerial credentials does little to enhance competitiveness. Still, all those involved should learn their lesson and pick competent managers from the market to run big corporations, even if it means paying them hefty bonuses, and focus more on what is more important for the economy, such as the potential for a good EU budget deal for Greece.