ECONOMY

Ballooning debt was a deliberate policy choice

By D.G. Papadocostopoulos – Kathimerini Greece’s public debt is a heavy heritage for the generations to come. It comes to 194.4 billion euros and requires about 30 billion euros each year to serve it; these are funds forcibly deprived from other policies. At the end of 2005, public debt was at 107.9 percent of gross domestic product, having amounted to just 22.9 percent of GDP 25 years earlier. For years, the debt’s rise was justified by a variety of arguments, based on the growth it would create. This actually proved to be a myth, as the 1980s, when the debt was created, did not deliver growth but instead big problems. Economic philosophy in Greece in the 1970s still included balanced budgets as a central target. Curiously, this was diametrically opposite to what was happening in the West, which was dominated by the Keynesian model. Greece began adopting that model in the early 1980s, when the West began abandoning it. New in office at the time, the socialist PASOK party introduced a broad range of policy changes. State resources from borrowing were channeled into consumption and the strengthening of domestic demand. Those in charge of economic policy believed that this would create a strong productive base, but the results were the opposite. Greek consumers did not choose local products but imported ones, resulting in the devaluation of the drachma in 1983 and 1985. As the leading figures of the time testify, Greece’s foreign currency reserves had dwindled to almost nothing. In 1980, Greece’s debt amounted to 22.9 percent of the GDP, while five years later it had already doubled, reaching 47.8 percent of GDP. In 1990, it came to 79.6 percent of GDP and its course was upward as the country was gradually entering a new period, that of revealing the gray aspects of the broader public domain which was burdened with heavy debts, but showed none of them. It was then again a New Democracy government with Ioannis Paleokrassas as finance minister who started including all the hidden debts in the real public debt and began issuing the financial redemption loans. The effect of that policy of undertaking hidden debts was the increase of public debt, for which the then government was not responsible; it was still blamed for swelling the public debt in the 1990-1993 period. Greece had started convergence with the European Economic Community and undertaking the debts was part of the game. Consequently the public debt in the mid-1990s reached 108.7 percent of GDP and, at the end of last decade, was at 114 percent of GDP. It is today widely known that the debt was the outcome of policies made and applied in the 1980s. They were expansionist policies that many people considered obligatory as they concerned a large part of society, the so-called «non-privileged» by then-prime minister Andreas Papandreou. The original target of the policy’s plan, to create a strong and competitive production base proved impossible despite the huge resources invested. Another target was met however – the political hegemony of PASOK in Greek society. The latter grew accustomed to «getting stroked» by the state, which gradually became an end in itself aimed solely at buying votes. When socialist PASOK realized it could not apply socialism, it chose something simpler and easier; it used public money (either from taxes or borrowing) to remain in office. This was a political choice and was gradually combined with the entry into the game of all those who today are collectively called «entangled interests.» It was they who supplied the socialist government with the cover it needed, to their own benefit, of course. According to the latest data published only last week by the General Accounting Office, the central government debt rose by 14.2 billion euros in 2005, reaching 215.41 billion euros from 201.24 billion euros in 2004. The central government debt, which is larger than the so-called Maastricht debt, amounts to 107.9 percent of GDP. To serve this in 2006 some 27.7 billion euros are needed or 60 percent of the net revenues (40.6 billion euros) estimated by this year’s budget. About 12.9 billion euros remain then from net revenues, barely sufficient to cover only two-thirds of the state sector’s salaries and pensions for 2006. Finance Ministry data shows that from 1994 to 2005 Greece has paid 280 billion euros to serve its public debt. Every four-member family in Greece must serve about 78,000 euros of the debt through taxes, Parliament heard last December during the debate on the state budget. Obviously the state must borrow if it pays 60 percent of its revenues to serve its debt; it also has to pay for pensions, social security funds, for subsidizing transport and for the public investment program. The public debt’s interests will set the country back 9.6 billion euros this year, that is 1.2 billion euros more than the public investment program’s resources, estimated to reach 8.4 billion euros in 2006. In 2005, Greece paid 8 billion euros for its debt when its revenues from EU structural funds did not exceed 4.6 billion euros. Another issue of relevance to the public debt is the guarantees supplied by the state. They stand at 15.7 billion euros and could at any point of time turn into further debt.