PM to tread a fine line between sticking to reforms and promising handouts in Thessaloniki speech

Prime Minister Costas Karamanlis will walk a fine line between sticking to belt-tightening policies and announcing populist handouts when he delivers a major economic speech tomorrow. Economists worry municipal elections in October, the ruling conservatives’ first real test since they ousted the Socialists in 2004 polls, may force Karamanlis to relax fiscal policy, putting Greek efforts to cut the budget deficit at risk as EU sanctions loom. The annual speech at the trade fair in the northern city of Thessaloniki often draws violent street protests and Greek prime ministers traditionally use it to promise handouts. «We hope the trade fair’s podium will not become a pre-election soapbox,» said Dimitris Daskalopoulos, president of the Federation of Greek Industries. «Citizens do not need fireworks, they need serious words and promises delivered.» He was among several industry and labor leaders who filed through Karamanlis’s office recently, pushing opposing agendas. The government has vowed to keep a lid on populist promises, saying Karamanlis will pledge to stay the course and focus on structural reforms in the economy. He is expected to highlight successful privatizations in banking and other sectors, which are filling state coffers while boosting competitiveness. «Economic growth is strong, unemployment is declining and the government’s restructuring program is being implemented effectively,» Finance Minister Giorgos Alogoskoufis told reporters after meeting with unionists. Discipline needed Economic analysts say it will take discipline to avoid fiscal loosening, but the government has no choice if it wants to shrink its budget deficit to below the EU ceiling of 3 percent of gross domestic product (GDP) this year. «Indications so far are they are not going to change course but the pressure from elections is strong,» said Theodor Schonebeck, an analyst at Deutsche Bank. If the government finds fiscal room to maneuver, there are other areas where funds are needed, analysts said. Spending could be increased in investments, to help absorb EU funds, where Greece has fallen behind. «The debt level should be reduced faster to ensure against high interest rates,» Schonebeck said. Greece has one of the highest debt-to-GDP ratios in the eurozone. But the political heat will be felt. Labor unions are preparing mass marches in Thessaloniki during Karamanlis’s speech, expected to include promises of some mild income tax relief and a small boost to the lowest pensions. Unions have made clear this is not enough, demanding a minimum monthly wage of 1,250 euros from about 580 euros now, saying Greeks have one of the lowest living standards in the EU. Despite high economic growth – at 4.1 percent in the first two quarters this year – unemployment has declined marginally to 9.7 percent. Northern Greece’s textile and other industries have been especially hard hit. The inflation rate, expected at about 3.5 percent this year, remains one of the highest in the EU, eroding incomes. «We feel that existing policy will continue to reduce workers’ incomes,» public servants’ union (ADEDY) President Spyros Papaspyros said after meeting with Karamanlis last week. «We will participate in the protests by joining the march.»