ECONOMY

Need for institutional safeguards

Those who remember the drachma drama of September 1985 may not know that the devaluation and the accompanying program of stabilization which Costas Simitis implemented as new national economy minister, had been preceded by agonizing appeals from the governor of the Bank of Greece, Dimitris Halikias, to the prime minister himself, Andreas Papandreou, regarding the dangerously low level of currency reserves. He told him that they would barely last five days. After that, the country would have to declare a debt moratorium, he said. And so, the then government’s promises for «even better days» were followed by a rigid austerity program, which, combined with reductions in the price of oil, led to a temporary improvement in the Greek economy. And I say temporary because the fundamental causes of the near fiscal collapse have never ceased to exist. The PASOK government continued to hire people in the public utilities regardless of fiscal realities. A nod from Papandreou (who, indeed, made some bold social reforms but in the economy was not so successful) would suffice for any minister to abandon economic planning. The Bank of Greece continued to print inflationary money, and the Finance Ministry would raise taxes to make up the shortfall but, in essence, it led businesses to closure and increased unemployment. As several of Papandreou’s prominent ministers confided to me, none of this would have happened if there had been a sturdy institutional framework in place which prevented the implementation of individual ministry policies without prior communication with the central «purse,» and if the Bank of Greece had functioned in line with the requirements of fiscal stability. Everyone knows that the basic prerequisite for attracting investment is businesspeople’s confidence in a country’s monetary and fiscal policy – inflation means devaluation and a deficit today means new taxes tomorrow. Insufficient progress Thanks to the European Union, an institutional framework has begun to be put in place during the last 10 years. For a start, responsibility for monetary policy has since passed to the European Central Bank, and second, fiscal policy is subject to clear regulations from Brussels. Third, some central control has been established in new hirings in the public sector, in addition to other measures of lesser or greater importance. But even this progress and these measures have not been enough. The system was not watertight and the governments of the period 1996-2004 found ways of bypassing many of the EU’s institutional obstacles. For instance, the National Statistics Service (NSS), in close collaboration with economic ministers, would doctor the data on the fiscal deficit and the debt, thus overcoming the fiscal limitations imposed by Brussels. The stock market bubble of 1999 is another example; if the Capital Market Commission had been fully independent, many of the wayward practices would not have happened. We therefore need to further buttress the institutional framework, create a leaner state and introduce stricter rules for certain government agencies such as the NSS. Fortunately, some steps have been made in the right direction in recent years. The privatization of public utilities and companies are limiting the extent of clientele relationships, while close collaboration between the NSS and Eurostat has reduced the risk of a future fiscal derailment. Nevertheless, much more remains to be done. For the goal is to create long-term relations of trust between the state, on the one hand, and enterprises and citizens on the other. This will be the greatest legacy left by those who refuse to bend at the possibility of personal and political cost in order to make a break with the past.