ECONOMY

Gov’t shies away from necessary structural reforms for second time

Less than two months since re-elected to power, the conservative government appears to be losing the opportunity to institute unpopular but necessary structural reforms by taking advantage of its fresh mandate and the turmoil in the ruling socialist PASOK party. The game is not over yet but it looks as if the government has fallen behind the curve for the second time in less than four years and history teaches this is a big political and economic mistake. The conservative New Democracy party came to power in March 2004, promising a new beginning by instituting reforms that would make the Greek economy grow faster, create more jobs, put its public finances in order and become more competitive. Although the Greek economy did not attain the goal of the annual growth rate of  5 percent sought in the conservatives’ program before the 2004 elections, it fared pretty well. Greek GDP (gross domestic product) expanded by about 4 percent annually from 2004 through 2006, proving wrong the skeptics who expected a pronounced slowdown after the 2004 Olympic Games. It surprised even some optimists by cruising at an even higher speed in the first half of 2007.   Strong growth in private consumption spending on the back of higher real wages, employment gains and low interest rates contributed to an increase of more than 3.0 percent annually during this period. The pickup in private investment spending from the second half of 2005, and especially in 2006, boosted growth further, helping the economy to overcome the drag from the external sector.    In addition, the government managed to overcome the criticism of the main opposition socialist party for proceeding with a fiscal audit that ended up revising upward the country’s budget deficits and put Greece’s public finances under EU surveillance until earlier this year. Instead, it used the fiscal audit both to accuse its political opponents of irresponsible fiscal management and as an excuse to avoid satisfying the demands of various interest groups. But the government chose in 2004 not to push forward a more progressive reform agenda, including the overhaul of the country’s ailing social security system and privatize some of the cornerstones of Greek statism, such as OTE telecom and electrical utility Public Power Corporation (PPC). On the other hand, it privatized Emporiki Bank by selling a large equity stake to France’s Credit Agricole, sold its own stake in the National Bank of Greece and reduced further its holdings in OPAP lottery and floated the Postal Savings Bank.   Despite arguments to the contrary, the conservatives were more aggressive than their socialist PASOK predecessors on the structural reform front but definitely came no closer to meeting the expectations they had themselves fomented prior to the March 2004 general elections.  These economic results may have sufficed to boost New Democracy Party to win a second term in office in mid September. Nevertheless, it is generally acknowledged it will get them nowhere down the road. The lessons are clear, with the case of the 2000 PASOK government under former premier Costas Simitis being the most recent. Simitis’s government, which was widely praised with bringing the country into the eurozone, won a narrow victory in 2000 but failed to move fast to implement a set of structural economic reforms early on in its second term to rejuvenate the economy and give a sense of national aim. The fact that the Greek economy was growing much faster than its EU peers, that real wages rose and employment picked up from 2000 through 2003 did not help either as it gave the impression of policy inertia. This, along with other factors, such as perceived corruption, dealt the socialist government a blow in the elections of 2004.            Future risks       The conservatives run the risk of finding themselves in a similar position a few years from now. Even though the Greek economy may grow at a high speed, budget deficits may be under control, the public debt-to-GDP ratio may fall and salaries may go up, they will find out, like Simitis, that these achievements are not enough to help them win a third term in office unless their main opponents commit political suicide. It is generally agreed that the key to avoiding this outcome would be for the government and Premier Costas Karamanlis to win the high ground and present themselves as the compassionate economic and social reformers of the new era, much like they did in the campaign leading up to the mid-September general elections.  However, less than two months after having won their second term in office, the conservatives appear to be letting this opportunity slip from grasp for a second time in less than four years. And this time around there are no excuses, such as the deliberations for finding a commonly acceptable solution to the Cyprus issue, elections for the European parliament and the 2004 Summer Olympics. Borrowing from Germany’s increase in VAT (value-added tax) tax and emboldened by the negligible impact on growth and inflation of their own 1.0 percentage point hike in VAT in the Spring of 2005, it is clear the government contemplated a 2.0 point increase in the VAT as enough to raise enough revenues to fund its social agenda and bring the budget deficit lower. That may be a realistic policy decision but by no means is it a reformist one. Moreover, failure to institute the harmonization of taxes on motor and heating fuel before the winter season, a measure announced by the Finance Ministry after the elections, created the impression that it was inadequately planned. The same impression has been given on the issue of overhauling the country’s real estate tax regime. In addition, the government appears to have put its decisions on hold about finding a strategic partner for OTE telecom after it became known that investment company Marfin Investment Group has been building a stake in OTE. Last week, it became clear that the management of PPC will not proceed with the implementation of its business plan for the next six months at best because of the strong objections from the utility’s powerful labor union.            It is known that a new government must take advantage of a fresh mandate to push forward with its reformist agenda in the first six months or so of its term to give enough time for the generally unpopular measures to work and reap the benefits. Although that time is not yet up, the government is not sending the right signals. By letting precious time pass by, it is giving the impression it is not prepared to carry out economic reforms and therefore risks failing the biggest test of its tenure.