EU calls for fiscal alertness, and more liberal market rules
BRUSSELS – The spring report by the European Commission on the member-states’ economies and their prospects contains a confirmation of the success of Greece’s drive to achieve nominal convergence but also a reminder of all that still has to be done to maintain this convergence and make it real and viable. The prospects of the Greek economy remain positive, especially in view of the outlook for global recovery, finds the report, which was prepared by the department headed by Economic and Monetary Affairs Commissioner Pedro Solbes and released on Wednesday. The document notes that the economy continues to be largely supported by projects for the 2004 Olympic Games, by the massive European Union-subsidized Third Community Support Framework (CSF III) investment plan for the 2001-2006 period and by the fall of interest rates in the eurozone. These three factors have contributed to the maintenance of investment at particularly high levels, to a housing construction boom and a spectacular increase in private consumption fueled by credit expansion and the increase in Greeks’ real incomes. An unwelcome corollary of these developments is that the country’s trade deficit has deteriorated appreciably. This is due to the fact that the increase in consumption and investment fuels imports while, given the lack of competitiveness, exports tend to become negligible. Debt and expenses Regarding the major problem of inflation, the Commission does not expect it to recede below 3 percent before the end of 2003. The very slow decline in public debt is exclusively attributed to the fall in interest rates and its corresponding impact on the cost of servicing. The report, however, renews older strong doubts regarding the feasibility of a reduction in primary expenses, noting that the main component of these expenses remains the remuneration of public servants which is a highly inelastic item, with high political cost if cutbacks are attempted. Therefore, even though a return to deficit budgets is not expected, the primary surplus is expected to continue to decrease, making a reduction in debt slower. It is also significant, as the report points out, that tax revenues have been «overestimated.» By contrast, the very serious dysfunctions of the Greek labor market seem to have been underestimated. Unemployment is falling, but very slowly, as «new job creation in services and the construction sector have not, to date, adequately offset the loss of employment positions in the industrial sector.» The present phase of a rising GDP provides the opportunity for an acceleration of structural changes, the goals being to boost the ever-low productivity of the Greek economy, improve the efficiency of the labor and product markets and create a better environment for the growth of business activity, the report stresses. «A major challenge remains how to deal with the high structural unemployment and how to increase the level of employment,» it adds Recommendations The Commission classifies its recommendations in three categories, regarding fiscal matters and the markets for labor and products, respectively. There are four recommendations for the fiscal sector: The first concerns inflation and focuses on the need for the budget «to avoid contributing to inflationary pressures, particularly if account is taken of the result of collective bargaining in the private sector.» The second recommendation underscores Greece’s commitment to institute and maintain «strict and binding» upper limits for expenses with a view to lowering their growth rate; third, Greece is urged to ensure that debt continues to decline as a percentage of GDP by «restricting the use of financial transactions that have a negative influence on its size.» Lastly, perhaps the most timely recommendation in this category, is for progress in social security reform within the current year. It is complemented by a note that if this does not happen, public finances will inescapably again become problematic sooner or later due to the aging population. Labor market The report repeats the Commission’s oft-expressed recommendations on how to deal with the inflexibilities of the labor market. Top priority is assigned to measures for restricting early retirement, which is estimated to absorb up to 20 percent of total spending for pensions. It may be seen as an ironic twist that early retirement for the older workers was seen as a positive measure for dealing with unemployment and other problems about 10 years ago. Further, taxation reform must be directed toward easing the burden on labor – Greece has the greatest tax evasion in the developed world, according to recent figures. A third recommendation urges the restriction of collective bargaining and more individual work contracts for a stronger link between remuneration, productivity and conditions in the regional labor markets. Strict labor market conditions must be eased to allow for more lay-offs, in order to attain a more «correct balance between market flexibility and labor security.» Most important of all is «an improvement in education and training,» with a view to enabling human resources to meet market requirements. Product markets The Commission recommends four priorities for product markets, starting with a push to catch up with the New Economy, where figures show Greece lagging. This can be achieved through improving education and training, promoting private investment in new technologies and their diffusion into the economy and society. Another priority is measures against bureaucratic red tape which clearly discourages investment; the report urges that the tax system become neutral in relation to the type of business. A third priority is the further liberalization of the electric power and coastal shipping markets and, lastly, the acceleration of the harmonization of Greek legislation with Community rules liberalizing the internal market. Almost none of the report’s recommendations are anything new. The inflexibilities of the labor market, the lack of manpower skills, the bureaucratic and taxation distortions, the oddities of early retirement and the huge problems of the social security system are clear and well-known. The only thing that remains is implementation of the recommendations. For, despite progress, only the most naive would deny that Greece continues to have a very significant characteristic: It is the European Union’s poorest country, a position once occupied by Ireland, now the second most prosperous in the club.
