Gov’t faces five major economic challenges in 08

In its autumn forecasts on the economies of member states, the European Commission sounded the warning bell for the repercussions on Greek competitiveness that inflation and the continuing widening of the country’s current account deficit are likely to have. Separately, a study by the Organization for Economic Cooperation and Development (OECD) taken among 26 of its member states shows that the Greek economy is among the least prepared to face the impact of globalization. To be sure, improving Greece’s ailing competitiveness is but one of five great challenges that the government is being called upon to face this year. Competitiveness The current account deficit widened 30.9 percent in the January-October 2007 period, year-on-year, to 23.8 billion, or 10.3 percent of gross national product (GDP). Brussels partly shares the Greek government’s view that the widening of the deficit is also due to circumstantial factors, including the import of hardware for the realization of private investment plans. But it also considers that the widening is a reflection of low competitiveness, which is likely to further deteriorate due to the strong inflationary pressures that it has traditionally shown little ability to absorb. Due to rising international fuel and grain prices, Greek inflation climbed to 3.9 percent in November and is estimated to stay at the same level this month. The European Commission projects the average inflation rate for 2008 at 3.1 percent instead of the 2.8 percent forecast by the Economy Ministry. According to the OECD study, the chief reasons for the low competitiveness are that Greek exports often compete with those of low-cost developing Asian countries and are produced by «low» technology, at a rate of 40.4 percent. This is the worst performance in the EU-15 and the third worst in the EU-27. Just 14.8 percent of Greek exports are made using high technology, compared with 52.8 percent of Ireland’s, the 49.2 percent of Cyprus and the 33.8 percent of the UK. Also, only 6 percent of Greek exports are products of information and telecommunications technology. Greece also figures as a laggard in innovation in the EU, on the basis of a combined index which takes into account spending on research and technology, education and other parameters. Olympic Airlines Ailing public utilities, particularly the two biggest in the transport sector, Olympic Airlines and the Hellenic Railways Organization (OSE), which are running huge deficits, will also test the credibility of economic policy in 2008. Olympic is certain to cease to exist in the form we have known it for five decades, as the Commission has launched a new probe into illegal state subsidies in the 2004-2007 period which, according to all indications, will end with new fines on the carrier. The government now has to come up with a successor scheme. Since being divided into five separate operating units, OSE has been adding a deficit of -70 million monthly to an already overblown total of -7.5 billion. Health The fiscal chaos in the broader public sector, particularly in the national health system and local government organizations, also demands the government’s attention. In less than three years since last being settled, hospitals’ debts to suppliers have again run up to -2.8 billion. But social insurance funds also owe about -1.4 billion to hospitals. The Finance Ministry’s top priority is to force hospitals and municipal authorities to draw up budgets and balance sheets. Fiscal deficit By establishing tighter control of finances in the broader public sector and hoping to achieve a spectacular improvement in revenues, the government expects to bring down the fiscal deficit from 2.7 percent to 1.6 percent of GDP without having to resort to a hike in value-added tax. The Finance Ministry expects to collect -4 billion more in taxes from the rise in nominal GDP and -2 billion more via the fight against tax evasion, the equalization of heating and automotive diesel taxes and the introduction of a single property tax. But with the strong uncertainties in the international environment and its own poor record on tax collection, the VAT increase remains on the cards. Privatizations In the previous two budgets, the revenue target of -1.6 billion from privatizations was attained with relative ease. But the sources of possible privatization revenue seem to be drying up and attaining the same target looks doubtful next year. The government has now opted for an alternative model of seeking strategic investors or allies in the still publicly run companies. The privatization plan for Athens International Airport has run into problems, after the concessionaire, Hochtief, demanded an extension to its contract. The placement of Postal Savings Bank has been postponed to 2009 to await for a better valuation. So it seems that the only large source of privatization revenue remains the placement of 5-10 percent of ATEbank, when market conditions allow it.