Bold moves needed to exit crisis

The Greek economy is at a crossroads as consumer and business sentiment has been hit by the combined effects of the global crisis and popular discontent with the government’s economic policy. If the economy is psychology, then the current psychology is poor and threatens to further undermine the economy in the months ahead. A number of studies show that the course of an economy depends to a large extent on the psychology and expectations of its main actors, that is, consumers, producers and others. If this is so, the Greek government has its hands full because it will have to take initiatives to change these expectations at the same time it strives to control the budget deficit in a slowing economy, creating grievances even among some of its most ardent voters. Irony It is ironic that this is happening at a time when the economy is growing at a faster rate than most of its peers in the eurozone and experiencing a rise in employment along with average nominal annual wage increases in the region of 5 to 8 percent – the highest in the euro area. Employment is projected to rise by 1.2 percent this year, similar to the growth recorded in 2007, while average annual pay is seen up 7.4 percent this year, compared to 7.2 percent in 2007. Moreover, this is happening even though one of the weak points of the local economy, namely stubbornly high inflation, is likely to fall in coming months, provided the drop in world oil prices below 120 dollars per barrel holds. Greek inflation rose to an annual 4.9 percent in May and June, a multi-year high, on the back of buoyant oil prices. Uneven spread Undoubtedly, the steep rise in the international prices of oil, food and other commodities has hit households in the lower income brackets harder. So, the benefits of economic growth are not spread evenly across all social strata. There are pensioners who live on the 700-euro pension paid by IKA, the country’s largest state pension fund. Nevertheless, the negative reaction and the downward revision of expectations even among professional groups, which have made tax evasion a hobby and are little affected by the world crisis, reveals something important. Most Greeks expect a constant rise in their standard of living because they have become accustomed to more than 12 years of strong economic growth. So they have come to have expectations about the future based on what happened in the past. For example, if economic growth turns out to be lower than expected in the past, they would revise their expectations for the future. In economics, this is called adaptive expectations. Moreover, most Greeks, like their fellow Europeans abroad, are shaken further because they are exposed to a steady barrage of press reports which portray the economic situation as sometimes worse than it actually is. This is not the best environment for economic policy to work. Especially when the structural shortcomings of the Greek economy force policymakers to resort to administrative measures to raise more tax revenues in order to close the budget deficit so the 3 percent of GDP threshold is not overstepped and Greece does not again come under the scrutiny of the European Commission. This is particularly true since the government has a slender majority in parliament which makes some of its dissatisfied deputies more bold in airing their criticism of the tighter and therefore more unpopular economic policy. In doing so, they make political risk a more important factor for companies and other investors who want to do business in Greece. Of course, this is not taken into consideration by the deputies because what counts to them is the trade-off between their own private gain and private cost. Still, the government can win the gamble of turning the economy around by helping to improve the psychology and expectations of the public by presenting a simple, pro-growth package of economic measures early next month when Prime Minister Costas Karamanlis makes the annual major speech on the economy at the Thessaloniki International Fair (TIF). In this regard, it is the government’s duty to single out and inform the general public about all the professional groups engaging in what appears to be massive tax evasion before announcing measures to curtail it. The government has a great opportunity not just to tax them more fairly but also to use this as an excuse to open up their occupations to competition. Of course, this will not be easy. But it could have been made much easier if the government had taken the initiative to make the Greek economy a cashless economy like others abroad. In this way there would be no need to impose new taxes targeting different groups to close the budget deficit because tax evasion would be fought more effectively. Some 47 years ago, a US president, John Kennedy asked his fellow citizens, «My fellow Americans, ask not what your country can do for you – ask what you can do for your country.» The Greek premier can ask the same question today, although he must know the answer. So, moving ahead with a pro-growth but socially just plan leading to a cashless economy may after all be the best answer to elevate gloomy expectations and the economy.