Expansionary fiscal policy seen as a double-edged sword

The Greek economy has yet to experience the effects of the global economic crisis in full force but politicians, businessmen, the media and others behave as if the country is in the eye of the storm. In so doing, they increase the risk of seeing their expectations being fulfilled. The Greek economy may not be in the best possible shape, but it is in a better position than most of its eurozone partners to weather the impact of the global financial and economic crisis. On the positive side, the economy is projected to grow by about 3.2 percent this year, which may be less than earlier estimates of 3.8 percent but is almost triple expected average eurozone growth of 1.1 percent. Moreover, the banking sector, which has been a source of problems in other countries, is relatively strong and the real estate sector is not characterized by the kind of speculative bubbles seen abroad. On the negative side, inflation remains higher than in most other EMU countries, the budget deficit is still high even if it ends up less than 3.0 percent of GDP this year – though this is doubted by some economists – and the current account deficit is one of the highest, projected to be over 11 percent of GDP, compared to 12.2 percent in 2007. Under these circumstances, it looks as if the ranking assigned recently to Finance Minister Giorgos Alogoskoufis by the Financial Times was fair. Alogoskoufis was rated ninth among 19 EU Finance Ministers on the basis of certain economic and political criteria. Still, judging by the way local interest groups and others view economic policy, Alogoskoufis or anybody else in his shoes, should have been rated at the bottom of the EU finance ministers’ league. Undoubtedly, the situation is not good and is likely to become tougher for the Greek economy in 2009 and perhaps 2010. In addition to the deteriorating trends in the banking and construction industries, two other sectors of high importance to the Greek economy will also feel the pinch next year. A significant slowdown in tourist arrivals and receipts should be expected, along with a drop in receipts from the shipping industry. However, even if this translates into GDP growth of 2.0 percent next year, which is more than double the expected eurozone average, it will not go down well with the vast majority of consumers, businessmen who have been accustomed to growth rates of 3.0 percent or more in the last 15 years or so. Opposition politicians do not help by painting a bleak picture while the ruling party is split between those who blame almost everything on the global crisis and the others who demand a change in economic policy. These calls are being supplemented by businesses demanding more and cheaper credit from banks, tax and other relief measures from the state to brave the economic slowdown, employees want higher wages and pensioners higher pensions. In such an environment, it is no surprise that expectations have taken a turn for the worse. Consumers prefer to save more and consume less, especially when banks offer high interest rates on time deposits and businesses look more toward cutting costs than investing to expand their productive capacity or acquire new companies. Of course, pessimism about the future is nothing new in Greece. But this time around there are no external positive factors, such as shipping, tourism or fast growth in neighboring countries boosting exports. One way to counter the worsening expectations at a time of a sharp global economic slowdown would have been to make fiscal policy more expansionary. However, this is a two-edged sword for a country with a public debt amounting to more than 90 percent of GDP, an aging population and a tottering social security system. This is because the creditors of the Greek state, that is those who buy its bonds, may become more reluctant to invest in Greek debt paper if fiscal policy becomes too expansionary. This is something any responsible government should avoid at any cost. All-in-all, it is impossible for any policymaker of a highly indebted country like Greece to pursue an expansionary fiscal policy to head off the effects of the crisis and satisfy the demands of consumers and businesses. Perhaps the best approach to dealing with the crisis at this stage is to either help alter the negative expectations of economic factors or prevent them from being fulfilled. In addition to policy measures, this also means educating the public.