ECONOMY

Crisis, riots demand tough decisions and true leadership

It is not easy for politicians to accept short-term political costs for the country’s medium-term economic and social benefits. However, that is precisely what Greece needs at this juncture. With the economy on a downward trend in the midst of a deep global financial crisis, the choices are few and painful and only a strong political leadership can deliver. Greece was blessed to have two strong leaders after the fall of the military dictatorship in 1974. Constantine Karamanlis, uncle of the current Prime Minister Costas Karamanlis, was one of them. The elder Karamanlis led the country smoothly in the post-junta era and had the wisdom and the vision to integrate Greece into Western Europe by diligently pursuing the country’s membership in what was then the European Community. He fully understood the long-term implications of Greek membership and chose to go against the will of the majority of the people at the time. Among the other Greek politicians who showed leadership qualities, was the former socialist prime minister Costas Simitis. He chose to confront the powerful left wing of his party which was opposed to the country’s Maastricht economic straightjacket in the mid-1990s and successfully led the country into the eurozone a few years later. Both the elder Karamanlis and Simitis listened to the people, but chose to lead them along a different path to ensure long-term benefits for the country. If the convergence of Greek living standards to the average EU level is not convincing, one only needs to look at what happened to Hungary and other countries outside the eurozone during the current global economic crisis. After more than 13 years of uninterrupted economic growth, Greece faces the prospect of  a hard landing in 2009 if it cannot find more than 41 billion euros to refinance expiring bonds and T-bills and fund its projected budget deficit. The country’s task is made more difficult by the sharp increase in global government debt supply and the shrinking pool of investors, such as hedge funds, which traditionally bought Greek bonds. The situation is further aggravated by images of a country in chaos televised the world over and negative stories outlining the economy’s shortcomings and lack of leadership. There is no doubt that the large public debt to gross domestic product (GDP) ratio constitutes a major constraint when the country annually spends some 12 billion euros on interest payments to service it. The government stresses the fact that Greece’s public debt started skyrocketing in 1981 when the socialists took over and claims credit for trimming it to about 93 percent of GDP this year. In so doing, it forgets to mention that this is partially the result of an upward revision of Greek GDP by some 10 percent, at the behest of Eurostat. The socialist PASOK party blames the government for the situation and its earlier audit of public finances which led the European Commission to place Greece under surveillance in 2005 and 2006. However, this is only partly true, since the last socialist government used creative accounting techniques to produce a smaller budget deficit as a percentage of GDP by not including certain expenditure items. On the other hand, it is right to say that the government adopted the least favorable accounting method to record military expenditure, sending the budget deficit to unusually high levels. All market players agree that Greece would have had no problem funding its 2009 borrowing needs given the fact that investors can get rich spreads over German bonds despite the unfavorable global market environment. However, the government will have to show it is in control of the streets in Athens and elsewhere and has a plan with a timetable to tackle its long-standing structural problems. This is not about going ahead with a Cabinet reshuffle as is expected. This is about the prime minister demonstrating true leadership qualities by making some tough choices, which ignore short-term political cost and perhaps the advice of his communication advisers, and sending a positive message to the markets. Efforts to put a lid on primary budget spending, open up markets and so-called closed professions will be tougher than usual, but this is the price that will have to be paid for the timid policies of the last few years.