Sense of responsibility needed on all parts to handle the crisis

Greek government officials have stopped boasting about the strength of the local economy over the last few weeks and instead have started warning of difficult days ahead due to the international financial crisis. They are partly right, since the world crisis is to be blamed for setting in motion forces that have helped bring to the fore the chronic structural imbalances in the Greek economy. However, the politicians are not the only ones at fault for this development. The Greek economy is facing the prospect of stagnation in 2009, following a long streak of 14 years of consecutive growth. Under these circumstances, it may be a new and ugly experience for many young and middle-aged Greeks who have not worked in such an environment, if indeed this turns out to be the case. Let’s not forget that many economists had predicted a sharp slowdown for the local economy after the 2004 Olympic Games, but that did not materialize. However, unlike 2005, which benefited from the positive dynamics of the previous year, the economy enters the new year with a bundle of problems. The latter are undoubtedly exacerbated by the lack of much freedom in fiscal expansion, as the country had made insufficient progress in sharply cutting the budget deficit and the public debt during the previous good years. In this respect, making one of the policy moves, such as boosting the public investment budget, as suggested by the main socialist opposition party PASOK and other economists, would amount to fiscal irresponsibility. Unfortunately, the economy has been deprived of a very important growth booster at a very difficult juncture. Showing fiscal responsibility and fully cooperating with the European Commission is a must for a country like Greece, which is heavily indebted, in order to send a positive signal to international buyers of its bonds and T-bills. The Hellenic Republic needs to borrow more than 41 billion euros on international markets during the next year to roll over expiring public debt and finance its projected budget deficit and this will not be an easy exercise without the full support of the European Commission and perhaps the European Central Bank (ECB). Another important policy move would be to encourage credit institutions to lend more generously to households and firms than they have done in the last few weeks and discourage them from hoarding cash. After making a number of mistakes, the government and the central bank have finally presented a more acceptable version of a 28-billion-euro package to help banks obtain much-needed liquidity and prop up their equity capital to be able to grant more loans. This package should help banks, but may turn out to be insufficient if economic conditions in the neighboring countries where they have large franchises deteriorate and borrowing with state guarantees becomes either impossible or undesirable. Banks can issue up to 15 billion euros worth of two- or three-year bonds with state guarantees but the high cost of borrowing may discourage some of them from going ahead with that, according to high-level bankers. Undoubtedly, the credit crunch and the world economic slowdown should be partly blamed for bringing the Greek economy to this juncture in such a relatively short period of time. Nevertheless, the situation is also a clear indication of the economic policy mistakes made by both present and past Greek governments in tackling some of the country’s chronic problems, such as controlling primary budget spending, broadening the tax base and shoring up the ailing social security system. However, they are not only to blame. Their inability also reflects the wishes of the vast majority of Greek society, which does not want to make any sacrifices in order to secure a better future. This large segment of society is against the so-called «cold turkey» approach to facing economic problems and the politicians, who are fully aware of their preferences, have opted instead for the gradual approach. The latter works, as long as some economic reforms with limited political costs are made and the global economic environment is favorable for them. In this case, the global economic environment has sharply deteriorated, exposing the chronic structural problems of the Greek economy, which politicians and the society alike preferred to deal with in a smooth, gradual way over a long period of time. Unfortunately, the environment is not favorable and the country will pay for it. Just how much remains to be seen.