New economy minister faces some crucial fiscal decisions
The new conservative Cabinet will have its last chance to put Greece on the path to sustainable growth if it chooses to put the good of the country before its own political interests by opting for a comprehensive set of binding economic measures. Unfortunately, the history of Greek administrations does not favor such an outcome. It is a common ritual: Most Greek politicians and political parties fail to live up to the people’s expectations after coming to power. To some extent, they have only themselves to blame. After all, they are the ones who help mold the public’s expectations, usually by promising tax breaks, higher pensions and larger salaries to civil servants before the general elections in hope of garnering their votes. The question of who is going to pay the bill for the promised tax cuts and increased budget spending comes later and the answer is usually the same: fight tax evasion, do away with public sector waste and speed up economic growth. Of course, everything changes when politicians come to power and face economic reality. Many of their initial promises are forgotten or delayed until later and their main effort is to blame their predecessors for their inability to fulfill them. The socialist PASOK party played this card in the fall of 1993 when it succeeded the conservatives and the latter did the same when it came to power in March 2004. However, the new conservative government cannot play the same card this time around. The new finance minister, Yiannis Papathanassiou, succeeds a conservative colleague and friend of his, Giorgos Alogoskoufis, and has to deal with an overshooting of the 2008 budget deficit to around 3.5 percent of gross domestic product (GDP). This fiscal overshooting threatens to put Greece under the EU’s excessive budget deficit procedure for a second time since 2005 and, even worse, stifle its efforts to borrow the necessary funds on international markets to finance its 2009 borrowing needs. The country should be able to borrow 2 billion euros or more when it taps the international markets for three-, six- and 12-month T-bills tomorrow, but it is not certain that it can manage to do the same for bigger sums in medium- and long-term bonds later. Papathanassiou, who is liked by many in the market because of his business background and pro-market philosophy, cannot do much for the government’s slim parliamentary majority and the riots hurting the ruling party’s standing in the polls. He is in a good position though to convince Prime Minister Costas Karamanlis and Public Works Minister Giorgos Souflias, who appears to have a significant role in the formation of economic policy, to take a set of unpopular short-term and long-term economic measures to convince the markets and international credit rating agencies of the country’s willingness and ability to put its public finances in order. Already, Standard & Poor’s has sent a warning signal by putting Greece’s debt on negative credit watch as of last Friday, noting the credit watch will be likely resolved this month after receiving new information from the Greek government on how it plans to deal with the adverse implications of a sharply slowing economy on this year’s public finances. Of course, the need for a set of painful economic measures contrasts with the statement Papathanassiou made during his acceptance speech at the Finance Ministry, namely that economic policy cannot put new burdens on the little guy, such as small and medium firms. It is understood that the new finance minister will want to safeguard employment as much as possible for economic and political reasons. After all, employment affects consumption spending, which comprises more than 80 percent of Greek GDP and therefore directly affects economic growth and public finances. At the same time, much lower employment will also hurt the government’s political chances for re-election. So, Papathanassiou and the government will have to find a set of measures that boost or maintain employment, while ensuring a budget deficit of below 3 percent of GDP this year and in the medium-term. This means measures that combine targeted spending cuts and tax increases along with long-term reforms in the public sector should be adopted as soon as possible to send the right signals to Greece’s international borrowers and the markets in general. It is understood that such a set of economic measures is not likely to boost the ruling party’s chances if early elections are held in the next few months or later this year. It is, however, the right and responsible thing to do. Can this conservative government break with past practices? History is not on its side, but we should give it the benefit of the doubt. In a few months, we will know the outcome.
