ECONOMY

Paying more attention to politics than to the economy

The Greek government appears to be paying more attention to satisfying the demands of special interest groups than taking measures to reducing the budget gap. In so doing, it seems as if it is taking the support of the European Commission and the willingness of foreign investors to buy Greek debt for granted. It is a rational decision from the political point of view, but quite risky from an economic viewpoint. The government has been negotiating with representatives of farmers, who have blocked many major highways and other key road junctions for days, to put an end to the blockades, offering a package of 500 million euros in aid. By doing so, it has sent a message to various interest groups that the government will bow to their demands if their reaction is strong enough and has thousands of supporters across the country. Moreover, it has conveyed the message to the rest of society that there is public money to be spent despite all the talk of the international economic crisis and the possible difficulties facing the Hellenic Republic, as Greece is known on international capital markets, in borrowing abroad. Perhaps the government has been encouraged by the fact the country was able to raise about 3.15 billion euros in three-, six- and 12-month T-bills earlier this month and some 5.5 billion euros in five-year bonds last week for a total of 8.65 billion euros so far to more than meet its debt expiries estimated at about 7 billion euros. Standard & Poor’s decision to downgrade the country’s credit ratings and investors’ willingness to buy medium-term local bonds at a rich spread over corresponding five-year German bunds and five-year swap rates in the money market have not apparently shaken policymakers’ belief in Greece’s ability to meet this year’s borrowing need, which is estimated at between 41 and 47 billion euros and perhaps as high as 50 billion. In acting this way, the government has also given the impression that it does not worry that much about the measures taken by the European Commission to punish the country for producing a budget deficit-to-GDP ratio in excess of 3 percent in 2007, 2008 and most likely in 2009. This may be due to an understanding between the European Commission and member states stemming from the extraordinary economic circumstances or just may be a well-calculated bet on the Greek side. It could also be due to some fiscal ace the government is hiding up its sleeve. However, it is hard to think how the state could come up with more than 2 billion euros in both spending cuts and tax revenues to finance the new promises to various interest groups and contain the budget deficit at the same time. Of course, there is a painless way out and this would be to revise upward the country’s gross domestic product (GDP). This would be more accounting than anything else, but it should not be ruled out in a country where the black economy may account for 30 percent of the official GDP or even more. By revising the GDP by about 10 percent, Greece could improve its budget deficit and public debt as a percentage of GDP without taking any new fiscal measures. It should be remembered that GDP was revised upward by 9.6 percent a couple of years ago, covering the period 2000-2006, but Eurostat, the EU’s statistics arm, did not accept the country’s request for a 25 percent increase at that time. Still, this does not change the current situation. The government appears to want to appease farmers and other professionals, giving the impression it may have something else in mind. This cannot be anything else but the political benefits of handouts and aid packages, which, in turn, point to early general elections. Greece is scheduled to hold general elections in the fall of 2011 and elections for the European Parliament this June. Even if the government is taking a calculated bet with the European Commission, it is taking a much bigger gamble with foreign investors, who have been the primary buyers of Greek bonds for many years. Many of the latter have already sustained losses in their bond portfolios by holding Greek debt due to the sharp widening of the spread as opposed to Germany. So it is not easy for them to accept that a country with a public-debt-to-GDP ratio of about 94 percent would embark on an expansionary fiscal policy to limit the impact of the economic crisis. In so doing, the state runs the risk of scaring a number of these foreign investors away and this may have dire consequences for Greece’s borrowing program. Whether the government counts on the European Central Bank as the buyer of last resort for Greek bonds or the domestic public to pick up the slack left by foreigners remains to be seen. At this point, the government appears to be paying more attention to politics and less to economics.