ECONOMY

Swelling of public sector poses greater risk in post-crisis Greece

The Greek economy may weather the storm of the global economic crisis better than most of its eurozone peers in the short run, but may turn out to be one of its biggest victims in the mid-to-long term. This will most likely be the case if pundits are right and state interference in economic affairs increases in the post-crisis world. Even if Greece falls into recession this year for the first time since 1993, it will be less deep than that in most other eurozone countries. On the other hand, if the optimists are right, it will build on a growth streak, having outperformed the EU going as far back as 1996. The Greek annual average gross domestic product (GDP) growth rate stood at about 3.8 percent during the 13-year span from 1996 through 2008, compared to 2.2 percent in the core eurozone countries. This was no accident. After 1993 and especially 1995, the country set the goal of becoming a member of the eurozone by meeting the nominal convergence criteria as outlined in the Maastricht Treaty. In doing so, it managed to slash its budget deficit as a percentage of GDP to low digits from double digits earlier in the decade and bring chronic inflation to below 3 percent. Interest rates came down considerably and the country began borrowing by issuing fixed-rate bonds in the international capital markets. This whole process was facilitated by EU structural funds, which helped to upgrade Greece’s infrastructure and boost productive investments. The full deregulation of the banking and financial industries and the telecommunications industry at different points in time also constituted major structural reforms that helped boost productivity, productive capacity and the country’s potential GDP growth rate. In addition, the boom on the Athens stock exchange aided many companies to raise large sums of money to finance investments and reduce debt, while also forcing them to improve their organizational structure and pay more attention to matters of corporate governance. This was especially true with state-controlled enterprises, such as OTE telecom, which became more transparent. It also made Greek-listed companies, such as banks, more aware of the benefits of expansion into neighboring countries to take advantage of opportunities, while making clear the need for bigger corporate schemes to exploit economies of scale and synergies, leading to a binge of merger and buyout deals in the banking sector. Of course, a number of things were not done correctly with excesses in some cases, but overall this 13-year time span was characterized by high GDP growth rates, a significant increase in personal incomes and structural reforms. The bottom line was the acceptance of the two major political parties, the business community and others that the state should have had a more limited role in economic affairs. So it is quite worrisome for the future of the Greek economy to hear commentators, politicians and others here and abroad predict a greater degree of state interference in the economy. It is even more worrying when politicians of different stripes adopt a similar stance, advocating, for example, the return of the National Bank of Greece, OTE telecom under direct state control and seeking a greater role for the state in other major companies and industries. This development is quite scary for anybody who lives or knows the history and the results of state interference in the Greek economy where faithful party members with poor qualifications were picked for key executive positions in the public sector. The results speak for themselves. Look no further than the period between 1981 and 1996 which preceded the high-growth, 1996-2008 period. The Greek economy grew by barely 1 percent on average, while the annual GDP growth rate in the core EU countries stood at 2.2 percent. This was a period when Greece went from a country with relatively low public debt as a percentage of GDP to a heavily indebted country, running huge fiscal deficits. It was a period when Greece’s average per capital income fell to around 71 percent of the average EU-15 level from some 88 percent in 1980. Even if one should choose to ignore all this, they cannot do the same with the experience of free public education and healthcare. It is no coincidence that even politicians from the Left choose to send their kids to private schools and pay accordingly and seek healthcare at a private clinic rather than a public one. All in all, Greece may turn out to be one of the biggest victims of the world economic crisis, assuming the new, post-crisis order assigns a greater role to the state in economic affairs. This is a bigger threat to the economy and the country in the medium-term than anything else.