Government needs to get ahead of curve by listening to the people

The Greek government has a difficult task in navigating the country out of the current debt crisis but has made it even more difficult by staying behind the curve, as people in the markets say. It is therefore imperative to change its stance and make economic policy more effective in order to get the country out of this mess. All it has to do is listen to what the majority of Greeks have to say. There have been cases in the past, such as the reform of higher education and the sale of Olympic Airways, in which the majority of Greeks were in favor of reforms or privatization but the governments didn’t dare deliver, bowing to the demands of vested interest groups. When they were asked about their indecision at the time, government officials would largely point to political cost considerations. Looking back, it is clear they made a mistake for which the Greek economy and their own political party paid dearly at the ballot. Fast forward to the present, where a new government elected just a few months ago with a strong mandate, facing a serious economic crisis, appears to be giving much more consideration to political cost than it should. At least that’s what the message is from a new poll published yesterday in Ethnos. Some 76 percent of respondents were against strikes until the economic crisis is over. Furthermore, about 74 percent of those polled thought the government was unjustifiably late in taking the austerity measures, while some 58 percent thought the measures taken so far were in the right direction. There is no question that austerity measures hurt everybody and especially low- and middle-income earners in the private sector, who are being called again to shoulder the biggest part of the fiscal consolidation under way. However, it should have been clear to the government that in macroeconomics, as in capital markets, staying behind the curve may be more costly and more dangerous than staying ahead. In other words, it is better to take action to prevent a problem rather than waiting until it occurs, when the action would be less effective. Everybody knows that Greece will have to resort to the markets in the next few days or weeks to borrow because it faces redemptions of government securities worth more than 22 billion euros in April-May. It has even been rumored for days that it will come out with a multibillion bond issue this week. Markets also know that the EU authorities want Greece to take more measures to ensure a 4 percentage point reduction in the budget deficit-to-GDP ratio to 8.7 percent in 2010. Instead of discussing the possibility of new austerity measures, the government should have taken the initiative and presented a comprehensive supplementary package of tax hikes and spending cuts to please the EU and then tap the capital markets with a syndicated bond issue for a good amount of cash. It would have been great if the EU applauded this initiative and accompanied it with an explicit or implicit EU commitment for a backstop to new Greek debt issues. The Greek government should have done so because it knows that it has to come up with something concrete to make it possible for the German government to sell it to its people. The latter cannot understand why they should pay for the Greeks who tax evade, retire earlier and generally have a better life, even if assistance comes in the form of a bilateral loan or guarantee and not a handout. There is no doubt that the government is right in pointing out that it pays a higher premium than it should to investors to buy Greek bonds and this will undermine its efforts to slash the budget deficit in years to come because of the much higher interest payments on public debt. The following numbers tell the story: The country will have to borrow 5 percent of its GDP on average in the next four years. Since the central government debt-to-GDP ratio was around 130 percent in 2009, the same ratio will rise to 150 percent at the end of the four-year period. Assuming the average cost of borrowing goes up to 5 percent from around 4 percent in 2009, interest payments on public debt will amount to 7.5 percent of GDP at the end of the four-year term. It would have been better though for Greece if the government stayed ahead of the curve rather than behind under these circumstances. That’s what the majority of the Greek people implicitly tell the government when they find out it was late in taking the previous austerity measures.

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