Adopting the line of gentle adjustment to the new economy

Two months after the elections, which were followed by the storm over Cyprus and the task of getting preparations for the Olympic Games back on a tight but predictable schedule, new Prime Minister Costas Karamanlis has shown that he knows how to get things on track and to develop his strategy. Boosted domestically by having handled the Cyprus issue with the least possible exposure to danger, he is actively establishing his political position. Faced by a weak PASOK, with a leader who does not inspire or rally followers but is doubted by many party officials and has lost support for the party, Karamanlis seems to be on top of the political game for the moment. Ample time The government hopes to gain ample time in power by conducting a fiscal inventory to reveal hidden aspects of recent economic management and by freeing judges from political impediments to the investigation of vital issues, such as the stock exchange scandal and weapons procurements, but also by taking legislative initiatives against the high-priests of entanglement between politicians and the mass media. Early polls indicate that PASOK will lose ground in the upcoming European elections to trail New Democracy at a considerable distance, that it will lose support to Left and Right, and that its leadership will come under severe criticism. There is a general feeling in government and opposition circles that PASOK will then enter a period of grave crisis which party leader George Papandreou will not be able to control. Some predict that PASOK will follow in the footsteps of the Spanish Socialist Party, needing several changes of leadership before finding a winner. PASOK is certainly not in any position to place obstacles in the way of the presidential election next spring or to force an election without running the risk of a worse defeat than it suffered on March 7. What is certain is that Karamanlis wants to clear the way politically and then, having done everything in the summer to hold the Olympic Games without obvious imperfections or unexpected events, he will try to win the most difficult battle, that of the economy, which will determine the long-term prospects. In this sphere, matters are more complex and demanding, as Bank of Greece Governor Nikolas Garganas described in his annual report. The government, in particular Economy and Finance Minister Giorgos Alogoskoufis, gave it a positive reception, as it rebuts PASOK’s arguments, though the minister does not fully accept the bank’s prescriptions. «We choose the line of gentle adjustment in public finance; we will be more daring when it comes to structural finance, but not naive,» says Alogoskoufis. «We have learned from our mistakes, we know Greek society, and we won’t do things hastily without proper preparation.» In the first phase, the economics team plans to present a draft bill of transitional amendments to Parliament this month. The bill will cover commitments on compound interest rates and humanization of the interbank Tiresias system, which will no longer put people on its black list before the banks warn them and hear their objections. Since several clauses that clash with EU law are to be rescinded – such as the special tax on large investments – the existing tax law will be activated and harmonized until it is fully revised. At the same time, the Economy Ministry will take action to simplify procedures for absorption of funds from the Third Community Support Framework, and throughout the summer it will closely monitor Olympic Games spending, keeping it to the essentials. It will also activate tax inspections and move to finalize cases of outstanding tax from the 1999-2001 period, although Alogoskoufis is not in favor of continual changes. Among the priorities of this first phase is the activation of guaranteed capital for small and medium-sized enterprises, solving town planning issues so as to make the necessary changes for tourism investment, and finalizing the legal framework for co-funded projects. The first phase will also include the short-term privatization program, which is to be announced by the end of May. This summer, the government will prepare its new economic policy which the premier will present in early September at the opening of the International Trade Fair in Thessaloniki; it will focus later on the 2005 budget. Crucial aspects of economic policy will be tax reform and structural development measures. As for taxation, the government insists on lowering taxes for businesses to 25 percent for large businesses and 20 percent for small ones, and changing the system of carrying out tax inspections. Favorable tax measures will apply in 2005, and this year’s income will be taxed according to the existing system. Among structural and development programs, Alogoskoufis includes the opening of all closed markets, including the electrical power market. He places great emphasis on telecommunications,and has major plans to capitalize on the value of state property. He says this will be combined with a privatization program that will go beyond the notion of bringing in money, being integrated into the broader mechanism of structural change. «Everything will be done gradually, after study, in steady steps, without surprises,» says the minister. He rules out unilateral interventions in the labor market, leaving that to the jurisdiction of social partners and the dialogue between them. As for public finance, the minister expects pressure and warnings from Brussels, such as Italy is currently experiencing, but he is not deeply worried because many eurozone economies are in the same position. That’s why he will abandon his predecessor’s line at Ecofin and support the Italians. «We won’t come across as fiscal hawks,» he says, indicating a mild policy that favors the majority. The question that arises is how secure Alogoskoufis’s policy is – and how exposed it is to dangers and the unpredictable, especially as regards the economy. All the more so this fall when the burden of the Olympic Games will reveal the full extent of the fiscal problem, and the likely construction slowdown will result in less investment. In that case, Alogoskoufis will risk revision and may have to adopt a more aggressive economic policy. That is where matters may become confused should they not develop as planned. We shall see.

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