PASOK president George Papandreou’s declaration Friday that the poor state of the economy will eventually draw the government into early elections was presumably made in order to rally PASOK officials who are still shaken up over his recent bombshell foreshadowing a party overhaul. Since there is never any smoke without fire, we must inform our readers that the upper echelons of government and a small group of Prime Minister Costas Karamanlis’s closest colleagues are anxiously awaiting the European Commission’s verdict on the 2006 budget and Ecofin’s decision in January. They are convinced that this will be decisive for economic and political developments in Greece. And on the political front, these developments range from early elections to the government’s prospective completion of its four-year term of office and its keeping all its campaign promises, which would mean progress toward victorious elections in the spring of 2008. Crucial Ecofin meeting As Economy Minister Giorgos Alogoskoufis told me: «The great political battle for the budget is not the one that will take place in Parliament in the five days from December 18 to 22. We’ll win that easily by voting in the budget. The uncertain and critical battle will be fought at the meeting of the Council of Economics and Finance Ministers of the European Union (Ecofin), being held January 23-24 to discuss the EC’s proposal for the Greek economy.» Let us look then at the battlefield, the different camps and the possible outcomes. As our readers will recall, in February 2005 an Ecofin Council decision brought the Greek economy under strict supervision due to prolonged infringement of the Stability Pact because, since 2000, all our budgets had deficits in excess of 3 percent of GDP. In line with a European Commission proposal, Ecofin approved giving the Greek government a two-year period (2005-2006) in which to get the deficit back below 3 percent. In its report published on November 17, the EC praised the government for the progress it has made this year in cutting the deficit back from 6.6 percent to 4.2 percent of GDP. However, it expressed doubts about the government’s ability and determination to get the deficit below 3 percent by the end of 2006 and indeed predicts that it will be unlikely to do so by the end of 2007. The Commission believes that the deficit will remain at 3.8 percent of GDP in both 2006 and 2007. So what will happen in January? Early that month the EC, having re-examined the 2006 budget – which by then will have been approved by the Greek Parliament – and evaluated all the information that Alogoskoufis has given Joaquin Almunia, the European commissioner responsible for economic and monetary affairs, it will make its proposal to Ecofin. In its proposal, Ecofin will then either accept the Greek budget forecast of a decrease in the deficit to 2.6 percent of GDP (or some other figure less than 3 percent) in 2006, or it will reject the budget as unreliable and declare the imposition on Greece of the penalties provided for in Article 104, Paragraph 9 of the revised EU treaty. (The penalties range from fines to suspension of EU funding.) In between the good and the bad scenarios is a third which seems probable, whereby Greece would be handed yet another deadline. This would not entail any slackening of effort next year, but it would allow Greece sufficient time to demonstrate that it can yank the deficit down below 3 percent in 2006. Being granted extra time means that, instead of imposing fines and other penalties on Greece in advance, the Commission would wait till the end of 2006 to see if the budget complies with Greek commitments to Ecofin. And Almunia has already proposed this solution to Alogoskoufis. Hence the battle in Brussels will be a head-to-head confrontation. Either we persuade the Commission in the next few weeks or we will clash with it and Ecofin will not be able to save us since economy and finance ministers traditionally do not question Brussels’s technical assessments. All Ecofin can do is give us extra time. Political refusal Can we in fact persuade the Commission? Karamanlis and Alogoskoufis are optimistic. Of course, they know that if they had accepted Almunia’s recommendation and imposed new taxes, they would already have got the Commission’s approval. But both of them were categorical on that issue, explaining that their refusal was political, since the government stands by its principle of a soft adjustment. A few days ago, Alogoskoufis again told Almunia that the government does not have a mandate to take harsh measures. «I’ve already scraped the bottom of the barrel,» he explained, «in trying to cut back as much as possible on spending.» So if the improvements the minister has made to the draft budget which the Commission had in mind when it issued its report on November 17, together with the revised three-year convergence program (2005-2008) to be submitted to Brussels next month do not convince the Commission, then the government has no choice but to resort to early elections. Only this would allow the voters to decide whether or not to give it a new mandate to take tough measures, or whether it has lost its confidence in the New Democracy government. But, as we said, the premier and the economy minister are optimistic that we will not reach such an extreme impasse and that the Commission, which currently appears to be intransigent (probably because it is facing the explosive cases of Germany, France, Italy and Portugal), will give Greece and its government the time to successfully implement what may be its most difficult budget in years and wind up in December with a budget that may not achieve the projected 2.6 percent deficit of GDP, but will in any case be lower than 3 percent. «I believe that by relentlessly pursuing tax evaders and cutting back on spending we will meet the target,» said Alogoskoufis, «and I hope that I can eventually convince the Commission.» Encouraging developments If the government’s optimism is justified, then other developments that are more encouraging for the public – and more favorable for Karamanlis – will take place. In fact, if the government successfully gets through its EU ordeal in January, then by March 2007 the Greek economy will no longer be under supervision. This would improve its international creditworthiness and boost its attraction for foreign investment. Second, it would enable the government to resist offering handouts, but to meet some electoral commitments which would give poorer members of society the message that a socially sensitive economic policy was being implemented. According to the three-year convergence program, the budget will receive 1.9 billion euros in two installments, in 2007 and 2008, so that the OGA farm pension rises to 330 euros and the EKAS supplemental pension for low-income pensioners to 150 euros. This is a make-or-break issue for Karamanlis, according to the Finance Ministry. Also in 2007, the rates of income tax will gradually start to decrease (from 30 percent to 25 percent and from 40 percent to 35 percent), which will bring the annual rate of income tax increase down from 9.2 percent, which it is now, to 4.5 percent in 2008.