New finance minister lines up for a marathon (and several short sprints)
The naming of economist Gikas Hardouvelis as Greece’s new finance minister on Monday took most observers by surprise but the big challenges awaiting him are no secret.
Hardouvelis’s appointment caught many off guard because his name was not among more than half a dozen that had been linked with the post over the past few days.
“His background, though, matches that of the outgoing Yannis Stournaras and it is not so surprising that Prime Minister Antonis Samaras should want to stick with a nonpartisan figure that would also be welcomed by the troika,” according to the news and policy website MacroPolis.gr.
It was also noticeable that Samaras decided not to change the two deputy ministers at the Finance Ministry – Christos Staikouras and Giorgos Mavraganis – to ensure the maximum possible stability at this key government department. This means that the only outstanding issue is who will be the next general secretary for revenues after the resignation of Haris Theoharis last week. The government has already called for candidates wanting to become Greece’s next tax chief to apply for the job.
Hardouvelis comes with considerable experience in an advisory, although not decision-making, capacity. He was in charge of ex-Prime Minister Kostas Simitis’s economic office between 2000 and 2004. He held the same position during the interim government led by Lucas Papademos in 201112, when he played a part in drawing up Greece’s second Memorandum of Understanding with the troika and executing the haircut on private sector holders of Greek bonds (PSI). He leaves his position as an economics professor at Piraeus University and as Eurobank’s chief economist to take up the job at the Finance Ministry.
The new finance minister cannot say he is unaware of the size of the task he is taking on. Eurobank’s economic research division, which he headed, highlighted in a note at the end of May that there was “considerable margin for criticism” regarding the government’s lack of progress on some structural reforms. It also argued that Greece would not be able to deliver the planned primary surplus of 1.6% of GDP this year if revenues continued to miss their targets. Eurobank said revenues would only be in line with the budget if there is a widening of the tax base, if tax evasion is combated more effectively and if Greece returns to growth.
“Greece is suffering. Every household has at least one person who is unemployed or someone who is working and not being paid on time,” Hardouvelis told Ant-1 TV in his first interview after being named finance minister. “A lot of things need to be done. We have a marathon ahead of us,”
Hardouvelis certainly has a busy agenda ahead of him. His first Eurogroup meeting will be on June 19, with Greece unlikely to be in a position to claim its next bailout tranche of 1 bln euros as it has not yet completed its “prior actions.”
Here are some of the other issues he will need to tackle over the months to come, when Hardouvelis will have to run some short sprints as well as a marathon:
IMPLEMENTING THE ADJUSTMENT PROGRAMME -
Apart from the June tranche, which will be delayed, Greece also has to meet certain reform targets to secure the release of another 1-bln-euro instalment, which is due in July.
As Hardouvelis’s Eurobank economic research team highlighted, revenue collection is vital for the achievement of the primary surplus target of 1.5% of GDP (2.75 bln euros) this year. The budget execution so far shows a primary surplus of 1.05 bln euros to April but with the revenue shortfall widening to 622 mln.
The Medium-Term Fiscal Strategy envisages a primary surplus of 4.19 bln euros (2.3% of GDP) in 2014, 0.8%age points higher than Economic Adjustment Programme (EAP) target.
The next troika
is scheduled in July and one of the thorny issues that could be discussed is the further reform of the pension system. The merging of all supplementary pension funds of the public sector into the private sector main pension fund is a prior action for the July disbursement.
NEGOTIATING RELIEF -
Having been part of the team that oversaw the PSI in 2012, Hardouvelis might know what to expect when he sits down with his eurozone counterparts after the summer to discuss a second debt relief package for Greece.
Apart from being a key factor in deciding the sustainability of Greek debt, the outcome of negotiations will also affect fiscal targets for years to come. Furthermore, on a political level, the government will be looking for a boost later this year, when it has to implement more controversial measures, such as pension reform.
The government has reportedly assessed a plan incorporating a conversion of the Greek Loan Facility (GLF) variable rate (currently at Euribor plus 50 basis points) to 1% constant for the next 50 years. This could result in total savings of 25 bln (14% of GDP) over the 50year period. The government’s plan also incorporates the deferral of interest payments on GLF loans for 10 or 20 years, similarly to those previously applied to EFSF loans.
RESTORING GROWTH AND CREATING JOBS -
GDP contracted by 0.9% in the first quarter (Q1) of 2014, the slowest rate of decline since Q1 2010. Greece has seen its GDP contract by 25.6% since Q3 of 2008. Most official forecasts see the economy growing by 0.6% this year, partly on the back of even stronger tourism figures in Q2 and Q3. At the same time, the lack of liquidity remains a problem, especially with nonperforming loans rising above 30%.
It will also be important for the government and Hardouvelis that the return of economic growth goes hand in hand with job creation. Unemployment edged down for the sixth straight month in March but is still incredibly high at 26.8%. The number of unemployed is at 1.27 mln, which is 177% higher than March 2009. Youth unemployment remains persistently above the 55% park.
Prime Minister Antonis Samaras recently announced a very ambitious plan for creating a total of 770,000 jobs by 2020. Three quarters of those jobs are projected to be created in the following sectors: tourism, agriculture and fishery, and packaging. However, the official sector projects unemployment will ease by at least 1 pp this year and a further 2 pp in 2015. In contrast, the OECD projects a slower reduction of 0.7 pp cumulatively in 2014-15.