Coun­try’s eco­nomic model must forcibly change as pub­lic sec­tor needs cur­tail­ing

Shift will be more painful and abrupt than es­ti­mated a few months ago but the al­ter­na­tive is worse

Kathimerini English - - Business & Finance - BY DIM­ITRIS KONTOGIANNIS

The rapid de­te­ri­o­ra­tion in eco­nomic con­di­tions has made it clear that chang­ing Greece’s eco­nomic model will be more painful than pre­vi­ously thought.

The de­lays in over­haul­ing and down­siz­ing the pub­lic sec­tor, which is key to chang­ing the Greek eco­nomic model, will en­tail even greater eco­nomic and so­cial costs than en­vis­aged even six months ago if the gov­ern­ment does not con­vince party loy­al­ists in state-con­trolled cor­po­ra­tions to ac­cept pri­va­ti­za­tions and vested in­ter­ests ev­ery­where else to ac­cept competition.

Last June, af­ter a press con­fer­ence by the so-called troika – the rep­re­sen­ta­tives of the Euro­pean Com­mis­sion, the In­ter­na­tional Mon­e­tary Fund and the Euro­pean Cen­tral Bank – we had asked Ser­vaas Deroose, the for­mer rep­re­sen­ta­tive of the Euro­pean Com­mis­sion in the team, why the eco­nomic pol­icy pro­gram was not front-loaded with struc­tural re­forms, such as lift­ing bar­ri­ers to en­try for “closed pro­fes­sions,” and pri­va­ti­za­tions so there would be more time for the Greek peo­ple to see the ben­e­fits.

We do not re­mem­ber his ex­act an­swer but we do re­mem­ber that the for­mer rep­re­sen­ta­tive of the Euro­pean Com­mis­sion in the team re­spon­si­ble for over­see­ing the ex­e­cu­tion of the pol­icy pro­gram de­fended the pro­gram, ar­gu­ing it would be suf­fi­cient to put Greece back on the right track if im­ple­mented.

To give him and the head of the IMF mis­sion, Poul Thom­sen, credit, they had both raised the specter of re­form fa­tigue at this time of the year so they were fully aware of the im­pact of the eco­nomic pro­gram, or mem­o­ran­dum.

It is true Greece had to cut its

Mis­takes and de­lays have cost a lot but they will look very small com­pared to fu­ture ones if pub­lic sec­tor ra­tio­nal­iza­tion stalls

bud­get deficit in an ag­gres­sive way to win back the con­fi­dence of in­ter­na­tional in­vestors and bor­row some 60 bil­lion eu­ros to cover the re­main­ing bor­row­ing re­quire­ment in 2012-13.

It is also true the gov­ern­ment passed a far-reach­ing law in the sum­mer of 2010, re­form­ing the coun­try’s ail­ing so­cial se­cu­rity sys­tem. The ben­e­fits of this re­form on the fis­cal front will be re­al­ized later on.

How­ever, it is now the con­sen­sus that the gov­ern­ment has fallen short in im­ple­ment­ing the rest of the re­forms agreed to with the troika since then.

In ad­di­tion, the mix of spend­ing cuts and tax hikes aimed at clos­ing the 2010 bud­get gap has proven in­ef­fec­tive in meet­ing the ini­tial deficit goal but ef­fec­tive in deep­en­ing the re­ces­sion by putting a big­ger bur­den on the pri­vate sec­tor than it should, mak­ing it harder to push for­ward with more re­forms.

By all ac­counts, the gov­ern­ment in­sisted on equal bur­den­shar­ing be­tween the pub­lic sec­tor, in the form of spend­ing cuts, and that which mostly af­fects the pri­vate sec­tor in the form of tax hikes to slash the bud­get deficit.

It is in­dica­tive of the statist men­tal­ity which dom­i­nates Greek pol­i­tics and es­pe­cially the rul­ing So­cial­ist party’s old guard.

To some ex­tent, miss­ing the fis­cal deficit tar­get in 2010, de- spite the sig­nif­i­cant re­duc­tion achieved, and the de­lays in the im­ple­men­ta­tion of the struc­tural re­forms have a com­mon de­nom­i­na­tor: The strong op­po­si­tion of politi­cians and trade union­ists in rul­ing PASOK.

But time is on no­body’s side as fail­ure to im­ple­ment the struc­tural re­forms and pri­va­ti­za­tions promptly will bring about harsher eco­nomic con­di­tions and so­cial un­rest, and cost­ing the politi­cians and the union­ists their priv­i­leges.

Tough task

Premier Ge­orge Pa­pan­dreou has to con­vince them even at this point to ac­cept the sac­ri­fice of their priv­i­leges for the com­mon good or col­lide with them and pub­licly seek the help of An­to­nis Sa­ma­ras, the pres­i­dent of the con­ser­va­tive op­po­si­tion New Democ­racy party, as well as the other po­lit­i­cal lead­ers to do so.

He should make clear to his party loy­al­ists who ex­ert power over key state-con­trolled en­ter­prises like the Pub­lic Power Cor­po­ra­tion that the al­ter­na­tive will be much worse for ev­ery­body in terms of so­cial dis­lo­ca­tion, in­clud­ing a fur­ther rise in un­em­ploy­ment.

It is also im­por­tant that the Greek peo­ple be in­formed that the coun­try un­der­took the pol­icy com­mit­ment to com­plete a 50bil­lion-euro pri­va­ti­za­tion and real es­tate de­vel­op­ment pro­gram in the in­for­mal EU meet­ing on March 11 in re­turn for ex­tend­ing the bi­lat­eral loans and cut the in­ter­est rate by 100 ba­sis points.

So it is noth­ing new when our part­ners de­mand we carry out this pro­gram.

More­over, it is nec­es­sary if we want to re­duce the pub­lic debt and grow out of this mess by pro­mot­ing eco­nomic growth, since pri­va­ti­za­tions lead both to a more efficient al­lo­ca­tion of cap­i­tal and usu­ally bring about more in­vest­ments.

They should also be in­formed that di­ves­tures of this type un­der the cur­rent un­fa­vor­able con­di­tions will not pro­duce the kind of pro­ceeds the coun­try could have hoped for un­der nor­mal cir­cum­stances but this should not stop the pri­va­ti­za­tion process be­cause the cost of de­fault would be much greater for all.

It is un­for­tu­nate that one year af­ter the eco­nomic pol­icy pro­gram was put in place, the Greek peo­ple see no light at the end of the tun­nel.

Mis­takes and de­lays have cost a lot but they will look very small com­pared to fu­ture ones if the ra­tio­nal­iza­tion of the pub­lic sec­tor stalls and vested in­ter­ests suc­ceed in de­rail­ing competition in out­put and in­put mar­kets.

The change in Greece’s eco­nomic model will be more painful and abrupt than es­ti­mated a few months ago, but there is no doubt the al­ter­na­tive is much worse.

Pre­par­ing for surgery:

Greece’s pub­lic sec­tor will need an emer­gency op­er­a­tion in or­der for the coun­try to have any chance of stream­lin­ing its fi­nances, as a slow ad­just­ment and pri­va­ti­za­tion process is no longer fea­si­ble.

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