De­ci­sion to up rev­enues rather than cut spend­ing fur­ther pe­nal­izes pri­vate sec­tor

If there is any hope left, this lies in front­load­ing EU funds, pri­va­ti­za­tions and sell­ing pub­lic prop­erty

Kathimerini English - - Business & Finance - BY DIM­ITRIS KONTOGIANNIS

ADe­spite the melo­drama sur­round­ing the vote for Greece’s medium-term fis­cal plan in Par­lia­ment this week, we are con­fi­dent that the gov­ern­ment will be able to har­ness enough sup­port from the so­cial­ist deputies to pass it. How­ever, the gov­ern­ment and the rest of the lo­cal po­lit­i­cal elite can­not es­cape an­swer­ing the fol­low­ing: Are they will­ing to se­verely down­size the bloated and cor­rupt pub­lic sec­tor or are they go­ing to let it drive the Greek econ­omy down to de­fault? The omens are not good.

It is widely agreed that the Greek econ­omy will have to grow at sat­is­fac­tory rates for many, many years, bor­row at in­ter­est rates well be­low the nom­i­nal GDP growth rate dur­ing the same pe­riod and pro­duce large pri­mary bud­get sur­pluses in the or­der of 6 per­cent of GDP to be able to re­duce its huge pub­lic debt to around 100 per­cent of GDP in 20 years or so.

The mar­kets ob­vi­ously do not think this is pos­si­ble, mean­ing the Greek debt is not sus­tain­able, and have rushed to jack up bond yield spreads and spreads on Greek CDS (Credit De­fault Swaps) to strato­spheric lev­els. Some may say mar­kets are not al­ways right and tend to cor­rect their mis­takes in a sharp, quick way if they are con­vinced to the con­trary. But they are right, and there are some re­cent his­toric prece­dents to sup­port this view.

The cost of in­sur­ing against an Ice­landic de­fault was the high­est in the world in Oc­to­ber 2008 when its three banks failed with CDS on five-year debt trad­ing at 1,473 ba­sis points com­pared to some 300 ba­sis points or less re­cently. Ukraine had seen the cost of its five-year CDS shoot up to more than 1,300 ba­sis points a few years ago, if we cast our minds back, but re­ceded around 500 ba­sis points.

So, there is hope that Greece may be able to turn the cor­ner and do what many in the mar­kets and EU gov­ern­ments think is un­think­able at this point – that is, not to re­struc­ture its pub­lic debt. How­ever, the prob­lems of this coun­try are quite dif­fer­ent from those of Ice­land or Ukraine.

From a sim­plis­tic point of view, Greece spent much more than it pro­duced for decades and this showed up in the twin deficits of the cur­rent ac­count bal­ance and the gen­eral gov­ern­ment bud­get bal­ance, amass­ing a huge amount of pub­lic debt.

So, all it would take for gov­ern­ment and cen­tral bank pol­icy mak­ers to cor­rect this im­bal­ance was a com­pre­hen­sive pack­age of fis­cal and re­form mea­sures aim­ing at com­press­ing ag­gre­gate con­sump­tion while en­cour­ag­ing in­vest­ment ex­pen­di­ture and ex-

to ports of goods and ser­vices.

With con­sump­tion spend­ing av­er­ag­ing above 88 per­cent of GDP since the early 1990s, all it had to do was to en­sure that nom­i­nal GDP growth out­paced con­sump­tion ex­pen­di­ture growth by far. At the same time, econ­omy more efficient and ex­tro­verted. This did not hap­pen.

The same goal could have been at­tained much eas­ier by fo­cus­ing on the root of many of the above prob­lems, namely the bloated pub­lic sec­tor.

Here we have to trust those who say that seek­ing a job in the pub­lic sec­tor was not ev­ery Greek’s dream be­fore the late An­dreas Pa­pan­dreou, the fa­ther of the cur­rent prime min­is­ter, came to power with the so­cial­ist PASOK party in 1981.

In other words, it has not been al­ways in the Greeks’ DNA to seek the se­cu­rity of the pub­lic sec­tor be­fore then. Need­less to say, this, along with the in­ten­sity of the cur­rent eco­nomic cri­sis, may be a card in the hands of the few in Greece who ar­gue in fa­vor of down­siz­ing the pub­lic sec­tor to ad­dress both the bud­get deficit and the lack of in­ter­na­tional com­pet­i­tive­ness.

How­ever, what we see in the medium-term fis­cal plan pushed for­ward by its of­fi­cial cred­i­tors and the com­ple­men­tary pack­age of aus­ter­ity mea­sures to close the es­ti­mated gap and reach this year’s bud­get deficit goal of 7.4 per­cent of GDP, is an­other strong dose of tax hikes.

Go­ing the eas­ier route

This shows that the gov­ern­ment wants to tackle the bud­get deficit by adopt­ing mea­sures that aim at gen­er­at­ing more rev­enues rather than go­ing for spend­ing cuts. The gov­ern­ment ob­vi­ously finds it eas­ier on a po­lit­i­cal level to pe­nal­ize the pri­vate sec­tor where trade unions and there­fore op­po­si­tion are not as strong and are more frag­mented, than to do the same in the pub­lic sec­tor, among whose la­bor unions some of its staunch­est sup­port­ers can be found.

By do­ing so, the gov­ern­ment is likely to find out along with the rest of us that the econ­omy will get grad­u­ally weaker in com­ing months since the health­ier pri­vate sec­tor will suf­fer more, sowing greater so­cial dis­con­tent. If this is ac­com­pa­nied by the usual ap­proach of drag­ging its feet when it comes to pri­va­ti­za­tions and struc­tural re­forms, the pub­lic sec­tor will also pay a heav­ier price, but it will be too late since this will be the con­se­quence of the whole econ­omy be­ing in re­ally dire straights.

Un­for­tu­nately, lit­tle can be done now that the gov­ern­ment, with the bless­ing of our of­fi­cial cred­i­tors, has sought to deal with the fis­cal mess by rais­ing mar­ginal tax rates again. By choos­ing to pre­serve the bloated pub­lic sec­tor, the gov­ern­ment has opted for a path. If there is any hope left, this lies with front­load­ing EU struc­tural funds, pri­va­ti­za­tions and the sale of pub­lic prop­erty to soothe the pain but it is dif­fi­cult to say whether this will be enough or who is go­ing to ex­e­cute them down the road.

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