ND-PASOK gov’t may be more flexible

Yet slim majority creates risks that reforms the public sector needs immediately will be watered down

ANALYSIS The recent political developments in Greece show how fragile any governing coalition can become when faced with the task of overhauling the public sector. They also demonstrate why one should not have high expectations regarding policies aimed at rationalizing the main source of the country’s economic problems, the state-controlled entities and bureaucracy.

The three-party coalition government of conservative New Democracy, center-left PASOK and the moderate Democratic Left was able to survive the biggest tax raid in the country’s history, expenditure cuts and hundreds of thousands of private sector layoffs since it took office a year ago. But it was unable to continue intact when it came to dismantling the state broadcaster and then creating a slimmer, more efficient company while meeting the troika’s demand of 2,000 layoffs in the state sector by end-June.

Greek politicians of all stripes and especially those belonging to the left proclaim their sensitivity to layoffs. However, they are usually silent when private sector firms fire employees because the state has not paid them for projects completed years ago or supplies and services delivered in the past. In contrast, they become very vocal when it is about layoffs in the public sector. This is not due just to their human sensitivity but also their past role in awarding some of their associates and others positions in the public sector in exchange for votes in the last few decades. The clientelistic system, which helped make PASOK the dominant party in Greek politics after 1981 and lured the con- servatives to copy it and use it to its own advantage between 2004 and 2009, is behind the problem.

We have long argued, along with others, that Greece’s fate could have been different if the Socialist government of George Papandreou in October 2009 and the previous conservative government had had the stamina and courage to limit the pain of the sizable fiscal adjustment to the source of the burgeoning public debt, namely the public sector.

Instead, the Socialist government spread the pain via taxes to the rest of the economy, namely the private sector, weakening the economy and discouraging the few investors left willing to buy Greek bonds. It is no coincidence that primary expenditure at the general government level, which does not include interest expenses on public debt, is estimated at 43.5 percent of gross domestic product in 2013 by the European Commis- sion compared to an all-time high of 48.8 percent in 2009 – an election year with sizable one-off outlays – and a more normalized 45.5 percent in 2008 and 2010.

For a country facing the prospect of default and a euro exit to experience such a modest drop in primary expenditures as a percentage of GDP, it clearly demonstrates the priorities of the political elite. It is noted Ireland’s primary spending is seen at 37.2 percent of GDP and Spain’s at 40 percent in 2013 compared to 46.6 percent and 44.5 percent respectively in 2009. Primary spending in Por- tugal, another bailout program country, is estimated at 44.2 percent this year compared to 46.9 percent in 2009.

The fierce resistance of many politicians, openly or covertly, to the downsizing of the public sector more than three years into the crisis and the serious mistakes in the design of the first EU-IMF adjustment program, which resulted in excessive austerity and unnecessary output losses, have clearly made things worse. Many hope the new government made up of ministers from New Democracy and PASOK will show greater eagerness to implement reforms and especially to close down redundant state companies and rationalize others.

The good scenario wants the new bipartisan government to be more homogeneous and focused on reforms than its predecessor, although it will not enjoy the same support in Parliament. The fact PASOK, which has 28 deputies, is flirting with 3 percent of the popular vote according to polls, a threshold for electing deputies to parliament, also makes it more likely the government will hold together for some time.

However, it is hard to imagine there will be no strong objections from within the coalition, which commands 153 seats in the 300seat parliament and may count on the support of as many as four independent deputies when the time comes to overhaul more state companies.

To cope with the hurdles, the new coalition government is likely to water down any such plans and resort to raising revenues. The creditors will likely accept the watered-down version of the plans, fearing a political backlash. This is despite the fact the current plan calling for 4,000 layoffs in the public sector by year-end and more than 10,000 put in labor reserve may not be pleasant but is not ambitious when contrasted with the magnitude of the problem and the carnage in the private sector due to the credit crunch, the taxes and the domestic state arrears. So far, the reduction in the headcount is due to friction and voluntary retirement schemes, resulting in the increase of retirees.

Undoubtedly, it is much better for Greece and the eurozone that the country avoided snap elections and the government was able to survive after the withdrawal of ministers appointed or suggested by Democratic Left. However, there is no guarantee the new cabinet will do significantly more to rationalize the state sector. A watered-down overhaul of Greece’s state machine will be the most likely outcome. The road ahead may be rocky after a likely strong start.