TCS Daily

An Olympic Shift?

By Jurgen Reinhoudt - October 26, 2007 12:00 AM

Addressing the nation in a televised address in the wake of his party's narrow re-election, Greek Prime Minister Karamanlis said that "You have given a clear mandate to New Democracy [the center-right party] to continue the changes and reforms which the country needs."

Over the past few years, Greece's center-right government has accomplished quite a bit. The corporate tax rate has been cut from 35% in 2004 to 25% this year, improving Greece's investment climate.

Economic growth has been solid, around 4% on average for the past three years. The unemployment rate has been reduced from 11.3% in 2004 to 7.7% in 2007. The budget deficit has been neatly trimmed from 7.9% in 2004 to 2.4% in 2007.

Privatization has progressed apace. In June, the Greek government sold a 10.7% stake in Greece's dominant telecom company, OTE, raising $1.53 billion. It still owns 28% of the company and is likely to sell off more now that the center-right government has been re-elected.

In July, the government also sold a 20% stake in the Greek Postal Savings Bank: it now owns 44.4% of the Bank, and Greece's finance minister, George Alogoskoufis, has said that "if conditions are right and further restructuring takes place we will consider further reducing our stake."

Alogoskoufis also said that although though 'there are no current plans to reduce [the stake in ATEBank] below 51%,' the government is considering selling a chunk of its 77.3% stake in ATEBank.

Greece's government is also likely to re-structure its electrical company, Public Power Corp., where it holds a 51% stake. Once the troubled utilities company is efficiently re-structured, it is likely to be privatized.

During the past few years, the government has also encouraged people to work more. Under the old labor laws, shops closed at 5 p.m. on Mondays and Wednesdays, with longer hours during the rest of the week. Under reforms introduced in 2005, shops can now stay open until 9 p.m. on weekdays.

Moreover, flexibility has increased. Employers may now ask (but not command) staff to work up to 10 hours a day during busy periods, rather than the normal eight, in return for working fewer hours on another day.

Though these reforms were unpopular among some, a few months ago support for the government's agenda was strong, driven in part by strong economic performance. It was this support, and a gut feeling by many Greeks that structural economic reforms were needed, that motivated Prime Minister Karamanlis to hold early elections in an attempt to gain a renewed mandate for further reforms.

A natural catastrophe threw a wrench in the machinery of this plan: massive forest fires torched more than 500,000 acres of land and annihilated whole villages, killing 67 people. The opposition Socialists have relentlessly castigated the center-right government for an ineffective response to the forest fires, and the communist group KKE put up banners stating "Punish them!" urging voters not to re-elect the center right government for this reason.

On September 9, Socialist leader George Papandreou said that "Karamanlis' government is a graveyard of ideas and kindergarten administration...The fires and the catastrophes could have been avoided...They cannot coordinate the fire service with the army and local authorities and lives are lost as a result ... (people) were left helpless, with the government absent — this must never happen in our country again."

Voters did not defeat the center-right party but, in part due to anger over management of the response to the natural disaster, it will now have to rule with a far smaller majority of 152 out of 300.

Shortly before the elections, George Pagoulatos, associate professor of politics at the Athens University of Economics and Business, had stated somewhat prophetically that "The government can govern with 152 to 153 members of Parliament, but practically it will be difficult for measures such as pension reform to be implemented."

This is unfortunate because numerous challenges remain for Greek reformers. Among them: the runaway growth of entitlement spending. According to some estimates Greece faces a pension deficit twice the size of its gross domestic product, or around €350 billion. As things are, pension systems in the EU15 as a whole are far more sustainable than the Greek pension system. In the EU15, by 2050 spending on public pensions will have risen by 2.8% of GDP, a manageable increase. In Greece, by contrast, pension spending as a share of GDP is set to soar from 12.4% of GDP today to 22.6 % by 2050.

On September 9, Prime Minister Karmanalis said that "The pension issue is a big issue, and it must be dealt with ... (Voters) know that this is not something we can constantly push onto the backs of the next generation." But this remains to be seen: before Greek voters will accept concrete far-reaching entitlement reforms, they must be acutely aware of the urgency of the matter.

It is in this regard (among others) that Karamanlis has been making a useful contribution to public discourse: he is doing his best to change the prevailing mindset of the population in a bid to gain support for structural reforms. It is imperative that Karamanlis, in combination with strong deeds, continue to proclaim the need for urgent structural reforms.

Another elephant to tackle is the widespread corruption in the public sector that is hurting Greek society and the Greek economy. Takis Michas, a writer for the Greek daily Eleftherotypia, notes that "There are few other places in the Western world where the average man so readily expects the worst of the men and women leading them as in Greece. Greeks habitually refer to their politicians as 'liars' or 'crooks.'" Some Greek political economists have gone as far as to compare corrupt Greek civil servants to the Vikings plundering the national welfare of European societies in centuries past.

The center-right coalition has not adequately tackled this corruption, known as fakelaki ("the little envelope") in years past. One way to tackle it would be to increase the competition civil servants experience with the private sector in the delivery of their services. At present, many Greeks feel forced to bribe civil servants for various services—even medical services—because it is difficult to obtain them another way. If an effective private competition existed for services now mainly provided by the public sector, it would help force the public sector—described as "huge yet hollow" by Pelagidis and Mitsopoulo—to clean up its act.

Just as important for the new government is tackling education reform. A reform package that included a proposal to cap the number of years students can take to achieve a degree passed Parliament in March, despite violent protests. But moves to permit the establishment of private universities (!) continue to flounder in the face of dogged opposition. Why? A worldview overflowing with visions of class warfare bears a significant part of the blame.

Greek higher education is in shambles: its infrastructure is often dilapidated and its quality often lax through a lack of standards. Yet Apostolis Nellas of the Socialist PASOK Party told Dutch newspaper NRC Handelsblad that "You don't solve these problems by making it a commercial education market...the government should just reserve more money for public universities...With private universities you introduce elite reservations for rich kids." The Socialists had supported permitting the creation of private universities (!) before violent student protests cowed them into submission to old dogmas.

One student, Alexis, said that "Things are in such disarray here because it's a state university. The government should spend more money, instead of letting itself be corrupted by business people who want their own universities for their own children who are too stupid for real academia."

If Prime Minister Karamanlis succeeds in changing that class-warfare mindset just a bit, he will have won most of the reform battle. Let the games of structural Greek economic reforms begin.


TCS Daily Archives