A Journal of Foreign Policy Issues
By Professor Tassos Giannitsis, Economic Advisor to the Prime
Minister
1. Introduction
The course towards the economic and monetary union (EMU) is actually
one of the most ambitious goals in the history of Europe. The
monetary integration of a large part of the European national
economic spaces represents a qualitative difference in the history
of unification efforts which, most of the times, were historically
connected with catastrophic wars in the continent. The new element
is that now, an economic process for the first time has to precede
a political initiative. If this is the most successful way, it
will be tested over the next few years. Besides, what could prove
to be a "success" also depends on the concept and
the expectations one has for this important process. Today, the
discord between the economic and the political elements in the
planned union, even in the context of the most optimistic outcome
of the Intergovernmental conference, is so big that EMU was rightly
characterised as a "lame construction".
In such a context, the question arises as to: "what will
then be the architecture of Europe at the end of this century?".
Negatively defined, nothing in historical terms has any similarity
to past political construction. It seems complicated, and perhaps
unsuitable, to argue on future events using historical categories
and experiences. We are facing new realities, while the regionalisation
in North and South America, in South-East Asia and in our continent,
as well as the internationalisation of the markets and competition
turn a new page in history. However, the implementation of such
an important project like EMU, should be associated with clear
answers for the long-term and strategic goals of this process,
as well as for its internal cohesion and its evolutionary perspective.
The answers to these questions do not have theoretical significance only. On the contrary, they introduce important political elements in the discussion, since they imply political processes with enormous significance for our societies. They constitute the background for the analysis of further serious problems, such as the flexibility issue, the relation between the Political Union and EMU, institutional issues of the future European Union, the issues of expansion, structural funds or the future of agricultural policy.
However, I will not pursue this kind of problem further. We are a few months away from the completion of the Intergovernmental Conference and one year away from the decisions on the first group of countries that will implement the EMU and my topic concerns the position of Greece and the main decisions that are necessary in order to participate in the new scheme. Hence, in this context, in what follows I will focus on the strategies and measures of the Greek government.
First, I would like to emphasise that for Greece there is no question of If, as is eventually the case for some other member states of the Union. The central question concerns rather How and When the country will be able to accede to this new institution. Greece has supported from the beginning, at the end of the 50's, the Common Market as first European country. The Association Treaty in 1961, and later on the accession in 1981, were the main actions of a long-term development which expressed the narrow economic, political, historical and cultural relations between Greece and the then member states, as well as the European institutions.
Actually, as a member of the European Union, Greece is oriented
towards EMU for the same reasons and pursuits that motivate most
of the member states. In particular:
- higher growth potential
- achievement of a greater economic stability, and reduction of
the burden due to higher interest rates and unstable foreign exchange
rates
- maintenance of a broader cooperation which, despite the burden
of adjustment, will lead in the medium and long term to clearly
positive effects, not only in the strict economic sense, but under
a wider perspective that cannot always be analysed in detail and
in quantitative terms.
It should be mentioned that during the fifteen years of accession
to the EC, significant adjustment capabilities and changes are
to be seen, which are rarely noticed and reported. For Greece,
the accession meant an enormous reorganisation of its economic
structures, which were the most significant ones in the recent
history of the country. The extended liberalisation of the product
markets, and later on of the capital markets, had fundamental
effects on the productive structure of the country. Especially
the industrial sector and certain important parts of the services
sector went through significant changes within a short period
of time. Within a few years, they moved from a state of marked
protectionism to a phase of intense international competition.
The pressures for adjustment in the first years of accession were
followed shortly afterwards by the pressure of adjustment to the
Single Market, and recently, to the EMU. The changes and reorganisation
of the economic structure have been significant. The percentage
of industrial imports in total demand increased from 25% to over
40% between 1980 and the beginning of the 90Õs, while in
certain industrial branches these percentages are even higher.
An important number of large and medium enterprises were eliminated
from the market and the participation of the industry in the Gross
National Product (GNP) shrunk from 19.5% in 1980 to 13.9% in 1995.
However, during the same period, the industry and other sectors which have been exposed to competition also demonstrated an important ability to adjust. A series of new enterprises was created, new competition structures were formed, negative trends were restricted and during the last few years a positive course can be noticed. In the last year, as well as in 1997, for the first time after many years, the growth rate exceeded for the first time after many years, the average growth rate in the European Union, which marks a real convergence process.
Today, the central issue for the Greek government is to meet the Maastricht criteria within a short period of time so that Greece can participate in the EMU.
Naturally, this goal may be considered as the greatest challenge of the 90's. I will examine this issue at three levels:
First, I will analyse the government's strategy after 1993 with regards to the EMU,
Second, I will present the performance achieved during the last few years and its significance for attaining this goal, and
Third, I will refer to the goals and means of our policy for the
next years.
2. The attempt to associate an effective stabilisation policy with a convincing development strategy
In 1993, the PASOK government was engaged in a Convergence Programme with which by the end of 1988 the Maastricht criteria should have been met. During the difficult conditions at the end of 1993, the main goal was to restore a fiscal balance, to restore the reliability of the economic policy and the Greek economy and to apply a balanced policy based on these elements: stabilisation-restructuring and development-social cohesion.
The specific goals consisted in the control of the then large
deficits, the reduction of inflation, and the acceleration of
investments by effectively using the Community resources.
In this framework, a period of stabilisation began in 1994 which
was based on the following elements:
1. Fighting tax-evasion by introducing special criteria for the
tax liability of a large number of free lance activities.
2. More effective organisation of the Ministry of Finance and
more intense efforts to tax part of the underground economy.
3. Imposing new taxes and higher tax rates on various activities
and transactions.
4. Establishing new economic-political institutions and/or practices
with the support of which the collection of taxes would be facilitated.
5. Introducing restrictive policies with regards to current public
expenditure.
The financial and monetary policy was one of the most important
tools to fight inflation too. Throughout the past three years
a restrictive policy was applied, which was mainly expressed in
foreign exchange policy. For instance, from the end of 1993 to
the end of 1996, the national currency lost about 10% of its value
against the ECU, which was significantly below the inflation rate
of this period.
In the past years, this policy contributed in the important improvement of the fiscal figures and the reduction of inflation. The successful liberation of short-term capital flows in spring 1994, namely in the middle of a difficult situation, as well as the effective handling of the monetary crisis of the time reinforced substantially the credibility of the overall policy.
The direct consequence of this development was the large reduction of the risk premium which was included in the interest rates. While inflation was reduced by 6% between 1993 and 1996, the interest rates on public securities dropped by 8.4% during the same period. This on the one hand eased up the pressure of public debt, while on the other hand, it led to an important improvement of the investment climate as well as of the competitive position and profitability of the enterprise sector.
A further consequence of this development was the recovery of investment activity in the private economy which, in conjunction with public investment activity and the resources from the Community Support Programme, led to accelerating growth rates and to the stabilisation of the unemployment rate, despite the applied austerity policy. In fact, private investment increased by a year average of 4.7% between 1994 and 1996 compared to an increase of 2% in the GNP in the same period, and to an average increase of 1.1% in private investments between 1990 and 1993. At the same time, public investments increased by an average of 7.5% and as a result, this combination created significant dynamic effect for the overall economy.
The results of these efforts is generally expressed by the improvement of the most important economic indices. The following results can be noted for the period between 1994 and 1996:
At the same time, there was a positive increase in salaries, which resulted in the increase of the real incomes during these years.
This performance was largely compatible to meet the goals set in the Convergence Programme.
In the field of structural policy, a series of decisions was made, such as, the partial privatisation of the Telephone Company (OTE),which represented one of the largest privatisations in the country; construction of a series of works that rank among the largest European ones, such as, the new Athens airport; the Rio-Antirio bridge etc.; the change of investment incentives which, in a short period of time, led to the recovery of private investments, to name but a few important examples.
As a consequence, during these years the mix of the economic policy would achieve important results both in stabilisation and development. It would not be an exaggeration to sustain the position that these years all typical criteria of a country's economic situation were significantly improved. This markedly distinguishes the situation from the previous years when the improvement of certain economic parameters was counterbalanced by the simultaneous deterioration of other parameters.
The simultaneous progress in the fields of stability and development has significantly facilitated the overall adjustment process. This result was largely made possible from the resources of the Community Support Framework which, despite the fiscal austerity, enabled to achieve high growth rates in investments. The investment programmes which are implemented are expected to lead to large structural effects and adjustments which will give new dynamics to the development process in the next few years and will also facilitate the stabilisation policy. The completion of a series of major and intermediate projects in the next few years will significantly develop further the countryÕs infrastructure and will directly and indirectly strengthen the competitiveness of the economy so that the growth potential will be further reinforced.
In this context, it should also be mentioned that 1996 has been
a year of significant political events, such as, the resignation
of Andreas Papandreou and the election of Konstantinos Simitis
as Prime Minister, the crisis at Imia, the death of Andreas Papandreou,
and the election of Simitis as President of PASOK, and finally,
the elections in September. All these events had little effect
on the economy and the international markets showed a remarkable
confidence.
3. Goals and difficulties of the government's strategy
Having briefly outlined the results of the past few years, I would now like to turn to the goals of the government for the coming years. Despite the aforesaid positive results, the distance that should be covered remains significant. Because there would have been elections at the end of 1997, the difficulties for the application of an effective stabilisation policy would be serious. Not only the degrees of freedom of an effective stabilisation policy would be very limited in view of the elections, but also the pressures from different lobbies could endanger the results achieved until then. Therefore, for a series of reasons, Prime Minister Simitis decided to hold the elections in September 1996. Thus, the said negative consequences were avoided, and for the first time in almost twenty years, the political circle of worsening fiscal deficits in election periods was interrupted. The negative consequences of the election battle on the economy were restricted and remained under control, while the space for a more decisive policy was expanded.
Greece will face three challenges in the next few years:
First, the achievement restriction of much higher values than other countries with regard to the Maastricht values within a very limited period of time. Although for this reason it will not be possible for Greece to participate in the first stage, it is politically and economically necessary for the country to accede to EMU with the next group.
Second, this effort should also be associated with the dynamic development process which will make visible the success of the stabilisation policy. Besides, a dynamic development process is an important factor for the maintenance of a stable position within the EMU too. Competitiveness, employment, the increase of investments, even inflation depend directly on the rate of the development process.
Third, during this stage the social dimension should also be maintained. Without a socially balanced stabilisation policy the appearance of serious conflicts could exert adverse affect on the stabilisation and development process itself.
Greece actually has the task to reduce within the next 2-3 years the budget deficit from 7.6% to below 3% and the inflation from 7.5% (end of December 1996) to approximately 2.5%, while at the same time, to achieve an improvement of the debt/GNP ratio. This goal is clearly beyond any numerical nature. The point is to create the conditions that will be able to maintain in the future a stable position of the country in the EMU without affecting the development process. The goal of the stabilisation policy as well as of the investment and development policy is to shape the general productivity level of the Greek economy in the next few years in such a way that the gap of productivity growth between Greece and the European Union would not take a dimension that would significantly deteriorate the stabilisation conditions by downward adjustments of wages.
A basic position of the government and Prime Minister Simitis personally is that regardless of the Maastricht criteria, the macroeconomic relations of Greece, particularly the fiscal deficits and inflation should improve independently of the Maastricht criteria. Regardless of the discussion on the suitability or the severe character of these, the present situation of the country does not leave room for the relaxation of the stabilisation efforts. The problem now is the time dimension of the required actions. In order to widen and consolidate the progress which has been achieved, the course of government policy is oriented towards a combination of a strict economic and monetary policy, and an effective structural policy. In accordance to the Convergence Programme the reference values of the Maastricht treaty should have been achieved by 1998. This may prove to be very optimistic, but in any case, the period to achieve this goal is very narrow. The government will be faced with elections in 2000 and this means that, among other things, it will also be judged for the successful performance of its mandate to include the country in the EMU. Therefore, the conditions of accession should have been met within the next 2-3 years so that the country may accede to EMU in 2001. The success or failure of the policy to fulfil the time schedule and secure the participation in the EMU after many years of political stabilisation, will be decisive.
Therefore, in 1997 and 1998, a new boost will be given to the efforts for further reduction of deficits and inflation. It is clear that the significance of the fiscal reform in 1994 reached in 1996 its limits and new additional measures should be taken.
Hence, the budget for 1997 is an expression of the government's determination to achieve the ambitious goals of the Convergence Programme. The fiscal policy now has the following goals:
1. Drastic cutback of expenditure, especially of subsidies to state
organisations. A new institutional framework has been decided
which aims at imposing a rational strategy and thus increasing
the productivity of state expenditure.
2. Abolition of the public tariff system and establishment of a
new one which will entail reduced expenditure for salaries in
1997 compared to the old system.
3. Abolition of a series of tax exemptions which will increase
tax revenues, and at the same time, will promote social justice.
4. Establishment of a series of new taxes and increase of selected
tax rates.
5. A socially fairer distribution of the tax burden. Emphasis has
been given to the taxation of interest from State securities as
well as the establishment of a tax for large properties.
6. Establishment of new organisational criteria and rationalisation
measures for public enterprises with the introduction of new institutional
measures, new relations between management and the government,
instruments for planning etc..
7. Further privatisation of certain organisations and enterprises
under state control, such as, small banks, OTE etc..
In addition to that, the monetary policy will continue its strict
course and will maintain its anti-inflationary character. The
more intensive application of fiscal measures in 1997 will facilitate
the monetary policy.
Problems and perspectives
The application of a policy that will lead in the next few years to the fulfilment of the Maastricht criteria is associated with a series of political and economic conditions, many of which are also characterising other countries of the Union. In the following, I will focus mainly on five such factors, mainly those that have a rather external character, and hence are not directly affected by the domestic policy.
First, the economic situation in Europe plays a decisive role in facilitating the denominator of the Convergence effort, namely the country's development dynamics. For the Greek Convergence Programme, investment as well as export receipts are important factors for achieving growth rates that would quantitatively contribute not only to the nominal convergence, but also to the real convergence between Greece and the EU. Since investments will certainly affect the import side of the balance of payments because of the internal productive structure, exports are a necessary factor to counterbalance the recession effects of the restrictive fiscal policy. However, Greek exports are characterised by a large income elasticity of demand, and as a result, significant consequences on growth are determined by the economic situation in Europe. Therefore, the economic cycle in the current period will facilitate or impede the domestic process which, in its turn will influence the intensity of domestic social conflicts and the stability of the convergence process.
Second, the general developments in a series of sectors and activities with high importance in the country's productive structure can exercise particular influence on the stability of the overall convergence process.
Although the external expansion of the Union and its external economic relations are not expected to cause dramatic changes in the next few years, developments in the agricultural sector and textiles, to name two significant examples, are decisive for the economic and social stability of the country. These two sectors represent 21% of the GNP, namely much more than in other member states, and are also important in terms of employment. In general, the perspective of increasing uncertainty for such wide parts of the economy as a consequence of present or future decisions made in Brussels is also a factor that may significantly affect the willingness of broad social groups to adjust to the requirements of EMU.
Third, the developments in the field of foreign policy proved also to be factors of increasing importance for the economic processes, which were associated with EMU. In this context, the relations between Greece and Turkey that are also affected by the foreign policy of the member states and other factors have to be mentioned. In the last twenty years, Greece has been under the pressure of the consequences of the invasion in Cyprus, the increasing aggression and the territorial claims of the neighbouring country, and in general, a systematic expansion policy from the part of Turkey which, after the collapse of the Soviet Union, attempted, even if unsuccessfully to claim a central geopolitical role among countries of the wider region, including Bosnia.
Any dispute or threat to national territory and sovereign rights is bound to have more or less serious consequences on stabilisation, development and convergence. The political reasoning lies beyond the scope of this paper. However, in this framework, I think it is useful to mention that the way the most important partners of the Union handle these issues, even their attitude in questions of basic principles, while self-evident for any European country, constitute an external factor which may significantly support or delay the success of the convergence process over the next few years.
Fourth, social reactions concerning the stabilisation policy will also play an important role. After 1994, several parts of the population have reacted to the fiscal policy. The strikes of farmers, pensioners, seamen, teachers, civil servants, to name social categories that represent wider parts of the society, have adversely affected the social climate, particularly in the recent period.
Fifth, the results of the Intergovernmental Conference, especially those concerning political cooperation, institutional issues, the perspective of a more profound integration, a cohesive and more stable structure in Europe as well as a series of other critical decisions, e.g. in the question of structural funds, enlargement and agricultural policy, will significantly facilitate the social acceptance of a policy that faces intense reactions from different sections of the society.
Now, the prevailing issue (and rightly so) in the government circles in Europe is the discussion on the Stability Pact and the reinforcement of the Euro. The request for a strong currency can not be questioned, mainly during the first period which will determine the confidence in the common currency. However, the implementation of EMU poses the question whether this historical step represents simply an instrument is the aim to achieve a European Union or simply in an instrument for completing the Single Market in Europe. In my opinion, the EMU risks to fail, if it remains disassociated from a broader integration process in Europe. Hence, sooner or later, the necessary measures will be taken to deal with this Òlame constructionÓ. It is clear that a single currency, in conjunction with the Stability Pact, largely restricts the national autonomy for important macroeconomic and other decisions. The political and social consequences of this change have such a significance, that the long-term stability of the entire construction cannot be achieved without the closer cooperation at a European level in political, economic and social issues.
The withdrawal of monetary, fiscal and income policy issues from the field of the national state cannot lead to a political and social vacuum without asserting significant consequences. Therefore, despite the arguments that are rightly stressed concerning the importance of a powerful Euro, the European project cannot be assigned to the exclusive responsibility of one Central Bank. The decisions are of a political nature and the complexity of the social and economic reality cannot be limited to monetary-political criteria and notions. In my opinion, a certain flexibility is necessary which will on the one hand not endanger the stabilisation terms of the programme, and it could on the other itself become a stabilisation factor.
This implies that the successful implementation of the EMU depends on the progress in many significant areas and would not be achieved simply because foreign exchange rates and the currency's purchasing power remain stable. The fact that, in none of the present member states, the society is not particularly enthusiastic about EMU, is not accidental. On the contrary, the prevailing feelings are rather of discontent, mistrust, and uncertainty for the future. This is certainly due to many factors, but the restrictive consequences of macroeconomic management, the continuous and increasing unemployment as well as the aggravation of the welfare level of wide social groups are naturally considered by the public as consequences of the course followed.
Stable unification processes may only be achieved through integrated social, economic and political concepts. From this viewpoint, the results of the Intergovernmental Conference as well as the discussions on the expansion of the European Union, the decisions of the Structural Funds and other important issues are extremely significant.
Finally, the political challenge lies in the achievement of a
balanced association of the necessary economic and political factors,
which would enable the creation of an adaptable, viable and socially
acceptable European construction.