In search of a common platform
The new gov't will need to employ the structural versus cyclical concept of the budget balance
The Greek people voted on Sunday for the second time in the last 41 days, pitting the conservatives against the Radical Left in a tight race according to the first exit polls. If the stakes were already high for the country prior to the elections, they have become even more so after the projected outcome. Some market participants think it is “game over” for Greece but we think there is another chance for the responsible pro-European political forces to join forces and save the game, even it means they will have to commit political suicide.
At the time of writing, it was not clear whether the conservative New Democracy part or the Coalition of the Radical Left (SYRIZA) would come first and get the bonus of 50 seats in Parliament. From a national point of view, a government enjoying the support of both major parties and some others, notably PASOK and Democratic Left, with a clear mandate to negotiate with the country’s creditors a feasible improvement in the terms of the bailout would have been the best possible.
However, we are not convinced at all that such a coalition government can be formed given the fundamental disagreements between SYRIZA and the rest, especially New Democracy. A fresh election could have been possible in a country without Greece’s economic problems and no indebted major political parties, but this is Greece, so that would be the least desirable outcome under the circumstances. However, the country has to have a stable coalition government with a two-year mandate -- that is till the elections for the European Parliament in the summer of 2014 -- to avoid risking a national catastrophe.
If New Democracy ends up being the first party, which was the most likely outcome according to the exit polls, it should have been able to form a government with PASOK and the Democratic Left party enjoying the support of more than 160 deputies in the 300-seat parliament based on initial projections. However, this prospect is clouded somewhat by the statement of Evangelos Venizelos, the leader of PASOK and former finance minister, that his party will not join a government in which SYRIZA does not take part. In addition, Democratic Left leader Fotis Kouvelis may find it difficult to support a government which does not have the backing of SYRIZA. However, given the dire circumstances facing the country, one would want to believe reason and statesmanship would prevail over partisan calculations.
In any case, all parties backing a new coalition government with at least a two-year mandate should agree on a common platform with the main goal being to keep Greece in the eurozone. They should agree on and present a feasible economic plan to the country’s creditors as the basis of renegotiating parts of the existing adjustment program to make it more effective. To this extent, they should try to minimize the amount of extra official funding which may be required to make it work in order to overcome objections from lawmakers and others in other eurozone countries. If possible, they should try to minimize additional official funding to nil by employing potential unutilized resources, i.e. part of the package intended for the recapitalization of Greek banks if possible.
Such a feasible plan should aim at fiscal consolidation without taking excessive restrictive measures which may do more harm than good at the end of the day. Employing the structural versus cyclical concept of the budget balance to identify the appropriate dose of measures, as suggested by economics professor Yiannis Mourmouras, who is an adviser to conservative leader Antonis Samaras, may be the right way to proceed for two reasons. First, the EU authorities recognize the significance of the cyclically adjusted budget balances in policy formulation, and second, the budget balances produce a breakdown between the structural and the cyclical component of the budget for all eurozone countries. This may require extending the time horizon for eliminating the structural component of the budget deficit so that permanent spending cuts have a smaller impact on the economy.
The economic plan should aim at boosting GDP growth via more investment spending and exports and make it an integral part of the country’s economic adjustment program. This could be attained by introducing binding deadlines for the Greek state to prepare, design and implement major works projects with secure European Investment Bank and EU co-funding. This would also make Greek bureaucrats accountable to the people and help correct inefficiencies and expose ineffectiveness.
The same plan should also foresee ways to cut the country’s public debt-to-GDP ratio in a market-friendly way. We can see no better way than Greece offering to buy back its deeply discounted debt in private hands. By reducing the public debt ratio by 10 to 20 percentage points, the Greek debt will become more sustainable in the eyes of the market, enhancing the credibility of the program. Moreover, it will make it less likely the country’s public debt in official hands will have to be restructured in the future, saving the money of taxpayers in Germany and elsewhere.
Of course, Greece needs a stable, viable government with a clear mandate of no less than two years for such plan to work. This requires responsible political behavior and statesmanship bordering on political suicide for the leaders taking part in such a government, along with understanding and generosity from the country’s EU partners.
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