Government plan has no enforcement mechanism, rests on questionable assumptions
Faced with a tough election battle ahead, Prime Minister Costas Simitis announced last week his government’s four-year plan, called “2004-2008 Convergence Charter,” aiming at raising Greek living standards closer to the level of more developed European Union member states. Although few can disagree with the plan’s stated goals for 2008, all should know that the plan is not credible. This is so because, as in many other economic plans, no disciplinary action is foreseen to enforce performance. Nevertheless, a number of its targets are feasible within the above time framework.
Following its 2.3-billion-euro package of measures aiming largely at boosting the incomes of targeted interest groups, like farmers and pensioners, Simitis unveiled last week the long-awaited charter. The plan sets as a goal to increase the average real wage to 90 percent of the EU average in 2008 from 81 percent at present, increase per capita income (in purchasing power points) to 80 percent of the EU average from 71 percent today, raise labor productivity to 90 percent from 86 percent at present, and attain higher annual GDP (gross domestic product) growth rates by 2.5 to 3.0 percentage points above the EU average during this period. The plan envisions a drop in inflation to 2.0 percent in 2008.
On the fiscal front, the plan targets a reduction in the public debt-to-GDP ratio to 85 percent, counting on a combination of strong economic growth and a smaller budget deficit on the heels of an expected further drop in interest expenses as a percentage of GDP and the containment of budget consumption outlays to achieve it.
Other stated goals of the convergence plan are a reduction of unemployment to 6.0 percent in 2008 from 8.9 percent at present, an increase in employment to 62 percent from 58 percent currently, creating 290,000 new jobs, and greater employment for women and young people. To meet the above goals and a number of others outlined in the 2004-2008 plan, the government intends to push forward with structural reforms, mainly through sales of state assets, reduce taxes for individuals and corporations, and cut red tape, among others.
Despite all the criticism directed at the plan by political foes and others, the truth of the matter is that most of these goals are feasible and could be easily attained within the above time span. One of the reasons for this has to do with the fact that the EU will consist of 25 countries and perhaps more by the end of 2008. Since most of the newcomers will have lower living standards compared to those of current members, one would expect it to exert downward pressure on most EU averages, making it easier for a country like Greece to reach their level. This is purely technical but it can still work.
Aside from this, there are other good reasons to be more optimistic rather than pessimistic about the attainment of some of the plan’s goals. Greece will be on the receiving end of a good deal of money from the EU’s structural funds through 2008. Since it had a slow start in absorbing the money, it is reasonable to believe it will receive the bulk of the funds from 2004 through 2008. Moreover, government officials and New Democracy party members believe that Greece is likely to get a significant amount of funds, although much less that the 20 billion euro plus allocated in the Third Community Support Framework (CSF) after 2008. In addition, the country may benefit from increased tourism if the 2004 Olympics turn out to be a success. The opposite, of course, will happen if they are deemed a failure. Assuming the major European economies start recovering from 2004 onward, Greece is likely to get another growth boost via increased exports and tourist receipts. In other words, the strong economic growth rates envisaged in the plan are feasible, even though they may fall short of government expectations for a 2.5 to 3.0 percentage point outperformance vis-a-vis the EU average, especially if one thinks new EU members will add to average growth.
It is not reasonable, though, to expect that Greece will keep on growing fast over the next few years while headline inflation declines to 2.0 percent in 2008 from an average 3.5-3.8 percent at present. If one accepts the OECD estimate that Greece’s potential GDP growth rate, which is compatible with non-accelerating inflation, stands at 3.1 percent and the consensus view is right in forecasting growth rates well in excess of that figure, then it is highly unlikely for the inflation target of 2.0 percent to be met under normal circumstances, that is, average annual EU growth in excess of 1.5 percent during the 2004-2008 period. The plan’s GDP and inflation targets could have been met if Greece had taken more decisive steps toward deregulating markets, especially the labor market and professions and had streamlined the public sector.
The trade-off between growth and inflation highlights one of the shortcomings of the 2004-2008 convergence plan, that is, its internal inconsistency. This characteristic is shared not just by this plan but by most other macroeconomic plans presented by governments and political parties in the past. The reason is simple. These plans represent more the wishes of the authors — who have in mind maximizing political benefits rather than form a time-consistent macroeconomic plan which may offer unpleasant surprises to some in the audience. This is typical in Greece, where political parties unveil “economic” plans before elections to win over voters but they never bother to put them under the stress of empirical testing. This is done for good reason. These are more essays of ideas and wishes rather than economic plans.
Even if one thinks of the “2004-2008 Convergence Charter” as a feasible economic plan, we will dare to disagree on another point. This “charter,” like other multi-year plans unveiled by governments or political parties, suffer on another note as well: credible commitment. This cannot be attained, in our view, unless performance is coerced or discretion as to its application is eliminated. Although Prime Minister Costas Simitis is an honest man and means to honor his commitment, there are other external and internal factors which will most likely make self-enforcing the “charter” a mission impossible.
Faced with a tough election battle ahead, Prime Minister Costas Simitis announced last week his government’s four-year plan, called “2004-2008 Convergence Charter,” aiming at raising Greek living standards closer to the level of more developed European Union member states. Although few can disagree with the plan’s stated goals for 2008, all should know that the plan is not credible. This is so because, as in many other economic plans, no disciplinary action is foreseen to enforce performance. Nevertheless, a number of its targets are feasible within the above time framework.
Following its 2.3-billion-euro package of measures aiming largely at boosting the incomes of targeted interest groups, like farmers and pensioners, Simitis unveiled last week the long-awaited charter. The plan sets as a goal to increase the average real wage to 90 percent of the EU average in 2008 from 81 percent at present, increase per capita income (in purchasing power points) to 80 percent of the EU average from 71 percent today, raise labor productivity to 90 percent from 86 percent at present, and attain higher annual GDP (gross domestic product) growth rates by 2.5 to 3.0 percentage points above the EU average during this period. The plan envisions a drop in inflation to 2.0 percent in 2008.
On the fiscal front, the plan targets a reduction in the public debt-to-GDP ratio to 85 percent, counting on a combination of strong economic growth and a smaller budget deficit on the heels of an expected further drop in interest expenses as a percentage of GDP and the containment of budget consumption outlays to achieve it.
Other stated goals of the convergence plan are a reduction of unemployment to 6.0 percent in 2008 from 8.9 percent at present, an increase in employment to 62 percent from 58 percent currently, creating 290,000 new jobs, and greater employment for women and young people. To meet the above goals and a number of others outlined in the 2004-2008 plan, the government intends to push forward with structural reforms, mainly through sales of state assets, reduce taxes for individuals and corporations, and cut red tape, among others.
Despite all the criticism directed at the plan by political foes and others, the truth of the matter is that most of these goals are feasible and could be easily attained within the above time span. One of the reasons for this has to do with the fact that the EU will consist of 25 countries and perhaps more by the end of 2008. Since most of the newcomers will have lower living standards compared to those of current members, one would expect it to exert downward pressure on most EU averages, making it easier for a country like Greece to reach their level. This is purely technical but it can still work.
Aside from this, there are other good reasons to be more optimistic rather than pessimistic about the attainment of some of the plan’s goals. Greece will be on the receiving end of a good deal of money from the EU’s structural funds through 2008. Since it had a slow start in absorbing the money, it is reasonable to believe it will receive the bulk of the funds from 2004 through 2008. Moreover, government officials and New Democracy party members believe that Greece is likely to get a significant amount of funds, although much less that the 20 billion euro plus allocated in the Third Community Support Framework (CSF) after 2008. In addition, the country may benefit from increased tourism if the 2004 Olympics turn out to be a success. The opposite, of course, will happen if they are deemed a failure. Assuming the major European economies start recovering from 2004 onward, Greece is likely to get another growth boost via increased exports and tourist receipts. In other words, the strong economic growth rates envisaged in the plan are feasible, even though they may fall short of government expectations for a 2.5 to 3.0 percentage point outperformance vis-a-vis the EU average, especially if one thinks new EU members will add to average growth.
It is not reasonable, though, to expect that Greece will keep on growing fast over the next few years while headline inflation declines to 2.0 percent in 2008 from an average 3.5-3.8 percent at present. If one accepts the OECD estimate that Greece’s potential GDP growth rate, which is compatible with non-accelerating inflation, stands at 3.1 percent and the consensus view is right in forecasting growth rates well in excess of that figure, then it is highly unlikely for the inflation target of 2.0 percent to be met under normal circumstances, that is, average annual EU growth in excess of 1.5 percent during the 2004-2008 period. The plan’s GDP and inflation targets could have been met if Greece had taken more decisive steps toward deregulating markets, especially the labor market and professions and had streamlined the public sector.
The trade-off between growth and inflation highlights one of the shortcomings of the 2004-2008 convergence plan, that is, its internal inconsistency. This characteristic is shared not just by this plan but by most other macroeconomic plans presented by governments and political parties in the past. The reason is simple. These plans represent more the wishes of the authors — who have in mind maximizing political benefits rather than form a time-consistent macroeconomic plan which may offer unpleasant surprises to some in the audience. This is typical in Greece, where political parties unveil “economic” plans before elections to win over voters but they never bother to put them under the stress of empirical testing. This is done for good reason. These are more essays of ideas and wishes rather than economic plans.
Even if one thinks of the “2004-2008 Convergence Charter” as a feasible economic plan, we will dare to disagree on another point. This “charter,” like other multi-year plans unveiled by governments or political parties, suffer on another note as well: credible commitment. This cannot be attained, in our view, unless performance is coerced or discretion as to its application is eliminated. Although Prime Minister Costas Simitis is an honest man and means to honor his commitment, there are other external and internal factors which will most likely make self-enforcing the “charter” a mission impossible.
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1275.09
