The inevitable fiscal adjustment
Slowly but surely, the tightening of fiscal policy will be increasingly felt no matter whose view of the new Stability Pact prevails in the European Union – the regulations promoted by France and Italy, which are adapted to the peculiarities of each European country, or the rigid view of Germany and its 10 backers, or something in between.
A few things are clear: According to the 2023-26 Stability Program submitted to the European Commission by the last New Democracy government, government spending on intermediate goods will be reduced by 1.1 billion euros and salary expenses by 730 million euros, in real terms, over a period of three years. This reduction will be reflected in the salaries of the public sector and in the quality of services provided by the state. The fiscal space will be very tight, up to 0.3% of GDP by the end of the next three years. This will be the threshold for new spending, which translates into 760 million euros per year in terms of the gross domestic product in 2026.
The government has cultivated high expectations for high-level services, wage and pension increases, and tax and other kinds of relief. The truth is that there will be no new hires, only replacements; that the increases in pensions will be those defined by the so-called Katrougalos law on social security, named after ex-labor minister Giorgos Katrougalos who introduced it; and that everything will be under the condition that the primary surplus is achieved. That will not be easy.
The adjustment effort would start on a better footing if the mandated support of the economy and vulnerable households had not been derailed
It will not be easy, not only because the government has committed to handouts that were not included in the country’s Stability Program, but also because the architects of the program have made the paradoxical prediction that the share of public expenditure in GDP will decline way faster than the share of public revenue – almost twice as fast. They achieved this by specifying a deflator on public spending that is (rather unorthodoxly) smaller than the deflator on GDP or consumption or investment. This is how the coveted primary surplus of 2% to 2.3% of GDP has been achieved. That is why some international rating agencies are talking about Greece’s “optimistic” fiscal forecasts. A fiscal adjustment is inevitable.
It would have been necessary one way or another, after a three-year pandemic, the war in Ukraine, and their consequences on the economy. But the effort would start on a better footing if the mandated support of the economy and the most vulnerable households had not been derailed, and if it had not taken on the characteristics of a fiscal blitz – with tax cuts on wealth in particular, and with ingenious clientelistic benefits of an unprecedented scale. At the same time, the European Commission is not saying a word, as if it has bought into a stupid narrative, such as: “Let’s spend what we need to end populism in Greece, and then we’ll figure it out.”
But much of the spending was done without seriousness, without fairness, often without true growth criteria. Overall, the government’s economic policy would have led to a dead end if inflation had not increased. It reduced the wages of salaried employment and boosted the absolute and relative amount of profits (that brought euphoria to the markets and parasitic capital to real estate), it contributed significantly toward reducing debt as a percentage of nominal GDP and, at the same time, it accumulated billions in windfall tax revenues.
Their distribution, together with borrowing from the increase in public debt, was the material basis for the electoral defeat of a very bad main opposition. If this was a political objective of the government’s economic policy, it was achieved. In the new political landscape, everything else remains to be managed.
