Greek economic crisis: New government to pick up the pieces

Athens  - Greek voters go to the polls on Sunday with the state of the economy at an all-time low as the country faces its first recession in nearly two decades. Voters recognize that whoever wins the election will be faced with a big budget crisis.

With only a one-seat majority in the 300-seat parliament, the Conservative New Democracy Party under the leadership of Prime Minister Costas Karamanlis has been unable to push through necessary structural reforms agreed upon with the European Commission this year to reduce the budget deficit and improve competitiveness.

Karamanlis, 53, the descendant of a Greek political dynasty that has dominated the country's politics for half a century, rose to power promising to clean up crooked finances and public life.

In September he called for elections nearly two years ahead of schedule, hoping to win a fresh mandate to tackle the economy in the wake of a series of financial scandals that embroiled his government in allegations of corruption.

One of the largest was a land-swap deal involving a powerful Orthodox monastery, in which high-value property was traded for cheaper monastery land at a cost of about 100 million euros (145.5 million dollars) to the state.

"The year 2010 will be a difficult and decisive one, and so the Greek people must choose a government that can lead the country out of this crisis," said Karamanlis.

From enjoying steady 4 per cent annual growth rates through 2007, the International Monetary Fund predicts the country will enter recession by the end of the year, hard hit by the global downturn.

"The international crisis highlighted the vulnerable spots of the Greek economy - the most important of them is the growth rates of the past decade and, consequently, the employment levels were based in public borrowing," said Panagiotis Petrakis, director of the Economics Department at the University of Athens.

Poor state revenues forced the government to resort to borrowing 52 billion euros so far this year in order to finance a widening budget deficit, expected to exceed 8 per cent of gross domestic product.

According to Petrakis, improving the state of public finances is the primary challenge of the next government, as is taking all necessary measures to inflate economic activity.

"A further decline in domestic demand will, most certainly cause a harsher and possibly destructive recession at a time when the global economy is gradually recovering," said Petrakis.

Nikos Maginas, a senior economist at the Economic Analysis Department at the National Bank of Greece, says the next government must find some way to improve tax collection methods and combat tax evasion in order to increase revenues.

"Greece will face the most significant constraints in the social security system," says Maginas, adding the budgetary impact from an ageing population because of health care and pension spending remains one of the long-term challenges of the future government.

Attempts by the conservatives to overhaul the social security system, which experts say will collapse in 15 years due to an ageing population fell short of what reforms were necessary.

According to analysts, the next government must issue programmes that balance measures to rescue them without cutting back pensioners' rights.

Shortly after being elected in 2004, the Conservatives cut corporate tax rates, froze public sector pay, raised indirect taxes and privatised public sector companies such as state flag-carrier Olympic Airlines in a bid to boost investment, create jobs and shore up ailing public finances.

But spending cuts in 2007-08 derailed the government's budget plans, sidelining some of these projects, analysts said.

Tourism, shipping and construction, the sectors that bolster the economy, are now suffering because of the recession in Europe and a decline in international trade with China.

Although trailing about 6 percentage points in opinion polls, Karamanlis has, if re-elected, promised to fight tax evasion and freeze public sector hirings, pensions and salaries in an effort to curtail government expenses.

The Conservatives say they will press on with privatizations, including that of nickel producer Larco, water utility EYATH and gas monopoly DEPA. There are also plans to streamline state railways OSE, which loses 2 million euros a day, in order to stop losses.

The main opposition Socialists, under the leadership of George Papandreou, say they will cut government waste, spur development and raise taxes on the rich in order to increase revenues.

Papandreou also promised public sector pay raises above the inflation rate and has suggested renegotiating past privatization deals with loss-making Olympic Airlines and OTE Telecom, while dropping similar plans for other companies. (dpa)