Monday, 18 January 2010


[under construction]

Having spent some time scrutinising the Updated Growth and Stability Programme, I'm now happy to comment but it's all I am happy about.

1. The baseline scenario and the bad- (not worst-) case scenario quote the same deficit.

Yes, it's true. Come rain or shine, Babis the Builder will deliver the same deficit. Note that this does not mean achieving the same savings. In the pessimistic scenario, automatic stabilisers kick in: social security spending increases, tax revenues fall. So, in order to achieve the same deficit, we'll need deeper cuts. Which of course will deepen the recession, necessitating further cuts.

In reality this commitment implies two things, neither of which I believe. First, that the savings promised by our Government so far do not exhaust the possible gamut of savings they have in mind. They've got aces up their sleeves. Second, that the Government will stop its ears against the cries of pain from their constituents and resist their Keynesian instincts, and in fact cut deeper as the economy deteriorates despite unbearable political pressure.

The former sounds unlikely. The Government has been very sparing on the details in the Stability and Growth Programme itself, which suggests they're still looking for the savings and efficiencies. Andreas MUPPET Loverdos himself famously said "I don't know where I'm going to get the money". And, of course, nobody's ever cut that far before in Greek history without also disbanding the state apparatus.

The latter might just be possible. We can always blame Brussels and cite extraordinary circumstances. But that takes us through year one. What about year two, or, God forbid, the originally-planned year four?

2. The baseline growth predictions overestimate inflation. 

Trust our ministry of finance to project GDP in nominal terms, despite the added layers of uncertainty involved in this projection. Why would we bother? Because for once that's the only number that matters - as we're hoping that between them inflation and growth will erode Debt/GDP. For once in our history, we're trying to over-estimate inflation.

The rate of inflation implied by our forecasts is extremely constant, hovering between 2.0 and 1.9 per cent in the baseline scenario and falling to between 1.9 and 1.6 per cent in the pessimistic scenario. Don't snigger - economic forecasts are like that. The levels of inflation, however, I do object to. In December 2009, CPI inflation was indeed 2.6% y-o-y, but the average annual CPI inflation was only half that: 1.3. That was already much lower than the forecast value for 2010, and price controls like wage freezes in the public sector hadn't kicked in yet.

And to think we don't even have our own currency... the Euro, buoyed by the far more advanced recovery and Germany and France, should insulate us from a great deal of imported inflation in the recovery. Even this, however, doesn't quite explain why our inflation rate is projected to start falling slightly, just as our economy accelerates to a giddy 2.5% growth per annum. It looks like fiction.

3. Implementing the Stability and Growth Programme will require an unprecedented level of parliamentary and administrative work.

Our homegrown journos estimate that implementation of the programme will require the passage of 53 administrative acts and acts of parliament. This can happen, if Parliament sticks to a schedule of minimum fuss, erring on the side of rubber-stamping, and the civil service simply does what it's told without delay. But it will also require expertly designed, 100% constitutional laws that cannot be overturned by the courts (like many others so far).

Of course, this all becomes that much less likely if our Civil Servants' Union keeps going on strike.

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