Simitis pursues his EMU pipedream

Date: 12/12/1996

By Tim Jones

EVERY country in the EU has a chance of joining the single currency bloc if it begins on time in January 1999 - everyone, that is, except Greece.

Denmark, Sweden and the UK may choose to stay outside, but at least they are likely to have a choice.

The Greek government knows that whatever it does, it does not have a hope of remedying the country's economic problems within the 15-month deadline before the EMU short-list is drawn up.

With the country's toughest budget in a decade and a half due for approval by its parliament by 21 December, the Socialist government is up against a national blockade by farmers determined to hang on to long-held tax privileges.

In early 1998, when heads of government come to look at the performance of member states, Greece will still have an inflation rate 4&percent; above the maximum set out in the Maastricht Treaty's entry rules.

With the drachma remaining outside the Exchange Rate Mechanism and no domestic long-term government bond market by which to measure the treaty's interest rate criterion, Athens is a world apart from the rest of the Union.

These difficulties could probably be overlooked by Greece's fellow member states were it not for the government's shaky finances. Every country has its problems with the treaty's requirement that budget deficits should be reduced to around 3&percent; of gross domestic product and the total amount of public debt cut towards 60&percent; of GDP. But no other government faces a task as Herculean as that of Premier Costas Simitis.

Even the European Commission's generous forecasters predict that Greece's budget deficit next year will average 6.5&percent; and the debt stock will stabilise around 112&percent; of GDP.

Simitis, who succeeded veteran Socialist Prime Minister Andreas Papandreou earlier this year, and his Finance Minister Yannos Papandoniou are determined to put this right as soon as they can.

“We are not so far behind as to believe we have missed the train,” Papandoniou told parliament as he announced the country's most ambitious budget in almost two decades. “With work, I believe that at the turn of the century, we will be in [the EMU].”

A programme of spending cuts, an attempted rationalisation of the country's swathe of tax exemptions and, for the first time, the extension of tax to interest income from bonds and treasury bills is aimed at cutting the deficit to 4.2&percent; next year and 2.9&percent; in 1998.

Getting both these through the parliament and accepted by powerful lobbies will, however, be a difficult task. This week, farmers tightened their blockade in the protest against the proposed measures and prevented the transport of trucked supplies from the country's borders with Turkey and the FYROM.

The farmers are fighting to keep tax breaks on fuel and the purchase of equipment, and are demanding a huge billion-ecu debt write-off with state banks to compensate for lower agricultural subsidies.

These demonstrations will soon be followed by more, staged by teachers, customs officials and tax inspectors protesting against a public-sector hiring freeze. Yet this has long been a demand of other EU finance officials - sceptical about the continued growth of the public sector - as a condition of the country's 2.2-billion-ecu loan from the Union.

The government's inflation performance has been one bright spot. Earlier this year, the rate of price increases started to creep up and threatened to top 10&percent; by December.

Instead, the trend has been reversed. The most recent figures for November showed the annual rate of inflation slowing from 8.3&percent; in October to 7.7&percent; - a 23-year low.

Unfortunately, as part of the promises he had to make to secure re-election in the summer, Simitis pledged to honour a commitment to increase public-sector wages by 2.5&percent; above the rate of inflation next year - a move that will both stoke up inflation and undermine the budget cuts.

The outcome of the struggle with the farmers will be critical to the success of both Simitis and Papandoniou.

If they can break or buy them off without too much impact on the budget, their ambition to shed the drachma for the

single currency before euro notes and coins are issued in 2002 may start to look less of a pipedream.