High Debt, Inflation Signal Austerity Program

AT Jimmy's Coffee Shop, a crowded corner caf'e down a chic pedestrian shopping street from the national parliament, smartly dressed Athenians take in the warm fall. Just as every discussion comes around to the topic of the fine weather, the talk at Jimmy's inevitably turns to the poor and deteriorating condition of the Greek economy.

In this microcosm of the Greek upper crust, the economy - with huge and deepening debt, the highest inflation in the European Community, and low productivity - is described as ``worrisome,'' ``very serious,'' even ``disastrous.''

But people nevertheless remain insouciant and jovial, which a former Finance Ministry official explains by swinging an arm in a wide arc.

``Look around,'' he says, indicating the many fine jewelry, clothing, furniture, and other shops on all sides of Jimmy's. ``The truth is that the Greek people are living way beyond their means. The day when we must change our ways is coming,'' he adds, ``and the sooner the better.''

Economists and analysts here agree that Greece faces a severe austerity program, as soon as a stable government can give it one. Such a program would aim to rein in high public and private spending and bring down 15 percent inflation to single-digit, Western European levels.

Beyond that, however, there is a growing recognition that Greece must fundamentally change relations between the public and private sectors if the country's reputation as the ``problem child'' of the European Community is to be improved. Even as much world attention focuses on efforts in some Eastern European countries to adopt a market-driven economy, Greece stands as a reminder that such a model is not uniformly followed in the West.

``There are too many rigidities in our economy,'' says George Vlachos, director-general of the Federation of Greek Industries. ``There is no freedom in our market, and our whole system is filled with bureaucratic disincentives and time delays.''

Adds Konstantinos Alexopolios, general secretary of the Ministry of Industry, Energy, and Technology: ``We could use some Greek perestroika, but that will put a few rather hard years in front of us.''

The influence of the public sector in Greek affairs is heavy and growing, despite some change of heart in even the far-left reaches of political thought. The Greek budget deficit is about 50 percent higher this year than last. The current account deficit reaches about 20 percent of the gross national product and total public debt is about 39 percent of GNP.

With high public borrowing requirements - at 20 percent of GNP, roughly double the next highest Western nation - money for private investment is made more expensive to borrow.

The country has spent billions of dollars to prop up nearly 50 ``problematic'' companies, primarily in the textile, mining, and cement sectors, which would have either failed or adapted to the private market years ago if not for government subsidies. It now costs the government about $40,000 annually to maintain each one of the 30,000 jobs in these companies, although studies show that, even on unemployment assistance, the workers would cost the government about one-third as much.

Beyond that, prices on many important consumer products are controlled.

Electricity and bread are cheap, while new cars are very expensive, as much as three times the price of the same model elsewhere in Europe. Still, with galloping public and private demand, the country's trade deficit, after increasing by more than 10 percent last year, will likely do the same this year.

``We're living a life of imported luxuries without the productivity to back it up,'' says Mr. Alexopoulios.

Many Greeks have adapted to the pressure from the public sector and to very high tax rates by going underground.

Economists estimate the underground market to be as much as 40 percent of total economic activity.

Given this situation, economists and other analysts here say that solving the country's economic problems will require strong measures and, perhaps most important, fundamental changes in the way the government operates and how Greeks view their economic system.

``Our success will depend on a government that has the courage to present the picture honestly and openly,'' says Alexopoulios, ``and then to take the steps that have to be taken.''

He and others add, however, that with recent inconclusive parliamentary elections, and with no stable long-term government in sight, it will be difficult to take potentially unpopular steps to slow spending and abolish programs that artificially prop up employment.

Noted economics writer Constantin Collmer says the only way Greece can begin climbing out of its ``bankruptcy'' is to introduce a two-year, debt-reducing austerity program that starts with a 50 percent devaluation of the drachma.

He says a new tax system must also be introduced that brings in the millions of Greeks who do not now pay taxes.

Beyond that, he adds, billions of dollars in government subsidies, including those propping up the ``problematic'' industries, will have to be dropped.

``Five years ago we wouldn't have required quite such a drastic approach,'' says Mr. Collmer, ``but now it's too late for half measures.''

Not everyone here agrees with Collmer's scenario.

The Bank of Greece, the country's central bank, which recently took measures to squeeze credit growth, does not support devaluation.

But Collmer is not alone when he worries that Greece, despite its potential, could become ``a second-class citizen in the EC.'' Says Alexopoulios: ``Whether we climb out of our difficulties or slide into a crisis depends on our leaders and all of us. We hold our chances in our own hands,'' says Alexopoulios.