Papandreou gets down to Herculean task of economic recovery

Elections behind him, Greece's Socialist prime minister, Andreas Papandreou, must now face the country's daunting economic problems. Their solution will require tough, unpopular measures, but Mr. Papandreou has stressed that economic recovery will be the top priority of his second term.

Greece's economic picture is not bright: Unemployment exceeds 9 percent; inflation is near 18 percent; the annual trade deficit is more than $2 billion; the public-sector deficit amounts to 16 percent of gross national product; and the country's foreign debt has nearly doubled since the Socialists came to power in 1981 -- to $12 billion. Servicing this external debt absorbs 19 percent of earnings from exports.

Wage indexation has allowed salaries to increase by 3 percent a year after inflation. Combined with declining productivity, this has undermined Greek competitiveness, despite wages that are lower than elsewhere in the West.

As the rate of private investment continues its steady decline -- 10 percent in 1984 -- private initiative is further stifled by the high cost of borrowing -- 21.5 percent.

To make matters worse, many healthy businesses have been squeezed out of the credit market by the government's decision to take over management of a number of failing companies. The government has subsidized these so-called ``problematic enterprises,'' which account for 30,000 jobs, with massive loans from the government-owned banks. One estimate is that these companies owe close to $4 billion.

In his annual report, the Socialist-appointed governor of the central Bank of Greece, Dimitri Halikias, warned that Greece's economy will suffer in the long run unless the government adopts far-reaching policy changes.

Tourism -- which accounts for 6 percent of GNP and 30 percent of foreign-exchange earnings -- was hurt this summer because of problems stemming from the hijacking of TWA Flight 847 out of Athens airport and subsequent warnings to American travelers to avoid Athens. Americans amount to 10 percent of total arrivals and, because they are among the wealthiest, provide 15 to 20 percent of Greece's earnings from tourism.

Private industry sources, even some who are staunchly opposed to Papandreou's policies, acknowledge that the prime minister is not solely to blame for the country's grim economic picture.

``To be fair,'' says Anthony Lykiardopoulos, managing director of ICAP, an economic and market research firm, ``longstanding structural problems, the suffocating government controls, the low productivity, have all existed for a long time, way before the Socialists took power.''

Investment banker Alexander Coutroubis agrees that previous conservative governments are to blame for much of the problem.

``What is needed,'' says Basil Coronakis, editor of Greece's Weekly Business and Finance, an English-language business magazine, ``is decentralization, deregulation, and discipline. The signs are, that is what we will get, nicely wrapped in Socialist language.''

More than 50 percent of Greek GNP derives from the public sector, which is one of the least efficient and most unproductive in the West. Farmland was broken into small holdings years ago, so there is no scope for redistribution there. Eighty percent of the country's private businesses have no more than five employees.

Greece's rigid system of price and market controls and the government's use of the state-owned banks to finance its deficits have driven many companies out of business and scared off potential investors.

Political and business sources agree that to solve this web of problems Papandreou will have to deregulate the economy, open up the country to real competition, and impose more labor discipline. Papandreou's statements since his reelection, while draped in Socialist jargon, have called for more private initiative and efforts to improve productivity.

But if he does try to shift his policies in a more conservative direction, he will have to deal with communist power in the trade unions and leftists in his own party who favor more controls on the economy and greater protectionism. Most economic and business experts say Papandreou cannot avoid this fight.