Greece, Portugal Test EC Capacity to Grow

The two poorest members of the European Community provide sharply different models of integration: Portugal emphasizes fiscal discipline; Greece pursues social welfare

IF the European Community were a classroom, Portugal would undoubtedly be the most promising new student - while Greece might be called the black sheep.

Vaunted in the hallways of EC headquarters in Brussels as "the Korea of Europe," Portugal is repeatedly praised for its high economic growth - second only to Japan among industrialized countries over recent years - a fast-moving modernization program, and an unrelenting effort to correct bad budgetary and inflationary habits.

Greece, on the other hand, brings groans from Community officials. With failing grades in all the criteria the EC uses to judge economic integration, Greece stands out as an embarrassing reminder of the Community's inability to make all its members toe the low-inflation, free-market, economic line. Test cases for EC

The two poorest of what are called the Community's "poor four," a club that also includes Spain and Ireland, Portugal and Greece together make up only about 6 percent of the EC's population of 340 million people, and an even smaller percentage of its huge economy. But they matter in part because they stand as tests of the EC's ability to integrate Europe's fringes into its wealthy mainstream.

With the EC focusing growing attention on how to draw the ex-communist states of Eastern Europe into its prosperous democratic fold, Portugal and Greece represent what the EC will be able to do, and how well it will be able to do it, for poor neighbors in need of fundamental reform and modernization.

As models for the future, Portugal's performance since it joined the EC in 1986 will undoubtedly be pushed to the spotlight, while Greece, which joined in 1981, will be pushed to the background - or see its failed stabilization plans, its huge public debt and stubbornly high inflation, singled out as examples of what not to do.

What such a heavy focus on macroeconomic criteria overlooks, however, some experts point out, is Greece's stronger performance in the social arena, and the comparatively better job it has done until now of spreading the fruits of economic growth.

"Until the 1980s, Greece's economic performance outdistanced both Spain's and Portugal's, while over the past decade the latter two have done better at managing their economies, but at the end of the day the social indicators are generally better in Greece," says Nicos Christodoulakis, an economist with the Athens School of Economics and Business.

"Poverty rates are lower here than in Spain, much lower than in Portugal," he says, "and our literacy and education rates are higher," he says.

Adds George Alogoskoufis, chairman of economic advisers at the Greek Ministry of National Economy, "Income distribution is much more even in Greece than in Portugal, which is why you don't see the terribly poor and rundown neighborhoods [in Athens] that you do in Lisbon."

What worries economists like Mr. Christodoulakis, however, is the "live-for-today" attitude they say Greece has developed over the last decade of high public spending, when the public debt ballooned to 135 percent of gross domestic product.

Just a few years ago Greece's per capita GDP was still comfortably ahead of Portugal's, but the Iberian country is now on the verge of overtaking the Balkan nation. And while Portugal is busy investing in its future, partially with EC funds, Greece is focusing less on future returns than on propping up the public-consumption gains now threatened by an inevitable belt-tightening.

"The Greek people are preoccupied with eating their bread today," says Christodoulakis, "while Portugal is busy building ovens for baking bread tomorrow."

The Athens economist says Greece's stagnation took hold in the 1980s, when governments developed a pattern of heavy public spending, with bounding increases in the months preceding national elections as the party in power attempted to preserve a parliamentary majority.

"In the election year of 1981 alone, the budget deficit jumped from 4 percent to 10 percent" of GDP, says Christodoulakis. "That behavior was adopted by everyone over the ensuing decade."

Also during the eighties, public ownership in the economy more than doubled from 30 percent to about 70 percent, as the then-Socialist government nationalized failing heavy industries. The result was a ballooning of public sector employees. Sacrifice required

Righting Greece's economic course won't be easy because people have become accustomed to government largesse, observers note. "The resistance to the idea of changing the economy and its structure is very strong," says P.C. Iokimidis, counselor on EC affairs to the Ministry of Foreign Affairs. "We need a whole new kind of administration, a different approach to taxation and better tax collection," he says.

"What's needed now is sacrifice and long-term investment, which are the opposite of what we've become accustomed to," says Christodoulakis. "It will require a shift in social attitudes, and that won't be easy."

Still, these specialists see reasons for optimism when it often seems EC officials see none.

Inflation, which ran at 18 percent last year, "is falling, and we have the lowest deficit in terms of GDP for the last eight years," says Mr. Iokimidis. "Progress is not swift, but the signs are there that stabilization is producing some results."

And Mr. Alogoskoufis, one of a new breed of Greek economic reformers, says that after disappointing earlier stabs at privatization and improved tax collection, both programs are beginning to show encouraging results. "The cement industry was 50 percent public, now it's 100 percent private," he says. "Tax collection is finally being computerized, and tax evasion being addressed."

In addition, the government is working on a plan for replacing only one of every two or three departing public employees.

In the case of Portugal, even some Portuguese experts agree that circumstances have made their country's integration into the EC somewhat easier. For one thing Portugal, unlike Greece, joined the EC at a time of intense optimism about the EC, as the Community embarked on creation of its single market. By the late 1980s the EC's guidance and oversight in the use of its funds had become better developed, and the international economic picture was brighter.

"When Greece joined the EC [in 1981] it was the period of Euro-pessimism, they didn't have the unanimous sentiment that `it's good for us' that we did here," says Francisco Torres, senior economic adviser in Portugal's Finance Ministry.

"They got a lot of money, but not the supervision we did," he adds. Portugal integrated

Yet perhaps the biggest difference, says Mr. Torres, is that Portugal had recently come through a "tough" International Monetary Fund stabilization and restructuring before joining the EC, and was a member of the European Free Trade Association.

"Actually we probably came in more integrated with the Community" than Greece, he says.

Another factor in Portugal's favor is that it has had a stable government since 1985 under Prime Minister Anibal Cavaco Silva, which is fiercely determined to prepare Portugal for entry into the Economic and Monetary Union (EMU) mapped out in the EC's pending Maastricht Treaty.

Mr. Cavaco Silva won a vote of confidence in legislative elections last October that gave his government another four-year term and the stability needed to prepare Portugal for EMU. Greece, on the other hand, has elections scheduled for 1994, which has some economists worried that pre-election public spending will take off again by the second half of next year.

Still, some observers say it is a basic attitude toward the EC that most clearly separates the two countries. When EC Commission President Jacques Delors visited Athens last month, he bluntly told the Greeks that Europe needed to hear their voices "and not only to claim what they have coming to them."

Greece receives $500 a year in Community money for each of its 10 million citizens - an EC record - and most of it is used to prop up public consumption. That contrasts with Portugal, where EC development funds can be seen transforming the country through infrastructure projects and other long-term investment.

"We do not want to maximize EC transfers but to optimize them," says Mr. Torres. "We want to avoid falling into the trap of waste and dependence."

Praise for Portugal's performance is not universal. "The country's monetary situation is strong, but in many ways we find the economy weaker than when we joined the EC," says Carlos Carvalho, international director of the CGTP, the country's communist-affiliated union.

"Our dependence on food imports is higher, quality jobs are being lost, and most new jobs are low-salaried," he adds. "The average salary is only now recovering to 1982 levels, and buying power remains half the European average and well below Greece."

The country's Socialists are less critical, because they support the goal of Portugal's economic convergence with the Community, but they still fault specific measures taken by the government. "There has been freeway development, but otherwise the [EC funds] haven't been used as they should, to upgrade our ports and railroads and attract quality foreign investment," says Luis Marinho, leader of Portugal's Socialist delegation to the EC. "Nothing has been done for professional training, nothing to moderni ze agriculture."

In response Torres says, "Certainly we could have done better," but in the broad picture Portugal's basic indicators are up - average income doubled between 1985 and 1990. Despite slower growth, Portugal should be in the European mainstream in 10 years, he says.

Since Portugal successfully entered the European Monetary System this year - leaving the Greek drachma the only EC currency not in the currency-stabilizing system - many experts believe the country has a better than even chance of being among the first to participate in a future EC currency, even as early as 1997. Demands on Greece

By comparison, Greece still sits at the back of the class, and almost no one outside the country believes it will master spending and inflation sufficiently to meet single currency requirements anytime this decade.

Alogoskoufis says Greece will succeed, however, because the Greek people "don't want to be relegated to second-class European citizens. The dispute over who should pay will continue a while," he adds, "but in the end the pain will be distributed because no one wants Greece to fail in Europe."

Christodoulakis is less confident, because he sees "few signs that the behavior and priorities of the politicians have changed, and that is where the lead must begin." Yet he says that it is arguably more important for Europe's future that Greece succeed, given its geography, than Portugal.

"Portugal is on Europe's western face and it has Spain," says Christodoulakis, "but Greece sits among the new and struggling economies of southeastern Europe. Either it succeeds and becomes a model for EC economic integration," he says, or it fails.

"In that case it might just end up a bad example," he adds, "but the danger is that Greece's failure would be a foretaste of the economic trouble and instability that would continue throughout the region."