A Spartan Outline for Closer Greece-EU Ties

The return of a socialist government to Greece has raised questions about its commitment to economic reforms

WITH Andreas Papandreou's resounding victory returning his Panhellenic Socialist Movement (PASOK) to power in October's elections, Greece stands at a crossroads. Both the incoming socialists and opposition conservatives see the country's future as a part of a unified Europe and have accepted political and economic policies that foster integration, including the controversial Maastricht Treaty. Yet continued tensions over relations with Balkan neighbors and over structural reforms required to slash a high budget deficit and inflation threaten to reverse trends toward convergence. Greek politicians must adopt a firmer stance for Central European democracy and for sound fiscal and monetary management to sustain a positive internationalist path.

After gaining a one-seat majority in parliament in 1990, the New Democracy Party of outgoing Prime Minister Constantine Mitsotakis set out to dismantle the legacy of a decade of socialist rule. The huge costs of a bloated public sector and welfare system had swelled domestic and external borrowing to dangerous levels, fueling double-digit inflation and interest rates. The budget deficit had skyrocketed to 19 percent of GDP; the foreign-debt servicing ratio rose to 40 percent of export earnings.

These figures were well above the norms needed for entry into the European Union's current exchange-rate mechanism and the wider monetary union envisioned by mid-decade. To support Athens's efforts at stabilization and to narrow these gaps, the European Union in Brussels extended a $2 billion loan in 1991, payable in three installments upon meeting budget and other targets. Simultaneously the Mitsotakis team initiated its own adjustment plan emphasizing austerity and liberalization measures, including government cutbacks, privatization, and financial market opening.

While the administration managed to overcome fierce initial resistance to its program, progress has been slow. Inflation fell to 14 percent in 1992 and the budget gap to 12 percent of GDP while a strategy of pension overhaul, civil service retrenchment, and tax enforcement took hold. Large-scale privatization began with the sell-off of cement and transportation companies, and capital and credit ceilings were lifted. But Greece's failure to meet the basic conditions for continued credit led the EU to suspend the program after only one disbursement. Against the background of 1 percent economic growth, this blow reinforced the pessimism reflected in a 33 percent drop on the Athens stock market for the year.

In 1993, sentiment shifted when the market rebounded on news of another EU funding package and of accelerated privatization. Yet investors now fear a hiatus in reform efforts and a resort to traditional post-vote largess with the end of the campaign. The pledge of $16 billion in ``cohesion funds'' from Brussels for infrastructure needs will help offset this temptation, and encourage Athens to sustain its adjustment course. To preserve the goodwill of aid givers, the previous government had announced the sale of stakes in big state-owned banks and the telephone monopoly. The new administration, however, is now reviewing those sales.

Unless the Greek economy improves substantially, Athens's desire to join the exchange rate arrangement in the near future is premature. Government spending, inflation, and budget and balance-of-payments deficits still rank among the steepest in the community. Moreover, the break-up of Yugoslavia and transition to democracy in Albania and Bulgaria next door have diverted attention to diplomatic questions and heightened near-term trade and unemployment difficulties.

Confrontation with the newly proclaimed state of Macedonia has flared; the use of that name has been interpreted to imply a territorial claim on Greece's identically titled northern province that dates back to the time of Alexander the Great. After first refusing any compromise, Athens has agreed to submit the dispute to international arbitration, but Skopje so far spurns any concession and has begun to win recognition from neighbors as the Former Yugoslav Republic of Macedonia. At the same time, Greek exporters have been forced to absorb the loss of markets and additional shipping costs from the United Nations sanctions against neighboring Serbia, with many allegedly turning to smuggling in defiance.

In Albania and Bulgaria, meanwhile, historic anti-Greek feelings have revived as Athens has cracked down on illegal immigration, which risks worsening the 10 percent unemployment rate. The sweep has been conducted under a broader campaign against rising crime, but Sophia and Tirana accuse Greek officials of deliberately closing an important economic safety valve and enhancing their own vulnerability to internal and regional unrest.

Current foreign and economic policies undermine Greece's potential for a leadership role in Europe. Its focus on issues of the past such as Macedonia forestalls the promise of new allies and markets abroad and dissipates energy needed for fundamental economic change at home.

To address these challenges and secure its place in an expanded and integrated Europe, Greece must move definitively in the direction of sound and competitive free markets and continent-wide peace and democracy. It must further diminish state interference and domination in the economy and pursue prudent fiscal and monetary policies to attract domestic and international private investors. It should serve as a model for Balkan neighbors attempting their own conversion from authoritarianism and socialism and should seek to forge cordial ties with them to create a foundation for mutual prosperity.

With post-election uncertainty heightening at home and abroad as Prime Minister Papandreou re-assumes the helm, affirming these goals can create a framework for growth and cooperation into the next century. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.