Greece’s most influential think tank projected the economy would contract by 5 per cent this year, taking a more pessimistic view than the country’s international lenders and casting a cloud over government efforts to meet fiscal targets.
Athens is set to apply more fiscal austerity to shore up its finances as part of a new rescue package it agreed recently with its euro zone partners and the International Monetary Fund to avert a chaotic default. Its continued funding will hinge on meeting targets.
The Foundation for Economic and Industrial Research (IOBE) projected Greek unemployment would rise further to 20 per cent this year, topping last year’s record 17.3 per cent as the debt crisis leads to yet more job cuts.
Fresh data released on Monday provided further evidence of the economy’s malaise, with a leading indicator of business conditions in manufacturing showing no let-up in the sector’s decline.
Production and new orders fell sharply in March, forcing firms to shed more workers.
In Athens to present an alternative way out of the slump, Guy Verhofstadt, the former prime minister of Belgium who currently heads the European alliance of Liberal Democrats, said Greece should cut taxes and launch a growth-enhancement fund to break the vicious circle.
“What is needed is a radical change from the old system. The two main parties have so far only contributed to postponing the necessary reforms and largely contributed over the years to the desperate situation Greece currently finds itself in,” he said.
Greece is headed for snap elections on May 6, with the ratings of the two parties supporting the current coalition government hammered by painful austerity policies.
The plan presented by Mr. Verhofstadt calls for a lighter tax burden on small business and for using part of the country’s privatization proceeds to fund a proposed growth fund, as well as for modernizing public administration by tapping Greece’s experts currently employed by EU bodies.
“The problem is not the private sector but the public sector and the fact that many professions remain closed. Greece will not exit the crisis by asking its people for more and more sacrifices, imposing more cuts in pay and pensions,” Mr. Verhofstadt said.
IOBE’s outlook on growth is more bleak than projections by the EU Commission and the IMF, which see the €215-billion ($283-billion) economy contracting 4.7 to 4.8 per cent respectively.
Rising joblessness is hurting consumer confidence and overall business expectations with another sharp drop in private consumption expected this year, deeper than last year’s 7.1-per-cent slump.
Taking a critical view on the policy mix pursued so far, the think tank said the government had cut investment spending too sharply, steps to boost competition in markets were inadequate and the pace of privatizations proved too slow.
Reforms to improve economic competitiveness, a main policy objective to return Greece to sustainable growth, must be applied in all markets and closed professions, which could generate long-term benefits estimated at 17 per cent of GDP.
“The privatizations program can become a growth lever, perhaps the most important one by attracting foreign investments,” IOBE head Yannis Stournaras said.
Looking at exports, the tailwind that boosted Greek exports last year will likely wane as economic activity in the European Union bloc of 27 economies is expected to weaken.
The quarterly report forecast that inflation would slow further to below 1 per cent this year from 3.1 per cent in 2011 as demand continues to weaken.