Justice can't be blind to facts in 2009 deficit case

Agora Contributor: Nick Malkoutzis

Under normal circumstances, justice being blind should be welcomed. But this also means it can miss the obvious, which is when the problems begin. We had one such example last week when the Supreme Court, following an appeal by one of its prosecutors, decided that the former head of the Hellenic Statistical Authority (ELSTAT), Andreas Georgiou, should stand trial for providing false official certification even though a lower court had deemed there was no basis for such a case.

The whole issue revolves around a longstanding dispute over Greece’s deficit data in 2009, which made it clear that the country’s public finances were off track and defined the magnitude of the fiscal adjustment that Greece had to make.

Georgiou has been accused by former colleagues of doctoring Greece’s figures and inflating the deficit to such a level that a bailout was needed. Beyond some disgruntled ELSTAT staff, this theory was adopted by both of the parties currently governing Greece (SYRIZA and Independent Greeks) as well as the main opposition party (New Democracy). It is, as we will examine, a myth that has been peddled by all three at one time or another to suit their political ends.

Having adopted this tale of conspiracy as fact, the three parties are now trapped. They can’t come out and admit they were talking nonsense and find themselves continuing to invest in the murkiness that surrounds this affair. State Minister Nikos Pappas described the Georgiou case as an “open wound”. He is right, but not for the reason that he suggests. Rather than an unresolved mystery that conceals the startling truth behind how Greece ended up needing the largest bailout ever put together for a country, the respinning of the unsubstantiated doubts about the 2009 deficit epitomises Greek decision makers’ lack of willingness to accept responsibility, both for the grave errors that drove the country to bankruptcy but also for the small-mindedness that subsequently exacerbated the problem.

Among the claims made against Georgiou are that he unnecessarily included public enterprises, known as DEKOs, into the general government budget, and that the deficit was inflated to make sure that Greece would have the highest figure in the eurozone, protecting other member states and justifying the tough measures demanded by lenders.

For starters, whether the DEKOs should have been included in the budget is somewhat of a moot point as they were being paid from the central government’s coffers. It is also worth pointing out that Georgiou took over at ELSTAT in August 2010, three months after Greece had signed its first memorandum of understanding with the troika. While the final deficit figure of 15.6 percent (published by Eurostat in November 2010) did play a significant part in the calculation of fiscal targets and austerity measures of 2011, it was not applicable to the terms of the first bailout. Also, if the plan was to pump Greece’s deficit figure up to protect Ireland, which had a 14.3 percent shortfall in 2009, or anyone else, it seems to have failed miserably given that the Irish also followed the Greeks into the arms of the troika.

There is another way of looking at this issue, which is to challenge the concept that by 2009 Greece’s public finances were in any way salvageable and that someone could suddenly flick a switch and make them look like a mess. The truth is that Greece had been on the road to ruin and that the data published before Georgiou even arrived at ELSTAT confirms this.

Greece began consistently running deficits that exceeded 10 billion euros and failed to record a surplus before interest payments from 2003 onwards. In November 2008, just as the financial crisis was unfolding around the globe, the New Democracy government led by Kostas Karamanlis submitted the 2009 budget to Parliament. It estimated growth of 5.9 percent of GDP and a state deficit of 8.8 billion euros or 3.4 percent of GDP. It had to revise these figures two months later and by May 2009, the budget’s unrealistic projections were exposed. The budget deficit was already way off track at 14.4 billion euros, with spending ahead of the target and revenues lagging severely.

In September 2009, before the elections that brought George Papandreou’s PASOK to power, the state deficit was at 23 billion euros, almost twice the projected amount for the entire year. The 2009 deficit closed at 30.9 billion euros after a complete collapse of revenues, which missed their annual target by 11 billion euros. Expenses increased by 10 billion euros compared to 2008. In 2009 alone, Greece issued 66 billion euros of debt (equivalent to 28 percent of GDP) to roll over existing debt or finance its deficit. At the same time, Greece entered the first year of its long recession, with GDP contracting by 3.1 percent.

This was not the figment of someone’s imagination or the dark machinations of international conspirators: this was the hard evidence of a country that had lost control of its public finances.

While there are many factors that contributed to this (the design of the euro, competitiveness, etc), what Greece woke up to in 2009 was the realisation that its decision makers fell asleep at the wheel. They managed to double the country’s public debt between 2000 and 2009, when it reached 129 percent of GDP. During this period, the public wage bill and amount spent on social benefits also doubled. Primary expenditure – spending before interest payments – shot up from around 53 billion euros in 2000 to 113 billion euros in 2009, while revenues remained relatively flat.

That the Greek justice system has failed to see all this after so many years is a great cause for concern. But in failing to see the obvious, maybe it can unwittingly provide an opportunity for many Greeks to open their eyes and acquaint themselves with the facts rather than rely on the speculation of politicians trying to exploit the situation. Voters certainly can’t afford to remain blind to the facts any longer.

*You can follow Nick on Twitter: @NickMalkoutzis

An earlier version of this article appeared in last week's e-newsletter, which is available to subscribers. More information on subscriptions is available here.

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