This Greek Tragedy has a lesson that Thailand must heed

EDITORIAL
This Greek tragedy has a lesson that Thailand must heed
By The Nation
Published on July 20, 2011


New government's pledge of massive spending on public projects is an eerie echo of what happened in Greece

There are grave concerns across Europe that the possible default in Greece will drag other countries into financial crisis. European leaders are this week discussing steps they hope will control the region's debt crisis, after the situation grew more severe than they had predicted.

Although the European Union and the International Monetary Fund approved a bailout for Greece worth around US$160 billion in May last year, Greece is still in deep trouble and Athens urgently needs another rescue package.

The region's failure to fix the Greek crisis could create repercussions that affect the financial stability of the whole euro zone, and possibly spread to other parts of the world.

The seriousness of Greece's troubles should now serve as a lesson to other countries of the sanctity of fiscal and monetary discipline.

The Greek crisis came about as a result of years of unrestrained spending and the country's failure to reform its public sector. The government borrowed heavily on the international capital market to finance its bloated budget and current account deficit. The crisis was also a result of the Mediterranean country's entry into the euro zone, which enabled Greece to access capital at a lower interest rate.

In the meantime, the Greek government saw weaker revenue collection than it had expected.

The Greek debt debacle should serve as a warning for the incoming Thai government, which is now burdened by populist promises it made in the run-up to the election. These pledges of massive spending not only pose a risk to fiscal health but also to monetary discipline, because they threaten to push prices up further.

Many economists have warned that the second half of this year will be crucial for the Thai economy. Thailand will face both internal and external threats. Externally, the economy will be affected by the global financial recession. Internally, the expected massive government spending to realise Pheu Thai's populist policies will apply severe monetary pressure.

The decision of the Bank of Thailand's Monetary Policy Committee last week to raise the policy interest rate by 25 basis points was a message from the central bank that fiscal and monetary discipline must be adhered to for sustainable growth.

The Bank of Thailand was attempting to use the policy rate to curb the upward trend in prices.

Unfortunately, the Bank of Thailand, the guardian of monetary stability, is unlikely to get help from the fiscal side. The politicians have instead tried to seduce voters by offering an unrealistically high minimum wage and massive populist programmes, without considering the consequences.

Additional inflationary pressure could be a result of the incoming government's massive spending, especially incoming Prime Minister Yingluck Shinawatra's plans to spend more than Bt1.8 trillion - or 16 per cent of the nation's GDP - over the next five years to finance 13 infrastructure projects.

The politicians often claim that these policies will have a "multiplier effect" to stimulate the economy. But if massive fiscal spending fails to yield the expected result for Thailand, just as it failed for Greece, we could run into a similar pattern of crisis.

The government must take into consideration the consequences of whatever policies it plans to implement. If it turns out that their pre-election promises will damage fiscal discipline, then the government must rethink its plans carefully.

The Yingluck government must also have the courage to tell the public the truth concerning the consequences of badly thought-out policies, rather than insisting on going ahead with unnecessary massive spending.

Thailand was able to recover from the 1997 financial crisis within just a couple of years because the country at that time did not have the kind of fiscal problems that Greece is now experiencing. The Thai financial crisis of 1997 was a result of excess borrowing in the private sector, not the public sector.

But if Thailand suffers a financial crisis due to an irresponsible fiscal policy platform, we may not be so lucky this time.