The Wall Street Journal Europe

ATHENS — Just over a year ago the conservative New Democracy party was swept into power in Greece, ending the Socialists’ almost uninterrupted 24-year run in office. Since then, little has changed.

New Democracy last March won a sizeable majority, and a mandate, to take on the country’s immense economic problems, claiming 165 seats in the 300-seat legislature. Greece suffers from a public deficit of over 6%, double-digit unemployment, a large and corrupt public sector and a totally dysfunctional incentive structure. High social security contributions and restrictive labor laws prevent businesses from hiring new workers. A myriad of regulations and red tape discourages businessmen from setting up new enterprises — as does rampant corruption.

Those problems cry out for free-market remedies, such as liberalizing the labor market, reducing the size of the public sector, privatization and outsourcing. Yet Costas Karamanlis’s ND government isn’t tackling any of these needed reforms. Far from it, this “pro-market” party didn’t challenge Greece’s statist economic regime. During the campaign, Mr. Karamanlis promised to expand the public sector by creating 50 new regulatory bodies.

From the very start of his term, the new prime minister said that he strived for “ipia prosarmogi” (soft landing), no radical overhaul of existing structures. His minister of the economy, George Alogoskoufis, has tried hard to distance himself from “ultraliberalism” (i.e. classical liberalism). Cynics like to point out that the only ideological reference points of the new government are its poll ratings. Though this may be unfair, it’s certainly the case that its reference points aren’t Adam Smith or Friedrich Hayek.

Even where the government had promised radical change, such as its pledge to combat corruption, the results have been mixed at best. A media bill adopted last January was intended to spearhead the government’s anti-corruption campaign. It limits the ability of media-construction conglomerates to bid for state contracts as these companies have used their media power in the past to influence public opinion to get the most lucrative deals. But the European Commission has demanded changes, saying that the bill conflicts with internal market rules on public procurement and fair competition.

According to Transparency International, in the EU, only Italy and some new member states like Slovenia and Estonia are rated worse than Greece in their ranking of perceptions of corruption. The problem with the current approach is that the government views corruption foremost as an ethical legacy of previous Socialist, or PASOK, governments.

Although the moral failings of politicians and civil servants are important factors in determining the level of corruption in a country, equally important is the size of the public sector and the role it plays in the economy. Former EU Commissioner and leading PASOK member Anna Diamantopoulou called Greece “the last remaining state of existing socialism in Europe.”

With the state controlling over 60% of the country’s GDP, it’s not surprising that interest groups, businesses and individuals would invest considerable energy and resources to influence government decisions related to the economy. The resulting collusion of the state with private interests, as Adam Smith was first to point out, is what creates the breeding ground for corruption. Only the radical reduction of the state’s involvement in the economy can eradicate it. It is regrettable that Mr. Karamanlis has not even contemplated following this approach.

Aside from the fact that it conflicts with EU law and fails to get to the heart of the problem, the media bill is also far removed from the real concerns of the population and does little to address the low-level corruption that the average citizen faces in his everyday dealings with the state.

Owners of small- and medium-sized enterprises complain about the kickbacks they have to pay to tax officials — for instance, to avoid a tax investigation. Another wide-spread example of low-level corruption relates to public health. Doctors working in public hospitals often demand huge illegal fees from patients to perform operations.

There are some signs that Prime Minister Karamanlis may have finally gotten the message. During the last few weeks he has given up talk about a “soft landing” and has instead declared “war” against the various interests blocking the road to reforms. But, as long as he and his government lack a clear vision concerning the sort of society they want, much less the policies needed to bring it to life, they will find their efforts continuously frustrated.

It may already be too late to push for change. In recent opinion polls, ND’s comfortable six percentage point lead over PASOK has all but disappeared. Having failed to build a momentum for radical reforms in the first and crucial year, the government now finds itself increasingly fighting with its back against the wall. It looks like Europe’s last remaining Marxist economy will be around for some time longer.

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Mr. Michas, a Greek journalist, is writing a book on Noam Chomsky’s economic theories.