Greece's great Olympics hope

VIEWS AMONG GREEK bankers about the prospects for the Greek economy are mixed. Yiannis Papathanassiou, a conservative New Democracy party parliament deputy and former chairman of the Hellenic Chamber of Commerce, is particularly pessimistic. He reckons that if the situation is allowed to drift Greece will experience a significant economic slowdown and serious fiscal problems after 2004 should it fail to push ahead with much-needed structural reforms.

Papathanassiou, who is widely expected to hold a key economic ministry in a conservative administration, says Greece cannot count on EU transfers alone if it is to grow and warns of more losses in international competitiveness and higher unemployment if policy inertia takes hold.

"EU inflows and investment spending linked to the 2004 Olympics account for the largest part of GDP growth in the last few years," Papathanassiou says. "I fully share the concerns about economic growth and public finances after 2004 because past EU transfers have not been used efficiently so as to enhance the country's competitiveness, while funds from the third Community Support Framework (CSF) will be more difficult to absorb given the stricter project selection criteria and the need to adhere to more precise timetables."

Papathanassiou says Greece stands to benefit from a well-organized Olympic Games in 2004 but will also have to foot the bill while not being able to count on a good deal of money that has already been collected by the government via privatization certificates and the securitization of future revenues from the third CSF, the state lottery and other entities.

He is in favour of cutting primary spending as a percentage of GDP to allow for corporate tax cuts to boost competitiveness and rein in inflation. "Interest expenses have fallen some six percentage points due to lower interest rates in the last few years but this is not reflected in the budget and public debt," he says. "Cutting primary spending is necessary in the same way deregulation and the liberalization of certain markets, such as energy and transport, are for bringing down inflation to the EU average. The bottom line is a smaller, better state but Greece needs a strategy to make it happen."

From a macroeconomic point of view the Greek economy is likely to outpace average eurozone growth again in 2003 but its biggest challenge will be the imposition of fiscal discipline and control over public debt dynamics in a pre-election year while pushing forward with structural reforms.

Preliminary first-quarter GDP figures paint a rosy picture, indicating that Greece is on its away to meeting and even exceeding the official real GDP growth target of 3.8% in 2003. This follows three consecutive years of strong growth rates ranging from 4% to 4.3%, underpinned by robust investment spending, partly financed by EU structural funds. In contrast to the situation in Germany, the Netherlands and Italy, Greece managed to expand by 4.3% year on year in the first quarter, banking on a 7.9% rise in investment spending and 3.6% in consumption.

"I expect the economy to grow by about 4% this year despite an unfavourable international environment, and inflation to ease below 3% at the year-end," says Yannis Stournaras, chairman of Emporiki Bank.

Papathanassiou: warns of serious problems ahead if Greece fails to carry out structural reforms to the economy

"I expect the general government budget deficit to approach 2% of GDP this year. It is not bad compared with France or Germany but Greece has a much higher public debt ratio," says George Provopoulos, chief economist at Alpha Bank.

The revised general government budget deficit eased to 1.2% of GDP in 2002 from 1.4% in 2001 on the heels of a 0.8 percentage point reduction in interest expenses as a percentage of GDP, partly offset by a 0.6 point decline in the primary budget surplus. It is projected to fall further to 0.9% of GDP this year but some doubt this can be attained. General elections are likely next spring - there is speculation that they might be called earlier. The run-up to elections in Greece is traditionally characterized by fiscal relaxation.

First-quarter figures showed a significant deterioration in the central government budget deficit, part of the general government. But officials attribute it to special factors expected to fade away. Total expenditures rose 18.2% year on year and revenues by just 1.7%, pushing the borrowing requirement to e4.3 billion.

"First-quarter budget figures were contaminated by special factors and were expected. If one takes these into account, the picture is a lot better," says Gikas Hardouvelis, economic adviser to prime minister Costas Simitis. He points to one-off revenues from the introduction of euro notes and coins in the first quarter of 2002 that augmented that quarter's revenue base, making a comparison with this year's figures rather unfavourable.

Still, some do not agree with this relatively rosy view, stressing the lack of satisfactory control on expenditures. "The fiscal situation is worrisome," says Miranda Xafa, economic adviser to Piraeus Bank and the former conservative prime minister Constantinos Mitsotakis. "It mainly stems from the inability or unwillingness of the government to control expenditures. The central government budget has ballooned in the first quarter despite the fact that not all so-called capital transfers - in effect subsidies to state-controlled corporations - are included in expenditures."

Xafa is also critical of the government's decision to give a tax arrears amnesty to professionals, saying that the move points to the difficulties in keeping the budget deficit under control and sends the wrong message to taxpayers. Instead, she favours closing down Olympic Airways and privatizing other state-controlled companies such as EAB (Hellenic Aerospace Industry), ELVO and Pyrkal.

The thorny issue of pension reform is linked to progress on fiscal consolidation. Although almost everybody admits that the current pay-as-you go system is in dire straits on the back of adverse demographics and the ensuing forecast steep rise in pension expenditure, few dare to call openly for drastic reforms.