Bank of Greece head sees bleak outlook for eurozone

Nicholas Garganas underlines urgency of structural reforms

By Foo Yun Chee - Kathimerini English Edition

The governor of the Bank of Greece has become the latest prominent figure to warn of the negative consequences of the war in Iraq as the conflict dragged into its third week.

Nicholas Garganas told a parliamentary financial affairs committee yesterday that the eurozone could fall into a recession as a result of the war. The warning came as the USA warned of the possibility of the conflict lasting months rather than weeks.

High oil prices have also added to the concerns. Crude oil reached a 12-year high of $39.99 a barrel on February 27 but has dropped by 24 percent since then.

Garganas’s bleak scenario came on the heels of a similar pessimistic forecast by EU Economic and Affairs Commissioner Pedro Solbes last week. Investment and consumer confidence could recover in the second quarter should war end quickly but a longer duration could tip the eurozone into a recession, he said.

The European Commission last month trimmed its full-year growth forecast for the region to 1 percent from 1.8 percent. The eurozone expanded by just 0.8 percent last year.

Both the Organization for Economic Cooperation and Development and the International Monetary Fund have warned of the fallout from the war, saying a lengthy conflict could undermine global growth.

Reiterating recommendations contained in the central bank’s spring monetary policy report released last month, Garganas called on the government to step up the pace of structural reforms and to stick to its fiscal policy as one way to counter the consequences of war.

He singled out the labor market as one area where greater flexibility could lead to lower costs and lower inflation. The central bank is forecasting inflation, stripped of fresh produce and fuel prices, to come in at 3.6 percent this year. The economy is seen expanding 3.7 percent, slightly lower than the official target of 3.8 percent.

The government has been reluctant to take more proactive measures to boost the economy, confident that the inflow of structural funds and infrastructure projects related to the 2004 Olympic Games are more than capable of fueling economic growth and providing a buffer of protection from the war.

Measures announced thus far are targeted at the tourism industry and exports, the two sectors most vulnerable to the consequences of war. Aiming at new markets, especially in the east, setting up promotional and marketing offices abroad and intensifying the advertising campaign are expected to help alleviate the fallout from the war.

The tourism industry in the meantime has already come under pressure with bookings canceled as a result of the war. Industry figures said cancellations for summer holidays have reached 15 percent while cruise ships have reported a 30 percent decline in bookings. However, Development Minister Akis Tsochadzopoulos said a return to normal levels is expected in May.