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An issue of statistical significance in Greece

By Nick Malkoutzis & Yiannis Mouzakis*

The head of Greece’s statistics agency, Andreas Georgiou, is to face a criminal inquiry. An ex-employee of the Hellenic Statistical Authority (ELSTAT), Zoe Georganta, has accused him of colluding with the European Union’s statistical arm, Eurostat, to inflate Greece’s deficit figure for 2009, thereby justifying Greece's EU-IMF bailout, signed in May 2010, and its drastic austerity measures. Georgiou vehemently denies the charges.

Financial prosecutors have referred the matter to a special magistrate and the Greek justice system will have to decide on the validity of each side’s arguments.

Beyond the judicial process, some observations about the case are needed as it goes to the very heart of understanding how Greece’s public finances veered dramatically off course and the country turned to the eurozone and International Monetary Fund for emergency loans.

Georganta argues that Georgiou's main offense was to incorporate 17 public enterprises (known as DEKOs in Greece) into the general government budget, thereby inflating the 2009 deficit by 18.2 billion euros. She claims that Greece’s deficit for that year should have been just under 4 percent of GDP, rather than the final figure of 15.6 percent, which came about after several revisions. Georganta, an econometrics professor at the University of Macedonia, says the final figure, which was announced on November 15, 2010, was pumped up so it would be bigger than Ireland’s, which was 14.3 percent, and therefore the biggest in the eurozone. According to Georganta, this inflated figure was used to justify the tough austerity measures demanded by the troika.

Some Greek commentators and politicians have seized upon these allegations as evidence of a wider plot against Greece or proof that the country was a victim of sinister forces from within and abroad. The strength of their argument does not stack up against the facts and feeds a misleading narrative in the public debate. This prevents a proper appreciation of the grave economic and fiscal errors made in the buildup to the crisis.

Firstly, there are a few procedural points to clarify. Greece’s statistics were repeatedly questioned between 2004 and 2010 by Eurostat. It was only after several checks by the Luxembourg-based statistical agency that the 2009 figure was approved, seeming to leave little scope for claims of it having been manipulated by Greek authorities. With regard to the inclusion of public utilities, Eurostat provides a manual (ESA95) that member states follow. It defines entities that should be part of the general government budget and appears to cover the inclusion of Greek public enterprises in the country’s deficit calculations. It should also be noted that regardless of the merits regarding the addition of DEKOs to the budget, there can be no doubt that their debts were being paid from central government coffers. Even after the Private Sector Involvement (PSI) early in 2012, the Greek government is still paying in full the holders of bonds issued by the Hellenic Railways Organization (OSE), who refused to submit their paper for a haircut. Lastly, it is 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 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.

Beyond these basic matters, it is important that there is an awareness of the magnitude of Greece’s fiscal derailment in 2009. If for no other reason than that it is important to appreciate what led to the country and its people experiencing the most extensive economic crisis a developed economy has suffered for decades. The events of 2009 should be looked at with a critical eye so Greeks come out of this turbulent period not just battered but also wiser.

It is worth taking the sequence of events from the start.

In November 2008, just two months after the collapse of Lehman Brothers in the USA and as the financial crisis was unfolding around the globe, the New Democracy government of Costas 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.

Two months later, as the crisis was sweeping through one country after the other, the government was forced to submit an updated Stability and Growth Program. It revised the prospects of the Greek economy for 2009, lowering the growth rate to 3.8 percent of GDP and raising the state deficit to 12.7 billion euros. With a budget based on such a macroeconomic and fiscal framework, the Karamanlis government was setting itself up for a spectacular failure and, perhaps unknowingly, laid a foundation stone for the deepest crisis in the country’s modern history.

Even as early as May 2009, the budget’s unrealistic projections were exposed and it went off the rails. The state budget deficit was already at 14.4 billion euros, with 43 percent of the budgeted expenses already used up while revenues stood at just 31 percent of the annual target.

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.

With the inclusion of 1.5 billion euros for hospital arrears payments – the only decision of the newly elected Papandreou government contested by New Democracy – the 2009 deficit closed at 30.9 billion euros after a complete collapse of revenues, missing the annual target by 11 billion euros. Expenses increased by 10 billion euros compared to 2008. At the same time, Greece entered the first year of its long recession, with GDP contracting by 3.1 percent.

Sometimes the simplest explanation is the correct one. Even without the subsequent revision of the figures under the supervision of Eurostat, the 2009 public deficit reached double digits very early in the year and missed the initial budget targets by some distance because it was based on an unrealistic framework to start with. Also, by that time, the Karamanlis government had been shaken by a series of scandals, was trailing in opinion polls and had a very loose grip on the wheel.

The argument that had the shortfall been smaller than Ireland’s, Greece might have avoided the bailout or an austerity package is unconvincing. Firstly, it should be pointed out that Ireland did not escape a bailout or austerity measures. Beyond that, the two countries were suffering from vastly different problems. Greece’s debt was much larger than Ireland’s. Whereas Greece owed 112.9 percent of its GDP in 2009, Ireland’s debt-to-GDP ratio was just 44.5 percent. The Irish problem was in the financial sector, Greece’s was predominantly fiscal and macroeconomic. By May 2010, Greece had a financing gap of 35 billion euros for the rest of the year, so it is difficult to see how there was any prospect of Athens borrowing from international markets at reasonable rates, staving off a financial assistance program.

Of course, if the Greek deficit for 2009 had been 3.9 percent of GDP, as Georganta has recently claimed, then events would certainly have turned out differently. It seems to be the wildest of claims considering the confirmed macroeconomic data from 2009 and the fact that Greece's interest payments alone for that year ended up at 5.2 percent of GDP. This means Georganta's scenario implies that the country ran a primary surplus of more than 1 percent of GDP in 2009.

To put things in perspective, the only period in the last 20 years that Greece produced a deficit under 4 percent was between 1999 and 2001, after a period of austerity to ensure the country met the criteria to join the euro. After joining in 2001, Greece’s fiscal discipline slipped ever more dramatically as the decade progressed. To a large extent, this period of economic boom fueled by cheap credit and unsustainable fiscal laxity is where the narrative for Greece’s troubles today can be found. To suggest otherwise is to dabble in fairy tales.

Greece and Greeks have suffered because of questions about the reliability of the country's statistics. This has included repeated misinformed and erroneous accusations concerning Greece's entry into the euro. It will take a long and consistent effort to restore credibility over this matter and the latest developments in the ELSTAT case are a serious blow.

There appears to be little that has been presented publicly so far to suggest there is any strength to the allegations of a conspiracy that intended to inflate Greece’s deficit and lead the country into the arms of the troika. Perhaps the criminal inquiry to come will produce more compelling evidence that will shed new light on this issue. In the meantime, though, it is vital that there is a better appreciation of the circumstances surrounding the Greek fiscal disaster. A diet of half-truths and red herrings will only succeed in apportioning responsibility wrongly and planting the seeds for the next catastrophe.

[Kathimerini English Edition]

*Yiannis Mouzakis is is an economics content specialist for a global content supplier. He blogs at The Prodigal Greek ( , Saturday Jan 26, 2013 (19:15)  
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