Economy looks set to stall or even shrink this year

Bank of Greece wants budget discipline

Bank of Greece Governor Giorgos Provopoulos said the unemployment rate in Greece is seen as rising by up to 0.8 percentage points this year from 7.6 percent in 2008.

Greece’s economy may slip into recession this year, according to the Bank of Greece, which called for fiscal discipline from the government in order to reduce borrowing expenses and boost investment activity.

Central bank Governor Giorgos Provopoulos reiterated yesterday that economic growth is expected to halt this year but left open the possibility of a negative expansion rate for the country’s gross domestic product (GDP) in 2009. “It is possible that during the year there will be negative GDP rates, while activity might be unfavorable if the international economic conditions essentially get worse,” he told an annual shareholders meeting at the Bank of Greece.

Greece’s 260-billion-euro economy has been slowing under the weight of the global financial crisis, with GDP expansion rates decelerating to 2.9 percent year-on-year in 2008 from 4 percent the previous year.

Growth is slowing as the international financial crisis takes its toll on investment and exports and rising unemployment dampens consumer spending. Exports of goods and services could fall 12 percent this year, Provopoulos said. The global slump is also weighing on tourism, which accounts for 16 percent of GDP, and shipping, which contributes about 7 percent.

The Economy and Finance Ministry has forecast growth of 1.1 percent for this year, while the European Commission has put the figure at 0.2 percent. With public debt over 95 percent of GDP, a budget deficit of over 3 percent in 2009 would tell international markets that budgetary adjustments are being put off or are slow in coming, said Provopoulos.

“Budgetary discipline is absolutely necessary, not only to meet the terms of the Stability and Growth Pact but also to inspire trust in markets and improve borrowing terms,” he added.

The premium at which investors want to buy Greek government bonds over benchmark German Bunds hit record highs recently on concerns over Greece’s membership in the eurozone and the country’s ability to meet its borrowing needs. Greece is expected to borrow about 42 billion euros this year.

The governor added that development prospects could be supported by a redistribution of public expenditures in favor of the weaker social groups and government investments.