The perils of consumption

The revised Stability and Growth Pact forecasts submitted this week to the European Commission provide a rather optimistic view of the economy’s medium-term prospects. The revised forecasts were submitted in the light of revisions forced by Eurostat, the EU statistics agency, which increased Greece’s total debt burden considerably and turned the much-vaunted budget surpluses into deficits. According to the forecasts, the Greek economy will grow at an average annual rate of 3.8 percent in the period from 2002 to 2006. This is a quite fast pace, even if eurozone growth rates, now less than 1 percent, improve after the second half of 2003. It is quite likely that the economy will grow at an even faster pace up to 2004, thanks to the investments in infrastructure for the Olympic Games. In any case, growth will be fueled by continuing growth in private consumption. In fact, as Alpha Bank analysts say, the entire economic growth after 2004 will be attributable to private consumption, the rise of which will have resulted due to the huge amounts invested from 1995 to 2004. This means that economic growth will not come from more competitive enterprises. The government forecasts allow for only a modest increase in productivity – a 2.5 percent average in the period 2003 to 2006, compared to a 4.4 percent increase in 2001 and an estimated 3.5 percent in 2002. As a result, the Greek economy’s competitiveness within the eurozone will worsen and this will also have an impact in the reduction of the debt. The annual budgets will simply not be able to afford to reduce debt by 4 percentage points of gross domestic product each year. The high private consumption will also keep inflation at higher-than-average levels within the eurozone. For 2003, at least, inflation is not expected to average below 3 percent.

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