Can Greece maintain high growth rates after 2004?

The Greek economy has managed to outperform the eurozone since 1996 and is projected to do the same in the next couple of years. Yet a growing number of economists, analysts, businessmen and even citizens express concern about the post-2004 period, citing the potential lack of impetus from low interest rates, investment spending being tied to the 2004 Olympic Games and even an end to EU inflows after 2006 in view of EU enlargement. Government officials and even some market analysts dispute these claims and argue that the Greek economy can outperform its eurozone partners for a longer period of time, perhaps extending to the end of this decade. They argue Cyprus’s admission into the EU and the prospect of normalized Greek-Turkish relations gives more credibility to their argument. Can they be right? Although nobody can dispute Greece’s progress in achieving macroeconomic stability in the last few years, it is widely accepted that the steep drop in interest rates – a by-product of fiscal discipline and the disinflation process imposed by the EMU drive – and the positive contribution to growth by various EU-funded projects played a key role in its outperforming most of its partners in economic growth in 1996-2002. Moreover, an increase in investment spending linked to the 2004 Olympic Games has also boosted economic growth in the last couple of years. A series of part-flotations and outright privatizations of state-controlled companies, coupled with the deregulation and liberalization of a few sectors, more prominently banking and telecommunications, also contributed to economic growth and even the easing of inflationary pressures. However, structural reforms seem to have slowed considerably in the last couple of years. This is mainly due to the Socialist government’s unwillingness to confront the trade unions and overcome the general public’s stiff resistance to labor and pension reforms. In addition to this, the poor state of the Athens bourse has made the privatization of state-controlled enterprises much more difficult in the last couple of years. Those who are skeptical about the sustainability of Greek economic growth after 2004 or even after 2005-2006 have all along pointed to the above factors, which boosted growth in the past, to support their main thesis. That is, the positive effect of low interest rates on investment will decrease, the economic impetus from Olympics-related spending will fade in 2005 – leaving a huge bill to be paid – and finally, the significant reduction or even elimination of EU inflows after 2006 will bring to an end a long period of economic prosperity. To optimists, these arguments are not convincing for various reasons. First, they say they underestimate the internal dynamics introduced by a long period of heavy investment, both private and public, privatizations and implemented structural reforms. These internally generated dynamics are supposed to be behind the significant rise in labor productivity and the increased operational efficiency of many companies and are projected to have a long-lasting effect on the Greek economy. To them, it is incorrect to rely solely on external factors to explain Greece’s economic outperformance since 1996. In addition to the internal dynamics, they see some long-lasting positive effects from other factors, considered to be temporary by the skeptics. The optimists claim that the end of the 2004 Olympics will release investment funds which will be redirected into more productive projects while the country will enjoy more long-term benefits in areas such as tourism. Moreover, they point out that EU structural funds, estimated to account for about a quarter of GDP growth rates at present, will be reduced only after 2008 and not 2006 as many believe. They also add that the likely normalization of Greek-Turkish relations will help attract foreign investment in the region at the same time as trade picks up. The government’s updated Growth and Stability Pact for the 2002-2006 period submitted to the European Commission a couple of weeks ago exhumed the same optimism by forecasting economic growth of 3.8 percent in 2003, 4 percent in 2004, 3.7 percent in 2005 and 3.6 percent in 2006. At the same time, it projected an improvement in public finances with the general government budget deficit falling to 0.4 percent of GDP in 2004 from 0.9 percent in 2003, turning into surpluses of 0.2 percent and 0.6 percent of GDP in 2005 and 2006 respectively. The public debt is forecast to drop to 100 percent of GDP in 2003, 96.1 percent in 2004, 92.1 percent in 2005 and 87.9 percent in 2006. Though both sides of this debate can make strong arguments in support of their main thesis, past Greek economic history seems to be more on the side of the pessimists. Internal dynamics may be present and strong at times; but the State and most large private companies appear to have a problem in realizing it without external and/or each other’s support. This is demonstrated by the degree to which private sector firms depend on state-funded projects for survival. On the other hand, it is hard to predict the international economic environment that will prevail in the future. Moreover, Greece’s willingness to truly reform its ailing pension system and its ability to reduce its huge public debt to more sustainable levels is in doubt. This may well determine who is right in this debate on the sustainability of Greece’s economic performance.