ECONOMY

You can’t have it both ways with rates

When Greece was making the effort to join the eurozone, one of the main arguments in favor concerned the low interest rates that would come as a result of adopting the single European currency. The argument was perfectly logical: an economy needs low-cost money to function more smoothly. Cheaper loans help enterprises to plan and implement new investments. It is exactly what we need to create new jobs which, in turn, will generate more income. That is exactly what they did, quickly and without too much backstage drama, in the United States, ever since Americans got wind of the fact that fast growth was not here to stay, as the most optimistic neo-liberals believed. Even before this happened, the terrorist attacks on New York’s twin towers and the Pentagon scared us all. European bankers did the same, as usual with a small time lag, putting their fears about inflation on the back burner. Logically, this is exactly what we ought to want to do, especially after the calamitous drop of the Athens Stock Exchange. We ought, logically, again, to be appreciative of our good fortune. What, then, is best for a country? At a time when the world economy is facing difficulties, Greece has certain unique advantages. It has the unique chance to be able to use a tremendous amount of cost-free capital – the inflows from the European Union – to improve its infrastructure, boost its enterprises and modernize its administration. It has replaced the drachma with a strong and stable currency, the euro. Its households and companies are at their wealthiest and least indebted, relative to their wealth, ever. It is at least paradoxical to focus exclusively on one side of the issue, that is, to the low savings account rates. We forget that money has but a single price, the one that is determined in the money markets through the decisive intervention of the European Central Bank, whose responsibility it is to set the euro’s main rate. It is around this main rate, plus or minus a few points, that the cost of loans and the savings rates revolve. For purely political reasons, Economy and Finance Minister Nikos Christodoulakis chose to focus on the invention of «popular bonds» which will protect the masses’ income. This emphasis caters to our laziest reflexes. We have passed through two decades of savings rates below the inflation rate. This was a scandal; it created enormous losses in our social security funds, allowed the public sector to spend without even thinking of spending cuts and allowed businessmen to borrow cheaply, thinking they could get away without repaying their loans. Many of them managed to bankrupt their businesses in the process and others are among those screaming about the extra charges imposed on defaulting loans. Let’s make a simple observation: if it is logical to demand compound interest on deposits, then it is supremely illogical to demand the elimination of compound interest on the loans of those who fail to repay on time. It is also illogical to denounce households’ «excessive» indebtedness at the same time. If this were true, low interest would be very helpful. It is true, in any case, that rates are set to rise, making it difficult for those who take on a floating-rate mortgage. The key to understanding this seemingly illogical behavior is the way we perceive inflation. When we had 8.2 percent inflation in 1996, savings rates were 11.9 percent, but mortgage rates were 21 percent. In 2001, the first year of our participation in the eurozone, inflation had fallen to 3.4 percent, but savings rates had fallen even further, to 2.4 percent, and loan rates to 8.6 percent. We should also note that, between 1996 and 2001, the exchange rate of the drachma went from 306.8 drachmas per euro to the final rate of 340.75 per euro. This means our purchasing power fell 11 percent. In the last 18 months, we have witnessed a precipitous slowdown in the eurozone’s economic growth. It was confirmed this week that the eurozone’s economy grew just 0.8 percent in 2002 and that things do not look up for 2003. The need for lower rates was obvious before the ECB finally took its decision, drawing much criticism in the meantime for its dogmatically anti-inflationary stance. In a modern economy, renewed growth cannot take place without new investments, in other words additional business risk. No one can hope that Greece’s economy will be in a position to create new incomes, new jobs, new funds for pensioners and social security and, finally, new savings, if it cannot boost its production. This is even more pertinent when our stated goal is to close the income gap dividing us from most of our EU partners. The inflationary fear, which has become deeply embedded in households’ psychology, is combined with another potent lie: that the EU inflows will continue forever.