Bank of Greece to pinpoint economy’s ills in annual report

The governor of the Bank of Greece, Nikos Garganas, last week heard firsthand the complaints of 16 prominent business leaders about government policy when he hosted them at a lunch; it was only the second such meeting in the last 30 years. Sources said criticism was centered on the failure to implement long-promised reforms and pursue bold changes in the labor market and the pension system. The guests also argued for reductions in corporate tax rates, deregulation of the education system, cutting red tape in the disbursement of European Union investment subsidies and improving public services. Garganas, who is due to deliver his annual report on the economy on April 22, is said to have promised to relay the complaints to the government, but urged his guests to undertake bold initiatives to bolster the productivity of the Greek economy. The same sources said the report will contain 10 elements that could help end the present severe downturn. He is said now to be putting the finishing touches to the document, adding his evaluations of the economic impact of the Iraq war. On the whole, the Bank of Greece seems to be taking the view that the repercussions are manageable if they are not followed by other events that will hit tourism more permanently. An outline of the 10 points is as follows: 1. A representative element of the internal weakness of the Greek economy is the serious lack of an export orientation; exports in 2003 are projected to fall by even more than last year’s 12 percent decline. Greece appears unable to attract direct foreign investment, which helps boost growth, and bring in necessary know-how. 2. Structural changes continue at a slow pace; failures such as promoting private investment in the power industry – although this is not mentioned specifically – are considered responsible for the persistence of inflationary pressures. Core inflation (without fuels and fresh produce) cannot fall below 3.4-3.5 percent. 3. The central bank is particularly worried about the rising current account deficit, which rose to 6.5 percent of gross domestic product in 2002 from 6.2 percent in 2001. All indications are that it will rise further this year as industrial production is falling. Even though there is no immediate problem in financing the deficit, the development reflects the continuing decline in productivity and rising unemployment. 4. Measures are proposed for making the labor market more flexible, which should help bring unemployment down from the current 10 percent. 5. Last year’s pension reform is considered not to have effectively tackled the real problems of the social security system. Measures are proposed for funds other than the Social Security Foundation (IKA). 6. Social partners are urged to show a spirit of conciliation in relation to pay demands and concern for productivity; labor costs in Greece are rising faster than in the rest of the EU, and this eats into the competitiveness of Greek products. In some economic sectors, pay is rising much faster than productivity, maintaining inflationary expectations. 7. The rationalization of public administration is considered as a key step toward reducing the presence of government in sectors where it is not needed and in cutting public expenses. 8. Strict adherence to fiscal policy and budget targets is advised in the present conditions of increased liquidity. 9. Business is advised to proceed with mergers, with a view to increasing the size of Greek companies; the banking system, where small institutions continue to exist, is seen as a case in point. 10. The process of privatizations must cease to be almost exclusively linked with the need for raising public revenue, and must start to become a real tool for decentralizing the economy.