The post-2004 economy

Greek industrialists last week joined a chorus of opposition political leaders, union leaders and other businessmen expressing concern about the country’s economy past 2004 whereas Prime Minister Costas Simitis appeared confident the economy will grow at even higher rates beyond that year. Who is right and who is wrong? Pessimists often cite, among other things, Greece’s high public debt burden, insufficient structural reforms over the last few years, above-average inflation compared to the euro area, the lack of impetus from low interest rates, and investment spending related to the 2004 Olympic Games as potential obstacles to attaining real economic convergence with core Europe. The enlargement of the EU with 10 new countries poses yet another challenge. On the other hand, the optimists read the situation differently. They say «the Olympics is not an issue» and make the case for more growth afterward as the country starts reaping some of the long-term benefits, such as tourism, associated with the 2004 Olympics and the redirection of budget investment funds into more productive uses. They say EU structural funds, accounting for 1.2 percentage points of the 4.0 percent GDP growth, will continue to flow in up to 2008, enhancing the country’s productivity and competitiveness to the point of generating growth internally. There is no doubt both arguments have valid points. Still, there may be some surprises down the road, depending on the course of the world economy, the eurozone’s in particular, as well as the behavior of capital markets. All these exogenous factors may throw any plausible economic scenario off track. So, one has to rely on some baseline assumptions with regard to the eurozone’s GDP growth rate, the effective euro exchange rate, and the price of oil before even dipping into Greek economic waters. Greek GDP growth remained surprisingly high at 4.3 percent year-on-year in the first quarter, when the price of oil jumped to over $35 per barrel, the euro strengthened even more, investor and business sentiment was bruised, the Iraq war unfolded, and the German economy contracted. All this was just a reminder of the inelastic nature of certain components of Greek aggregate demand, namely investment spending and consumption. Few should dispute the fact that EU transfers, low interest rates, an improvement in public finances and some minor structural reforms have contributed greatly toward Greek GDP outperformance versus EU average growth since 1996. Nevertheless, Greece’s high public debt ratio, estimated in excess of 105 percent at end-2002, shows that fiscal consolidation has been insufficient. Greece’s above-average inflation testifies to input and output market rigidities and the need for more deregulation and privatization. Moreover, its large current account deficit, accounting for some 5.0 percent of GDP, demonstrates both Greece’s faster growth rates relative to the euro area and more so the loss of competitiveness. What does this all imply about Greece’s future growth prospects? First, although the full liberalization of consumer lending, expected in early June, is likely to provide another boost, the positive effect of low interest rates should be expected to fade away and even turn negative if euro interest rates start heading north again, a possibility after 2003. So, a source of economic strength may not be there past 2004. Second, Greece is expected to collect up to 26 billion euros from the Third Community Support Framework (CSFIII), running from 2000 through 2006 but expected to be extended for another couple of years. This, along with additional financing from other programs, is estimated to net Greece some 5-6 billion euros in the next few years. However, given that the criteria for EU co-financing projects under CSFIII have become stricter, it is likely that Greece may end up with a smaller amount. On the other hand, all these past, current and future investments should lead to some permanent productivity gains, especially if combined with the liberalization of key markets, fueling economic growth for a few more years. Greece should already be seeing some of that, but tangible benefits may be more visible from 2004 onward. Third, the completion of projects related to the 2004 Olympic Games will deprive the economy of a much-needed boost. If, however, funds are indeed redirected into more productive projects, the economy should benefit. However, it remains unclear which are these large-scale projects. In addition to this, the country will have to foot the bill for the Olympics, but should be able to extract benefits in tourism and other areas if the 2004 Games turn out to be a success. Fourth, Greece has been unable to attract foreign direct investment (FDI) and improve the efficiency of its public sector. Although no miracles should be expected, gradual improvement should occur along with steps toward the liberalization of certain sectors. Fifth, the 10 countries recently admitted into the EU will undoubtedly compete with Greece for EU structural funds past 2008. Government officials and others, however, say in private that Greece will receive another EU package, the so-called CSFIV, whose funds should be at least half those of the CSFIII, that is 13 billion euros. If so, Greece can count on EU structural funds beyond 2010. Regarding concerns about possible product competition from some of these countries in traditional export markets, analysts point out that this has happened to a large extent without anyone taking notice. EU markets have gradually opened up to these countries since the mid-1990s, but the opposite did not happen. So, Greek products may be able to access some of these markets, according to analysts. Although there are pros and cons, the baseline scenario should favor healthy Greek economic growth rates for the years to come. This scenario is feasible, but is subject to the risk of external economic turmoil as well as domestic political instability. Barring these two variables, Greece should continue to grow past 2004 in quest of real economic convergence with its «old» partners.