The Greek economy is not an accelerating ‘little tiger’

A peculiar betting race regarding the country’s growth rate is taking place currently, as the prime minister prepares his keynote economic policy speech at the Thessaloniki International Fair on Friday. And this being a pre-election year, the race concerns the pace at which the economy must grow in coming years to converge with the rest of Europe. The government is referring to the economy as if it were Europe’s «little tiger;» we have the highest growth rate and will do even better next year, it contends. The opposition retorts that even higher rates are needed to achieve real convergence; at current rates, real convergence is almost unfeasible. Along general lines, both claims are true; we do have the highest GDP growth rate in the EU but it is not sufficient for real convergence, the drive for which will become even harder in coming years. Most, if not all, of the 10 new members have advantages in cost and competitiveness which Greece and a number of other small countries have largely lost to them. There is the distinct prospect of the Greek economy lagging behind some «fast tigers» among the new members. The evident growth of recent years is largely due to the fall in interest rates and a commensurate fall in inflation. The lower interest rates facilitated a drop in public spending and eased the fiscal situation; it also boosted investment, the stock market and domestic demand. But it has now come to an end; it cannot continue to the extent of previous years. By contrast, strong domestic demand bolsters prices and incomes, with negative consequences for exports, and a rise in land values and public debt. We now have interest rates at average European levels but a higher inflation rate that undermines competitiveness, which can no longer be improved by devaluation. The advantage of devaluation as part of the drive to attain the criteria for entry into Economic and Monetary Union has now evaporated. Moreover, if Europe’s two big «sick men,» France and Germany, boost growth next year, the road to real convergence will be even more difficult. For this reason, we had better remain wary of any pep talk about fast growth we may hear on Friday. Accelerating growth presupposes the adoption of measures overturning the economy’s given course; measures that will form a new base, create new markets and offer a sustainable comparative advantage. Such measures would upset many large and small vested interests. As long as there is no real desire to change entrenched balances and habits, accelerating growth will remain a mere pre-election slogan.