BoG paints positive picture but urges vigilance, reform

The Greek economy’s high growth rates have a limited base, which raises questions about their continuation in coming years, Bank of Greece Governor Nicholas Garganas warned in his interim report on monetary policy for 2003, released yesterday. The economy’s progress and dynamism will mainly depend on the policies to be followed, particularly on when structural changes, whose importance is paramount, will advance, Garganas said. Nevertheless, the monetary chief noted that the country’s economic performance is improving after the high degree of macroeconomic stability achieved in recent years, and his report paints a generally positive picture. Garganas identified the main problems of the Greek economy as: inflation, despite a slowdown this year; unemployment, which remains high; and the current account deficit, which is in excess of 6 percent of GDP for the fourth consecutive year and remains one of the highest in the European Union despite a marked improvement this year. The report notes that Greek inflation this year has narrowed the gap from the eurozone as a whole. Both consumer price inflation and the harmonized inflation index are projected to recede to 3.2 percent in the fourth quarter (from 3.6 and 3.8 percent in the respective quarter of 2002). For 2003 as a whole, both inflation indices are seen as closing around 3.5 percent, from 3.6 and 3.9 percent last year. However, inflation is still deemed high, mainly as a result of unsatisfactory conditions of competition in certain markets, where excess demand is causing prices to rise by more than would be justified by cost factors. The report also notes that the growth of unit costs throughout the economy may have slowed down but is still too high to be compatible with price stability (slightly less than 2 percent). The divergence of Greek inflation from that of the eurozone is on the whole related to the process of real convergence, the different phase of the economic cycle in which the Greek economy now finds itself and the inefficient functioning of certain markets. The central bank report cautions that fiscal policy must be further tightened rather than relaxed, in relation to the targets set last December. This would contribute to reining in inflation and to ultimately limiting the current account deficit. In view of 2004 being an election year and the fact that a number of significant pay demands are being made, the report stresses the importance of safeguarding the significant progress already achieved since the mid-1990s in reducing the effect of the «election» or «political» cycle on the economy and which has made an essential contribution to macroeconomic stability and growth rates in recent years. Further, it calls for the cooperation of employers and labor unions toward safeguarding price stability through the application of moderate pricing policies and setting real pay rises near the rate of productivity growth with a view to protecting working people’s purchasing power, boosting competitiveness and bringing unemployment down to tolerable levels. Finally, the Bank of Greece sees the country’s GDP growing at a rate of 4 percent this year (in line with the government target), against a 0.5 percent eurozone average, thereby making further progress toward real convergence. Separately, Alpha Bank concurred in a report that the growth rate will close at 4 percent for 2003.