Inflation, lax fiscal policy hurt economy, report says

While Greece’s economy will continue to grow at a fast pace in the near future, a slackening fiscal policy threatens to cause a flareup in inflation, and the country’s inability to attract foreign direct investment has a hard impact on job creation and economic growth itself, a study by a leading economic think tank has found. The latest quarterly report on the Greek economy by the Foundation for Economic and Industrial Research (IOBE), made public yesterday, views with alarm the government’s turn toward a more free-spending policy and predicts that the government’s estimates about spending increases may prove too optimistic. IOBE reflects the views of the Federation of Greek Industries (SEV), with which it is affiliated. The survey notes that the government itself has admitted that spending this year will increase 7.6 percent compared to 2002 instead of 6 percent, as the 2003 budget estimated. Fiscal policy will be further loosened in 2004, as the draft budget predicts a 7.7 percent increase in spending. As usual, such predictions turn out to be underestimates. «It will be especially difficult not to overshoot these targets, especially the one on spending, in a climate shaped up by the (coming) national elections, when employees in several state administration sectors step up pressure for higher income. It is well-known that the effects of the so-called ‘political cycle’ which the Greek economy has entered are to be found mostly in the increase in public spending and the loosening of fiscal austerity,» the report says. The IOBE report states three major reasons why a stricter fiscal policy is necessary. First, the Greek economy, in contrast with most of the other EU member states, does not face the prospect of recession. On the contrary, growth is the highest in the eurozone, thanks to an increase in investment and the continuing rise in consumption. Second, the monetary policy followed by the European Central Bank (ECB), with its low rates, is more appropriate for those countries which are in another aspect of the economic cycle, that is, closer to a recession. In Greece, this policy has inflationary effects. Third, even if the economy did not grow at such a fast pace, the high level of public debt, over 100 percent of the country’s gross domestic product (GDP), demands a policy which will allow Greece to reduce the debt level fast. Free-spending ways do not facilitate this task. Real convergence – that is, the goal of reaching the average EU income level – is a continuous process that in order to succeed must meet four conditions: First, the Greek economy must continue to grow faster than the EU average. When the current factors boosting growth – EU aid and investment in big infrastructure projects – will recede, Greece needs to raise its production by finding new investment sources, by increasing productivity and by creating a more business-friendly climate. Second, the government must ensure monetary stability. The ECB is taking care of rates and Greece must, in turn, tame inflation. Otherwise, it will continue to lose in competitiveness, which means less demand for its products, less production and, as a consequence, declining profits, incomes and employment. Third, the public debt must be reduced to under 60 percent of GDP in the coming decade. Fourth, the State and public administration must be restructured. The report says that rarely has the divergence between the public’s perception of inflation and actual inflation been so great. This risks creating self-fulfilling expectations of higher inflation.