In the 1990-1993 period, when a serious attempt was made to bring some order to Greece’s economy, the difference in inflation from the average of the other countries that now comprise the eurozone was 13 percentage points. In the following four years (1994-1998), the spread fell to 5.4 percentage points and in 2000, the year that Greece joined the eurozone, just 0.6 percent. By last year, it had climbed to 1.7 percent, and, according to all indications, it looks likely to remain roughly there the next few years. This inflation rate difference between Greece and the eurozone average may seem small but the prospect of its remaining there is not at all pleasant. Given the common currency, the difference means a widening divergence in real incomes. Even worse, excessive inflation is eroding any meager gains in key areas such as productivity. There are a number of basic factors causing this unpleasant phenomenon. A recent study by the European Central Bank (ECB) – «Inflation Differentials in the Euro Area: Potential Causes and Policy Implications» – seeks to explain some of them. The efforts by poorer countries to shorten their income differentials from the others justifies a higher inflation rate when the goal is attained by a faster rise in domestic product. These countries, as a rule, are found to have significant differences in productivity levels between industry and services. The bigger this difference, the wider the inflation spread. Therefore, a faster rise in service prices or the prices set by government decisions permeates the economy more easily. In this case, we are speaking about «convergence» inflation, which is true in the case of Greece. Another serious factor causing inflation differentials is related to expansive fiscal policies. An increasing certainty that Greece will show great fiscal deficits leads to an equal certainty that inflation will be maintained at relatively high levels. The authors of the ECB report identify a buoyant property market as another factor. In countries such as Greece, Ireland, the Netherlands and Spain, the contribution of realty prices to inflationary pressures must be viewed as decisive, due to their impact on disposable income and a wide range of other prices. The third stage of European Economic and Monetary Union has led to a steep fall in interest rates in all the members of the eurozone, particularly those that went through phases of high inflation and currency difficulties, such as Greece, forcing their central banks to maintain high interest rates in the old national currencies. These much lower rates fueled a «lending explosion,» thereby rekindling inflationary pressures. Such pressure was even stronger when the national economy had no appreciable leeway for any speedy adaptation of its productive potential. Growing incomes and consumption under the external conditions of rising oil prices and a sliding euro against the dollar bode ill for small economies which, like Greece’s, also maintain very large trade deficits. The last, but not least, important factor for a high inflation rate is related to incomes policy: With the exception of 1999, wage rises had a poor impact on inflation, unemployment and the level of employment. The «slide» of such an impact, from wages to the cost of final products and services, has become a systematic characteristic in the last three years. The relaxation of fiscal discipline that the government has followed in the last few months will have even larger and more serious consequences on prices. We can take it for granted that inflation in 2004 will again rise to the occasion.