Garganas fears spending exuberance of big EU members

Nicholas Garganas, Greece’s central bank governor, said it was in the country’s interest to provide unwavering support to the European Union’s Stability and Growth Pact. Speaking after eurozone finance ministers (ECOFIN) in Brussels effectively turned a blind eye to excessive budget overruns by France and Germany, contrary to pact rules, he said such support was especially in the interest of small countries. «If the big countries go on increasing deficits unchecked, there could be repercussions on interest rates, and this could possibly lead to a weakening of the euro,» he told a parliamentary committee. He urged the government not to relax its efforts for consolidating long-term economic stability and called on employers and unions to seriously take into account the threat of inflation in the upcoming negotiations for a new collective labor agreement. Garganas said pay raises should not exceed gains in productivity and urged businesses to raise prices only in line with costs. He saw inflation at around 3.2 to 3.3 percent in the last quarter of 2003. Oligopolies Garganas said average corporate profitability is expected to rise by 27-30 percent at the year’s three-quarters mark and agreed that there are oligopolistic situations in the economy. «In certain markets where competition is ineffective, there are large profits that contribute to inflation,» he said. Garganas forecast a growth rate of 4 percent for the Greek economy next year, of which he said less than 1 percent was due to the boost of European Union investment subsidies, with half the growth rate due to the growth of private consumption and the other half to the rise in investment. He said that Greece’s failure to attract foreign investment was due to the existence of disincentives which one of his prominent predecessors, Xenophon Zolotas, described 30 years ago. Seventy percent of the Greek economy is now accounted for by services, Garganas said. He said the country’s credit system needed stronger supervision and that the government was preparing legislation that would invest the Bank of Greece with much broader powers to protect borrowers. He called on banks to strictly apply lending rules and on households to take into account the likelihood of interest rates rising in one or two years. Finally, he said opaque public spending burdened the country’s debt by as much as 3 percent of gross domestic product (GDP). The budget projects debt at 101.7 percent of GDP.