High growth rates shield Greek economy from the rising euro

The euro broke through its previous peak against the dollar on Friday, sending shivers through Europe’s stock markets. Although the euro’s sharp rise against the dollar and other major currencies has been a major source of concern in most European countries, this has not been the case in Greece. Should it, however, have a negative impact upon the eurozone’s export-driven economy, it will be felt here as well. This is more likely to be the case after 2004 when a major impetus of Greece’s GDP growth – that is, the preparations for the Olympic Games – will not be taking place. The euro rose above 1.20 against the dollar on Friday for the first time since its debut in January 1999, despite strong US consumer confidence data and third-quarter GDP (gross domestic product) growth. Many analysts expect the single European currency to gain even more ground against the greenback next year, prompting fears it may kill what seems to be a fragile rebound in the eurozone’s export-dependent economy next year. Though there are various forecasts, it should be noted that well-known investment banks, such as Merrill Lynch, see the euro/dollar exchange rate as heading above 1.30 a year from now, while some others, who believe history repeats itself, see it heading toward 1.40 in 20 months’ time. These concerns have not been shared in Greece, mainly because the economy is growing at a strong 4.0 percent rate, shifting the focus toward the 2004 Olympic Games and the general elections scheduled for next spring. Some even think a strong euro helps the Greek economy more than it hurts it by putting downward pressure on sticky inflation. Greek consumer price inflation has failed to budge below 3.0 percent and most projections see it at these levels next year as well. Given this backdrop, fighting inflation instead of further boosting robust economic growth should be a top priority and a strong euro seems to suit it fine. Moreover, trade figures show the appreciation of the euro did little to harm Greek exports and boost imports in the first nine months of the year. Lower import growth Preliminary figures on the balance of payments, released by the Bank of Greece, showed the value of merchandise exports rising by 5.9 percent to 8.13 billion euros in the January-September period, compared to a year earlier. The import bill also increased by 2.2 percent to 24.8 billion, but non-fuel imports declined by 0.7 percent overall in the first nine months of the year. It should be noted that Greek imports of goods and services grew faster than GDP by four percentage points during the 1990s, but this relationship has completely reversed over the last two years, even though real GDP growth has continued to grow by 4 percent annually on average with imports declining by about 0.7 percent. In a very interesting paper, National Bank’s economist Nicholas Magginas said this import growth paradox was mainly explained by the fact that the more introverted construction sector has played a greater role in fostering economic growth in the last few years than before. On the other hand, investment spending on equipment and other capital goods, as well as on consumer durables slowed down considerably in the 2001-2002 period, partly reflecting the over-accumulation of these goods in the previous period, and therefore exerting a negative impact on Greece’s import growth. In other words, the change in the main drivers of Greek GDP growth accounted for the slowdown in imports over the last couple of years. However, this change in the composition of Greek GDP growth the last few years should be a source of concern because it may pave the way for an economic slowdown as construction activity is likely to enter a new phase characterized by much slower growth rates at best. Given the limited help the economy can receive from an already expansionary fiscal policy and the usual inertia that characterizes the three-to-six month period following any political changeover in Greece, the international economic environment could emerge as a more important determinant of Greek economic growth than it is today. Assuming the economic prospects of large eurozone economies, especially Germany, France and Italy – where a good chunk of Greek merchandize exports is heading and tourist receipts are coming in from – are hurt by the appreciation of the euro to the point of facing the prospect of another recession, the Greek economy is bound to feel the pinch. It will not just be a direct effect on the goods and services sectors exporting to non-euro countries which are going to find their profit margins being compressed and volumes falling. It will also be the indirect effects of lower incomes in many eurozone countries that will hurt Greek exports and tourism. Moreover, Greek export-oriented companies will see their sales in dollars and other currencies that have depreciated against the euro translating into lower sales figures. Given the fact that many of them do not hedge their foreign currency risk, lower sales will most likely translate into lower earnings, putting pressure on stocks if listed on the Athens Stock Exchange. It should be noted, however, that some companies using dollar-denominated primary materials in the production process will benefit. There is no reason to worry about a negative impact of the strong euro on the Greek economy at this point. After all, Greece is the champion of growth in the European Union this year and is expected to remain a top performer next year, thanks to the 2004 Olympic Games, a more relaxed fiscal policy and rises in real incomes for a wide range of professional groups and employees. It would be wrong though to assume that this environment will last even after 2004. It is at that stage that the Greek economy will need all the help it can get from economic growth in the eurozone and other countries. The further appreciation of the euro against other major currencies is likely to slowly but steadily erode competitiveness and undermine economic prospects in large eurozone economies, making it harder for the Greek economy to adjust to the post-2004 reality.