Greek economy is doing well by comparison with the past – and with others

There are two ways to determine whether the Greek economy is doing well. One is by comparing present with past performance. The other comes through comparing our present performance with that of others, preferably our EU partners or other members of the Organization for Economic Cooperation and Development (OECD). Whichever method we use, Greece is doing well. Granted, it is not doing as well as it should, in order to make up for past mistakes and to offer its citizens a reasonably distributed standard of living, comparative with other eurozone members. To see what lies ahead, we can refer to a study by OECD analysts, who have considered a number of likely outcomes. First will be a generalized drop in domestic demand among OECD members that will limit the rate of growth in the gross domestic product (GDP) in 2002. In the two years beyond that, though, there will be a reversal of this trend. For the countries outside the OECD, things look bleaker, with the downturn in domestic demand lasting longer. Their slowdown will also affect our GDP growth. According to the OECD, if consumption does not stabilize at current levels over the next two years, GDP in the eurozone will fall by 2 percentage points. It should be noted that the broader economic effect of the drop in consumption will be worse than if the oil price rises 10 dollars per barrel. In any case, it is not expected to. What is expected, however, is a weakening of the dollar against the euro. The OECD estimates that a single percentage point reduction in interest rates by the European Central Bank would help the eurozone: it would raise 2002 GDP by half a percentage point to 1.9 percent and would also positively affect 2003 growth by four tenths of a percentage point (3.4 percent instead of the currently forecast 3 percent). The likelihood of such interest rate cuts happening is quite high. After this year’s cuts both in the US and Europe and given the danger of recession, a laxer monetary policy is highly likely in all developed countries, except, of course, in Japan, where the central bank has reached the limits of monetary policy with its zero rate. The reduction in the cost of borrowing for private citizens and in the cost of capital accumulation for enterprises will gradually provide a base of support for both consumption and investments. The increase in disposable income will be considerable, as will the creation of new jobs. In other words, the deepest and most urgent problem for the OECD countries is the decline in demand. This has only happened twice in the past 40 years, as a result of the two oil crises, in 1973 and 1979. Greece does not appear to be facing a demand problem over the next two years; demand will grow at an annual rate of about 4 percent and will have a significant impact on GDP growth. However, this does not mean we will avoid all the effects of the ongoing retrenchment in the international economy. There will be less demand for our exports, and investment interest by foreigners in Greece will decline. Still, investments, boosted by EU handouts and the 2004 Olympics, are expected to rise fast: in 2002, by 8.7 percent (the highest rate among OECD countries) and, in 2003, by 9.1 percent, third best in the OECD after Turkey and the Czech Republic. By comparison, the average rate of investment growth in the eurozone will be 0.7 percent in 2002 and 3.8 percent in 2003. The Greek government has done well to emphasize consumption. However, ensuring even higher investment growth rates is necessary. This will only be accomplished through an even more aggressive program of market deregulation and a better tax and labor market regime.