Ecofin says Greece’s estimates on economy are too optimistic

Brussels – As expected, the European Union’s Council of Finance Ministers (Ecofin), which met here yesterday, expressed strong reservations over whether Greece’s updated Stability and Growth program is realistic. Greece’s estimations for the development of a number of economic indicators over the next four years were defended by Economy and Finance Minister Nikos Christodoulakis, in his last appearance in Brussels before the March 7 elections. Finding Greece’s estimations «optimistic,» the council remarked that, in its opinion, «the economic policy followed creates the risk of serious imbalances in the future.» Especially in 2003, the policy did not «completely follow the (EU’s) Basic Economic Policy Guidelines,» it said. Following this, Ecofin reiterated a number of recommendations made not only by itself but by the European Commission in recent years, that is, freezing public sector wages, further reforms in the social security and pension systems, a stricter tax policy, and strict auditing of primary expenditure – especially on so-called «social» measures in order for the Greek economy to be truly reformed. In essence, Ecofin follows the recommendations of the Commission, sometimes couched in more diplomatic terms. Thus it remarks, with no further comment, that «the fiscal stance on which the program is based depends on maintaining high primary surpluses, with a reduction in spending and an accelerating reduction in the debt level. At the same time, a very important public investment program is to be implemented.» This oxymoron is analyzed further down as follows: On the growth rate of gross domestic product (GDP), Ecofin remarks that estimations are «based on rather optimistic forecasts about the level of investment.» «Moreover,» it continues, «the pressure on prices and costs may prove to be stronger than expected, exacerbating the danger of letting some public expenditure run out of control.» This, in turn, «creates a risk for the economy’s competitiveness,» something that is also true of the significant, as it calls them, rises in public sector wages during 2003, «which must be controlled in coming years.» Regarding the budget deficit, the opinion repeats the Commission’s warning that it may exceed the 3 percent (of GDP) limit imposed by the Maastricht Treaty on eurozone members. «Even though the program’s fiscal targets appear to create an adequate safety margin against exceeding the 3 percent level under normal conditions, there are risks.» These risks arise from the «high probability» that the 2003 deficit was underestimated and «the lack of information over measures to limit public expenditure,» meaning that no expenditure capping is envisaged. Ecofin indirectly encourages the government to take advantage of the end of the Olympic Games and to divert resources toward plugging in deficits. Ecofin essentially places Greece on the same level with deficit rogues France and Germany by asking it to increase its primary surplus by 0.5 percent. It also remarks on something else: that, under current circumstances, a balanced budget ahead of 2006 is impossible. As for public debt, the government forecasts its reduction to 90.6 percent of GDP by 2006, which is at a pace lower than that recommended by the EU. Christodoulakis yesterday defended the slow pace by remarking that the only way to accelerate it would be to reduce public investment, thereby hurting growth. He admitted that the government’s only method of reducing the debt is revenue from selling the State’s shares in public utilities and banks. Ecofin, having remarked that pay rises and social measures play a very important role in keeping the debt at high levels, replies that «developments on the debt front will most likely be worse than forecast,» especially due to the deficits. The issue of the debt could prove especially painful in coming years as, under the pressure especially of France and Germany, the Commission already is thinking about focusing on debt as the keystone of fiscal discipline in the eurozone. Ecofin further remarks that given «the challenges created by an aging population and taking into account the high level of debt,» there is a risk of «very serious fiscal imbalances.» This risk must be fought through an integrated strategy «that will include further reforms of the pension system.» In conclusion, Ecofin remarks that Greece’s program «is not entirely compatible» with the repeated recommendations made to Greece and that, regardless, it is essential to rein in current primary spending, especially in regard to wages and welfare handouts. It is no coincidence that the recommendation asks, politely, for «an update of the assessment of long-term viability of public finances… given that the previous assessment clearly pointed to a risk of long-term imbalances.» Despite all that, the debate on Greece’s program lasted just two minutes, as Christodoulakis himself said. This was because Ecofin had a far more serious issue to debate: the EU budget. The Commission’s proposal to increase the budget to almost 160 billion euros in 2013 from 100 currently was greeted with dismay by the largest contributors to the budget who bluntly declared that they reject this recommendation. On Monday night, during a discussion among eurozone finance ministers, Germany’s Hans Eichel launched a strong attack on Finance Commissioner Pedro Solbes, accusing him of demanding that Germany impose a strict fiscal policy in its interior while, at the same time, significantly increasing its contribution to the EU budget. «You are asking us to stick to water while offering the others wine… these things are simply not done,» he said.