Real convergence in Greece needs real liberalization

The Greek economy managed to achieve nominal convergence by meeting the loosely defined Maastricht criteria a couple of years ago and earning the right to participate in Europe’s elite club of advanced economies. It failed, however, to attain real convergence and Greek policy-makers vowed to do their best to close the gap within a decade or so. Indeed, the local economy has been growing faster than that of the rest of the eurozone in the last few years and is projected to do the same in 2002. Nevertheless, this successful drive seems to be facing a challenge by the country’s high current account-to-GDP ratio. It is true that the country has been running current account deficits for years. The current account deficit-to-GDP ratio was still high at 4.1 percent in 1999 and 3.2 percent in 1998 but financing them was not a problem, especially in the last few years, mainly thanks to large net inflows in portfolio investments from abroad. Generally speaking, the deficits were the result of a large deficit in the trade account on the one hand and a mitigating surplus in tourism, shipping, net transfers from the EU and some other service categories, on the other. Last year was not an exception. The current account deficit widened to 6.9 percent of GDP in 2000 – a very high number by any measure – and, although it is projected to fall to around 6 percent of GDP this year, the improvement cannot disguise the low competitiveness of the Greek economy. According to the most recent figures released by the Bank of Greece, the country’s current account deficit stood at around 5,000 million euros in the first nine months of the year, posting a 5-percent drop compared to the same period last year. The decrease was mainly due to a 20-percent rise in receipts from exports to Southeastern and Central European countries which have increased their share in Greece’s total exports in the last couple of years. An almost 30-percent increase in net transfers attributed to receipts from the sale of UMTS licenses also helped close the gap. Nevertheless, the projected current account deficit for this year remains very high and, although it is comfortably financed by large inflows in government bonds in excess of 8,200 million euros in the first nine months of the year, one may have to start wondering what is going to happen when these huge inflows cease or even turn into net outflows from 2002 onward, as Greek government bonds’ attractiveness fades away. In that case, assuming the current account deficit remains high, Greece will be forced to borrow to finance the external deficit at the same time it strives to reduce its debt-to-GDP ratio closer to 60 percent. The combination of deteriorating conditions in domestic production, reflected in the high deficit, and the prospect of increased borrowing needs will undoubtedly undermine the process of Greece’s real economic convergence with its EU partners. Given the straitjacket of the Stability Pact, the country will find itself trapped on the receiving end of unpleasant economic consequences, such as an increase in unemployment and a drop in real incomes on the one hand and a bitter economic medicine on the other, consistent with the stated goals of the updated Stability Program. To brighten the picture, we have to say that the physical introduction of the euro does help Greece to finance its current account without having to worry about its impact on the drachma’s effective exchange rate or the conduct of economic policy. Unlike in the past, the current account deficit does not set restrictions in the formulation and the execution of economic policy. Given all this, Greek policy-makers must ask themselves the question: What should be done to ensure that Greek GDP growth continues to outpace the GDP rates of its trading partners’ in the next few years and still manage to slash the current account deficit in order to let the process of real convergence progress uninhibited? The answer is easy but the implementation is difficult: Push forward structural reforms by overhauling the public sector and liberalizing and deregulating output and input markets. This way, real convergence can proceed, the country’s actual and potential GDP growth rates can be raised, unemployment will fall and real incomes rise. OMV’s Roiss said Hellenic Petroleum has two choices.

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