Excessive deficits, high inflation, and a slow job creation rate are the biggest challenges the Greek economy faces as a full member of the eurozone, the Bank of Greece says in its interim economic report, published yesterday. Instead of fiscal adjustment, Greece has followed a very loose policy in the three years since entering the European Monetary Union on January 1, 2003. As a result, budget deficits are rising and the debt, still at over 100 percent of the country’s gross domestic product (GDP), is falling only marginally. The Bank of Greece recommends a tight fiscal policy to redress deficits and reforms to stimulate growth. Bank of Greece governor Nicholas Garganas also expressed his concern about rising household indebtedness. He said that rising interest rates, expected after the eurozone economy recovers fully, will be an added burden. The government’s assessment that the 2003 budget will show a deficit between 2.7 and 3 percent of GDP, and its estimate of economic growth for 2003, 4 percent, is even lower than the 4.2 percent announced last week by Economy and Finance Minister Giorgos Alogoskoufis. The National Statistics Service (NSS) had announced that GDP growth in 2003 was 4.7 percent. Garganas avoiding delving into the issue of whether NSS figures were accurate – an issue frequently raised by the conservatives when they were in opposition – by saying NSS figures were preliminary and that they might be revised downward. The central bank estimates that GDP will grow 4.1 percent in 2004. Internal demand remains the prime motor of growth but its importance will be lower than in 2003, because investment projects related to the Athens Olympics will have been completed. Average inflation, measured by the Harmonized Index of Consumer Prices (HICP) used by the European Central Bank, dropped to 3.4 percent in 2003 from 3.9 percent in 2004. Still, it was far higher than the eurozone average, which hovered around 2 percent. Besides, the Bank of Greece expects inflation to rise in coming months, partly because the Olympic Games will result in even higher demand and partly because of the expected rise in unit labor costs. The central bank urges employees, producers and retailers to contribute, through pricing and the collective wage bargaining process, to price stability and an increase in competitiveness. Government spending, if held under control, will also contribute to lower inflation in the medium term, the bank says. There are signs, however, that none of this could happen. The General Confederation of Greek Labor (GSEE) is demanding wage rises of 8 percent and has already announced a one-day general strike for tomorrow to back its demand, which is coupled with another, for a shorter working week. Producers and retailers, considering themselves liberated from the previous government’s desire to control the market, have raised prices considerably since the March 7 election, prompting the current government to plead for «self-restraint.» The government itself, although it has promised to keep spending under wraps, has already come under pressure to deliver on its extravagant pre-election promises. It has attempted to buy time by declaring that it will fulfill all its promises by the end of its four-year mandate. Shaking the habits of decades of state overspending will be difficult, as the experience of the last government has shown: initially committed to fiscal reform, it essentially gave up after Greece entered the eurozone and ended up being pilloried for trying to cook the books. Garganas recommends nominal pay rises of 4 percent for 2004, slightly higher than the employers have initially offered. He also urged employers and employees to change the collective bargaining procedures, which he considers too centralized. The Bank of Greece believes firmly that, until the inflation differential with the other eurozone countries is bridged, real wage rises – that is, after accounting for inflation – should be lower than increases in productivity. The Bank of Greece also believes that a decentralized procedure on pay rises will help create more jobs and also help enterprises adjust better to changing economic conditions. The central bank remarks that, although the unemployment rate is slowly falling, it is still the third highest in the EU and that job creation is too slow considering the growth level. Structural reforms, that is, making the market more flexible, will help reduce joblessness, the report stresses. Household indebtedness has increased from 9.3 percent of GDP in 1998 to 26.2 percent in 2003. Although the rate of growing indebtedness is slowing down, the bank says this is due to a historically low level of interest rates, which may not be sustained for long.