Brussels – The uncertainty over the actual state of Greece’s finances spared the country a warning from the European Commission yesterday. In a nutshell, nothing in the Commission’s report, except the possibility of an excessive deficit, is new. Otherwise, the warnings and suggestions repeat themselves to the extent that the Commission could spare effort and money by simply including a photocopy of one of its previous reports, hoping that, for once, its warnings will not fall on deaf ears. European Economic Commissioner Pedro Solbes marveled yesterday at how a country with such a high growth rate could show such a deterioration in basic economic indicators, even though the actual extent of the deterioration has not been ascertained. Solbes was referring mainly to the budget deficit, a key indicator of performance within the Stability and Growth Pact. According to the data published yesterday, the 2003 budget deficit will reach 3 percent of Greece’s gross domestic product (GDP), growing further to 3.2 percent in 2004 and retreating somewhat, to 2.8 percent of GDP, in 2005. The 3 percent is the ceiling above which measures are taken against the offending country, including fines. If the revision of main economic indicators, undertaken by the new government and expected to be completed by early autumn, reveals an even higher deficit for 2003, then all the Commission’s projections, including those concerning the debt, will have to be revised upward. What remains to be seen is whether Brussels officials will limit themselves to a warning or whether they will follow the excessive deficit procedure. This procedure is far more serious because, by activating it, the Commission will impose specific targets to be met within a specified timetable and on the basis of a binding action plan. According to the Commission, the excess spending on preparations for the Athens Olympics and the «lack of control over primary spending» was to blame for the deficit. Regarding other indicators, public debt remains the biggest problem, and is being reduced extremely slowly. The revised debt for 2003 stands at 103 percent of GDP, instead of 101.7 percent as the previous government claimed, and it is expected to fall to 102.8 percent in 2004 and 101.7 percent in 2005. Thus Greece is now the country with the second-highest debt (as a percentage of GDP), just below Italy and far ahead of Belgium, which, in the mid-1990s, had a debt equal to 133 percent of GDP. Average inflation, which stood at 3.4 percent in 2003, will remain stable in 2004 and rise to 3.5 percent in 2005. The jobless rate will drop to 8.4 percent in 2004 and 8 percent in 2005, from 9.3 percent in 2003. GDP growth is expected to slow down to 3.3 percent in 2005. European Commission on Greece’s economy: ‘Despite strong growth, progress in fiscal consolidation is postponed’ Following is the text of the European Commission’s economic forecasts for Greece, issued yesterday Economic activity in 2003 The economy continued to be buoyant in 2003, with real GDP growth estimated at 4.2 percent. Growth was driven by domestic demand, in particular, investment in construction, linked to the preparation of the 2004 Olympic Games and assisted by financial flows from the EU Structural Funds. Private consumption, buttressed by easy monetary conditions and an improvement in disposable income, has also been a significant contributor to GDP growth. (…) The unemployment rate, still among the highest in the EU, was slightly reduced as employment growth started to respond to booming economic activity in recent quarters. Compensation per head slowed down, partly due to the implementation of the 2002 wage agreement in the private sector. Inflation developments in 2003 point to the non-tradable sector and weather-related price increases in unprocessed food as the main sources of price pressures. Consumer prices growth averaged 3.5 percent in the year. Prospects for 2004, 2005 The economy is expected to continue to grow at fast rates in 2004, while a deceleration in economic activity is projected for 2005. The main factors that will contribute to growth in 2004 are still strong domestic demand and the recovery of the European economy. Private consumption, supported by easy monetary conditions, is expected to continue to grow at a sustained pace to the forecast horizon, as a result of an increase in disposable income due to the 2002 tax reforms and the 2003 social package. Investment should continue to increase, albeit at a slower rate than in 2003, as investment associated with the Olympic Games will still be realized in the first half of 2004. However, the expected improvement in the international environment from 2004, the assumed low interest rates and continued financial flows from EU Structural Funds may help in keeping economic activity relatively buoyant throughout the forecasting period. The current account deficit is expected to narrow temporarily in 2004 as exports, in particular of services, are expected to increase considerably due to the international economic recovery and the Olympic Games. On the other hand, imports should slow down due to a relative deceleration of investment. Nonetheless, private consumption is expected to continue to be sustained by positive increases in disposable income and low interest rates, implying strong import growth throughout the forecasting period. As a result, the negative contribution of the external balance should narrow in 2004 but increase again in 2005, due to underlying macroeconomic imbalances and competitiveness losses. Costs and prices Consumer prices are expected to rise at a fast pace, with consumer price inflation (national definition) averaging marginally below 3.5 percent until the end of the forecasting period. While the contribution of imported inflation should remain small, wage developments are quite uncertain, as the negotiations for the new collective wage agreement have just started. The generous wage increases in the public sector may adversely affect the outcome of the negotiations. Finally, the output gap, albeit narrowing, is expected to remain positive. Public finances Despite strong growth, the situation of public finances worsened considerably as implementation of the 2003 state budget was completely off track. Although partly attributable to some extraordinary factors (the preparation of the Olympic Games, compensation for weather damage), the overshooting compared with the budget target suggests a lack of control over primary spending (social transfers and public sector wages), while budget revenues also fell short of projections. The estimated budgetary outcome in 2003 is characterized by great uncertainty, with obvious implications for the making of 2004 budgetary projections. In a first EDP [excessive deficit procedure] notification (March 1, 2004), the general government deficit in 2003 was estimated at 1.7 percent of GDP against a target of 0.9 percent of GDP. Eurostat considered the data as provisional and subject to revision, due to ongoing discussion with the authorities in Greece. According to a second EDP notification (March 30), the general government deficit was revised upward to 3 percent; the new figures are being scrutinized by Eurostat and not yet validated. The Commission forecast is built on this latest estimate of the 2003 deficit communicated by the Greek authorities, although by no means does it represent a validation of this deficit figure. Under the usual assumption of unchanged policy, the Commission forecasts a further deterioration in the budgetary position of the general government in 2004. This is due, first, to the significant base-year effects for 2004 from the higher deficit in 2003; second, to the impact of the 2003 social package (estimated at over 1 percent of GDP for 2004), which seems to have been understated in the expenditure projections; and finally, to the lower than officially projected growth in tax revenues, given the recent tax reforms. A marginal improvement is expected in 2005, assuming that primary expenditure related to the Olympic Games will not be recurring. The primary surplus should continue to shrink in 2004, while the debt ratio is expected to decline at a slow pace, given still high stock-flow adjustments and debt-increasing financial transactions.