Reform the economy urgently, central banker Garganas warns

Three years after joining the eurozone, the Greek economy is still suffering from a failure to tackle the necessary structural reforms head-on, Bank of Greece Governor Nicholas Garganas said yesterday. In presenting his annual report, Greece’s top central banker described, not for the first time, the woes that afflict the economy: high inflation that saps the country’s competitiveness, rigid markets and a bureaucracy that stifles entrepreneurship. On top of that, public finances deteriorated significantly last year, raising the budget deficit significantly. Garganas advised the newly elected government to follow a five-pronged strategy to overcome the chronic dysfunctions of the economy. Specifically, he called for: – More flexibility in the job market and changes in the way pay raises are awarded. Instead of a single agreement, he advocated agreements by sector of activity and by region. He once again called for linking pay increases to rises in productivity and advised specifically against «generous increases in the public sector»; – Boosting entrepreneurship by a series of incentives to enterprises to spend more and research and innovation; – Acceleration of privatizations and opening up crucial markets to competition; – Upgrading education in order to «support an economy based on knowledge.» These policies, Garganas said, would help achieve a series of targets, most of which have been explicitly adopted by the new conservative government. These targets include achieving an annual rate of growth in excess of 5 percent; reducing the unemployment rate by three percentage points, to just above 6 percent, by 2008; and achieving a convergence of wages and pensions toward the European Union average within eight years. Garganas said that the public debt, still above 100 percent of the country’s gross domestic product, was the greatest obstacle to a healthy economy and chided – without directly naming names – the former economy and finance minister, Nikos Christodoulakis, for failing to live up to his declaration that the public debt would be reduced by 5 percentage points in 2003 (it was actually reduced by 1.7 percent). Garganas attributed the great spending increases in 2003 to an inability to control primary expenditure, extra spending on the Athens Olympics and compensation given to farmers. Referring to the global economy, Garganas, an ex-officio member of the European Central Bank’s Governing Council, said the outlook is improving, but the widening US current account deficit continues to loom over the global upturn. Garganas was commenting on the euro’s recent retreat against the dollar and told reporters he favored a stabilization in the euro/dollar exchange rate. «The US’s large and expanding current account deficit is still a source of worry, because it could lead to sudden readjustments of exchange rates, a surge in inflation and an increase in interest rates in the international money markets,» Garganas said. Citing International Monetary Fund forecasts, he said the world economy seemed poised for economic recovery while inflation was expected to remain benign. But he said countries saddled with large trade deficits as well as those enjoying high surpluses should adjust their policies to prevent unwelcome foreign exchange volatility. The euro climbed to life highs earlier this year, but has surrendered some of earlier gains in recent weeks as the dollar firmed on the back of expectations the US Federal Reserve will start raising interest rates later this year.

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