Ecofin to warn Greece on deficit

Brussels – The European Council of Finance Ministers (Ecofin) that is to meet on July 5 in Luxembourg will demand that Greece reduce its budget deficit to below 3 percent of its gross domestic product (GDP) in 2005 and keep reducing it steadily until the budget is balanced or a surplus created. The demand will follow the recommendations of the European Commission, which will call for structural reforms that will provide savings equal to 1 percent of GDP in both 2004 and 2005. For subsequent years, the Commission recommends cyclically adjusted surplus (that is, not taking account of the effects of the economic cycle) equal to 0.5 percent of GDP each year until public finances «reach a state of equilibrium or surplus.» At the same time, Greece must do something about its debt, which is still hovering around 103 percent of its GDP, making it the second most heavily indebted European Union member after Italy. The Commission has repeatedly called the debt level «worrisome.» The 2003 budget deficit, originally forecast to equal 1.4 percent of GDP, was finally announced by the previous government at 1.7 percent. The main causes for this significant overspending are the budget overruns on Olympics-related projects, emergency compensation to farmers and the significant cost of the so-called «social package» presented by the previous government last September. On the revenue side, there was also an unexpected decline in proceeds both from income tax and value added tax. Last spring, the Commission had accused the previous government of the «total derailment of the 2003 budget» and a general relaxation of fiscal policy after early 2000. The fact is, data on the budget deficit and the debt is still incomplete, as the current government is still going through its audit of public finances and Eurostat, the EU’s statistics agency, probes payments or other transactions not included in the actually reported debt and left for entry into the books of subsequent years. The final data, expected around September, may worsen the picture considerably, resulting in calls for even steeper savings in order to put public finances right. Greece’s case is not at all helped by the fact that this budget deficit, and the too-slow debt reduction, occurred at a time that the economy was growing faster than the EU average. Greece should have done much more to lower debt under these conditions. And, according to the Commission, growth will decelerate in subsequent years. It has already forecast a GDP growth of 3.3 percent for 2005; while further slowdown after 2007 is likely if funds earmarked for Greece under the Fourth Community Support Framework Program (CSFIV) are drastically cut compared to CSFIII.