Thriving in deep euro waters

Hatching sea bass and bream in the waters off Greece has made a small fortune for Christos Giannopoulos and he attributes much of his success to the euro. The former tutor of modern Greek at the University of Sydney, Australia, returned to his native country after 15 years when he became convinced in 1988 that Greece was serious about reforming its highly regulated economy. To qualify to exchange its 2,650-year-old drachma for Europe’s new single currency, Greece had to tame rampant inflation, cut its huge budget deficit, achieve currency stability and modernize a turbulent economy where an estimated 40 percent of business was conducted on the black market. «The fact that we would not have the jeopardy of the exchange rate helped our business utterly,» said the 56-year-old fish farmer based in Patras, Greece. He grew Riopesca SA, from 15 employees in 1990 to a stock exchange-listed company with 120 employees eight years later and earned 8 million euros ($9.81 million) when he sold his shares in 1998. With Greece set to join the euro in January 2001, Giannopoulos then started a second fish business, Andromeda SA. Now freed of exchange-rate risk and with lower business costs, it had 17 million euros annual turnover in 2003 and marketed 3,500 tons of sole, bream, bass and other fish throughout Europe and to the United States and Israel. «Using the euro as our currency… we feel as if we are selling in our own country,» he said. His is the kind of success story that businesses in Estonia, Lithuania and Slovenia – already en route to following Greece as the next countries to join monetary union – would like to replicate. They linked their currencies to the euro earlier this month with a view to adopting the currency in 2007. The biggest new EU members, Poland, Hungary and the Czech Republic, are lagging further behind in their preparations. Getting Greece ready to adopt the world’s second-largest currency required sheer determination but brought quick rewards, according to former government officials who led the effort. «It began a Golden Era for Greece,» said Gikas Hardouvelis, economic adviser to Prime Minister Costas Simitis from 2000 to 2004 sitting in his new National Bank of Greece office. Today Greece is one of the fastest-growing economies in the 12-nation eurozone, second only to Ireland. Its average annual growth rate has almost doubled to 4.2 percent this decade up from 2.2 percent average in the early to mid-1990s. Ten years ago, the Greek economy was on the rocks. Tax collection was in a shambles. A bloated civil service meant half of state budget revenues went to salaries and pensions and much of the rest to pay interest on public debt, which reached 110 percent of GDP in 1993 and was forecast to rise to 150 percent. Skepticism about privatization and fiscal reforms was rampant. Then there was a speculative attack on the drachma in May 1994. «It was hell. The sky fell in on our heads,» said Yiannis Stournaras, economic adviser to the Greek central bank and then to the Ministry of Economics and Finance from 1989 to 2000. Certainly, none of the new EU members face such a dire situation. The biggest countries all face problems getting their annual budget deficits down to the euro adoption criteria of under 3 percent of GDP and heading toward balance. Still Greece offers valuable lessons on how to push reforms forward. It was the 1994 drachma attack that galvanized the country, former officials said. Determined to avoid reigniting inflation, they defied markets and International Monetary Fund suggestions to devalue and instead accelerated lifting capital controls and pushed harder for aggressive budget reforms. On the fiscal front, nationwide strikes failed to stop a 1994 budget that limited state pay raises to only half the annual inflation rate and combated tax evasion. In late 1996, Prime Minister Costas Simitis stood firm when farmers blocked roads and held up food supplies for nearly four weeks to demand crop subsidies, lower petrol costs and tax breaks on tractors. «It was a matter of life or death to achieve these goals,» said Stournaras. On the monetary front, Greek central bank governor Lucas Papademos, now vice president of the European Central Bank, raised the Lombard short-term bank rate to a record 26.5 percent in May 1994, and the overdraft rate hit 180 percent to defend the drachma. Throughout the 1990s, the central bank pushed up interest rates, occasionally quite sizably, to strengthen the drachma and quash inflation. As markets matured by the decade, it added the extra tool of currency intervention. Before long, there were rewards. «By 1995, it was becoming obvious to the market that Greece was serious in making it into the eurozone, and bond spreads narrowed,» said Hardouvelis. Inflation fell to single digits in 1996 and Greece was able to issue its first 10-year bond. The electorate also started to display support. Doctors and lawyers were targeted in a tax-evaders program which raised public confidence that all sectors of society were paying the price. No shock therapy Tax collections rose sufficiently to make supplemental payments to poor pensioners. Seventy percent of Greeks backed joining the euro currency by 2000. It was teamwork, not shock therapy, officials said. «The main lesson for the new EU members is that policies need to work in tandem,» said Greece’s central bank president, Nicholas Garganas. From the early 1990s central bankers, government ministers, key business people and unions worked closely together to identify how to make reforms while cushioning their impact on society’s weakest. Union leaders agreed to wage restraint. The third part of the Greek program was privatization. Nine state-owned companies were sold between 1994 and 1997, rising to 24 in the three years ending in 2001. Ten percent of banking assets were privatized as well as flagship names such as the Greek telephone company OTE and the Hellenic Exchanges stock and futures markets. «There were radical changes,» said Spiros Travlos, who headed the effort as general secretary at the Finance Ministry. The government offered early retirement programs, assumed companies’ pension debt and wrote three-year employment protection clauses into the privatization agreements. By March 1998, Greece met none of the criteria needed to adopt the euro currency, namely a budget deficit below 3 percent, inflation and interest rates that are only a small amount above the lowest in EU countries and liberalized markets. But it was sufficiently on course to join the Exchange Rate Mechanism, where a country for at least two years links its currency to the euro as a test. Greece devalued by 12 percent just before joining ERM to give the drachma leeway to appreciate as confidence grew it would be ready for monetary union. At midnight January 1, 2001, Greece was celebrating. Political courage not to delay reforms until a better day was the secret, said Nick Sikiaridis, who headed Greece’s public debt management agency in the late 1990s and now is treasurer at Portuguese-owned Nova Bank in Athens. «Because tomorrow never comes.»