Short-term economic uncertainty

Despite short-term uncertainties, the Olympic Games can have a very favorable long-term impact on the Greek economy, provided innovative proposals are adopted and the arising opportunities are appropriately tapped, the employer-sponsored Foundation for Economic and Industrial Research (IOBE) says in its latest quarterly report. A successful hosting of the Games, the study argues, will help considerably Greece’s image in the world and relocate it on the global map as a destination for trade, investment and tourism. Moreover, the new infrastructure created for the Games will markedly improve public services in the capital and make it more attractive to new business activities. Sports installations, if properly tapped and promoted, could encourage the development of new activities in conference tourism and international sports services. The report notes that a number of developments related to the Olympic Games are casting a shadow of uncertainty on the Greek economy in the near future, namely that the completion of Olympic and related projects will deflate demand, that the holding of the Games at this time of year is not projected to offer a direct boost to economic activity, and third, that the cost of the Games is markedly high compared to original budget estimates. «The reserve of optimism early in the year may have not been exhausted but is gradually falling,» says IOBE. According to the study, the economic policy to be announced in the prime minister’s traditional keynote speech at the Thessaloniki International Fair at the beginning of September will play an important role in shaping a positive climate after the «interval» of the Games. Call for consistency IOBE urges the government to proceed quickly to fully implement its reform program. «If a clear message is sent, then the economic policy will resolutely move toward radical changes in those sectors in which the Greek economy shows chronic weaknesses and problems; the climate can improve significantly… What is needed now is an overall consistent and convincing reform program to mobilize the productive forces.» «The government has already announced a series of measures, which if ultimately applied will have positive repercussions on competitiveness and growth. However, what could immediately contribute to an improvement in the climate is speedy and convincing indications that the program is being implemented as a whole and that particular decisions form an indispensable part of it. Experience from all the countries where reform programs have been implemented has shown that a prerequisite to success was across-the-board progress in all sectors.» The report argues that the fiscal situation – much worse than was estimated in the past – is the most important problem that the economic policy will have to deal with. It offers a double challenge. That is, reducing taxation on the one hand, and speeding up the process of fiscal adjustment on the other. IOBE recommends the adoption of a medium-term fiscal adjustment program with a view to reducing deficits and debt. A viable long-term solution needs to comprehensively address the problem of public consumption and the size of the public sector. The government’s hiring policy will play a crucial role in this respect, as its wage bill accounts for the largest part of primary public spending. Immediate measures are required for limiting waste in public projects and defense spending, the report says. Growth rate up in 2005? The end of Olympic and other projects is likely to slow down the economy somewhat this year, although Greece still has a much higher growth rate than the eurozone average. The expected maintenance of consumption at brisk levels and a recovery of housing investment may lead the economy to grow a little faster in 2005, but this is subject to great uncertainty due to the chronic structural weaknesses of the economy, IOBE says. The construction sector is seen as slowing down, affecting economic growth and employment. According to a number of forecasts cited in the report, employment in Greece will grow at about 1.7 percent in 2004, depending on the intensity of the expected decline in construction. Some uncertainty also exists as regards inflation, which the government sees as rising, mainly due to pressures over the Olympic Games period, but not appreciably. The inflationary expectations of enterprises for the next three to four months are rather cautious, anticipating stability rather than any rise, IOBE notes.