Economic slowdown

Brussels – The European Commission predicts that Greece’s economic growth will continue to outpace the EU average in 2005 and 2006 but also mentions the dramatic lack of competitiveness in its Spring Economic Forecasts Report, released yesterday. The Commission also expresses its worries that Greece’s actual unemployment rate could be much higher than what is reflected in official statistics. Specifically, the report remarks that, despite the marked improvement seen in 2004 in markets targeted by Greek exports, the current account remained in deficit «confirming the Greek industry’s competitiveness problems.» It also remarks that pay rises, especially those agreed to in the public sector, far exceed improvements in productivity. On unemployment, the report remarks that «estimating developments in the job market has been complicated by the extensive statistical revision in 2004… It is reported that there has been a significant rise in unemployment along with a significant rise in the size of the workforce following the legalization of illegal immigrants.» The Commission forecasts that the creation of new jobs will slow down significantly in 2005 and 2006. In 2005, the planned fiscal austerity measures, along with the gradual disappearance of the «Olympics factor,» will lead to a decline in the rate of GDP growth. The rate is expected to recover slightly in 2006. The Commission remarks that cutting down on public expenditures, both for consumer and investment purposes, will affect total demand by over a percentage point. As a result, total investment will fall drastically, despite a slight rise in private sector investment, seen as the result of corporate tax cuts. However, this rise will not balance the cuts in the Public Investment Program, the report says, adding that it expects a decline in both household and corporate consumption. Exports «could increase somewhat» without, however, upsetting the negative trade balance and the effect of exports on the country’s GDP. On the contrary, salaries are expected to rise by more than 5 percent, both in 2005 and 2006, as a result of the generous pay agreements in the public sector, which, as the report remarks, serve as a guide to collective wage agreements in every sector of the economy. The report remarks that this 5 percent increase «is significantly higher than the expected rise in productivity.» Regarding Greece’s deficits and debt, the writers of the report, who work for Economic and Monetary Affairs Commissioner Joaquin Almunia, remark that they remain under revision. They do say, however, that the budget deficit is expected to drop to 4.5 percent of GDP in 2005 and 4.4 percent in 2006, especially as there is no further spending on the Olympics as well as due to «a series of other expenditure-cutting measures.» Eurostat, the EU’s statistics agency, and the Commission itself have not finalized 2004 deficit data because of questions as to the actual cost of the Athens Olympics, state hospital expenditures and EU fund inflows. On the European economy as a whole, the Commission expects a return to higher growth rates and a slight drop in unemployment. (The Commission sees growth in Germany at 0.8 percent this year, half of the current figure forecast by Berlin. The German government will make a new growth estimate on April 29. A German Finance Ministry spokesman said yesterday the below 3 percent deficit goal could be at risk. But Germany may well avoid sanctions, which include a warning, detailing recommendations on cutting the shortfall and ultimately fines, the Commission said in the report. Under the new pact sanctions can be avoided if the deficit is close to 3 percent and temporary, and the pact also looks favorably on states that cut the gap by 0.5 percent during the year. Germany will have cut it by 0.4 percent in 2005, according to the Commission forecast. But while the German deficit is seen falling to 2.8 percent in 2006 thanks to labor market reforms and higher growth which will boost tax income, the expected 2005 Italian deficit of 3.6 percent is seen as ballooning to 4.6 percent next year. «We will need to adopt measures in the case of Italy,» Almunia said. «When? As soon as possible, but first of all I want to have a clear picture of what has happened and what is happening in Italian public finances.» He said the Commission would wait with decisions until the European statistics office completes verifying Italy’s budget data over the next few weeks. The European statistics office said in March it could not validate the Italian 2004 accounts which show a deficit of 3.0 percent. An Italian treasury source said the forecast increase in the deficit was mainly due to expected slower growth.)

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