ECONOMY

It’s a long and painful road to real convergence

One step forward, two steps backward? Lenin’s description for the tactics of the Social Democrats is being increasingly heard at business gatherings and in the offices of key government officials lately. They are concerned about the future of the economy and are neither proud of its current high growth rates nor of the claims of general prosperity that today’s ruling politicians commonly make. The Greek economy, they point out, is facing potentially serious problems of competitiveness, investment and unemployment. Indeed, without the large inflows of funds from the European Union-subsidized Third Community Support Framework investment plan, the annual economic growth rate would have been below 1.5 percent, against the 4 percent of today. This means that about two thirds of Greece’s current economic growth is due to outside infusions. But these inflows will not last for many more years. The domestically driven part of the Greek economy’s growth at 1 or 1.5 percent is lower, not higher than the EU average. Therefore, there are few realistic hopes for the real convergence of the Greek economy with its European partners; not in 10 years, as claimed by Prime Minister Costas Simitis, nor even in 20 years, which Bank of Greece Governor Lucas Papademos estimates. The gap grows Instead of convergence, most indications now suggest that the gap between Greece and the rest of the EU will widen further. Let it also be noted that growth over the last two years was fueled by the precipitous fall in interest rates, which produced a steep rise in credit expansion (mortgages, consumer loans). But this cannot continue forever. If we also take into account the latest quarterly report of the Institute of Economic and Industrial Research (IOBE) – which says that the global slowdown will have a greater influence on the Greek economy in 2002 than in 2001, and that international organizations are lowering their estimates for the rate of growth of Greek GNP – we can better understand the true dimensions of the problem. In comparison with the rest of the EU, Greece’s position is likely to lose ground in the long term. And it is not at all coincidental that Greek exports fell 11.5 percent in the eight-month period January-August 2001. Indeed, according to estimates recently presented at a conference of northern Greek enterprises, the prospects for Greek exports are likely to deteriorate further in coming years. The argument goes that membership in the eurozone does offer protection from currency fluctuations, but also that the reduced competitiveness hampers Greek exports. Greece, unfortunately, has a steadily higher inflation rate than the eurozone average, which means that without any bold structural changes that would encourage a sustained rise in productivity, Greece’s competitiveness will be at a permanent disadvantage. The result will be the loss of more jobs. And when companies cannot sell their products at home or abroad, in the end they have to shut down. In this context, it is clear that the incomes policy and the pay rises which employers and unions manage to agree on will be pivotal in determining whether competitiveness, domestically driven growth and the country’s living standards can be maintained in the years to come. The big rise in incomes in the early 1980s undermined the Greek economy for at least 10 years after that. The resulting loss of competitiveness led to three successive devaluations of the drachma. Today Kathimerini opens a two-part survey, with contributions from prominent economists, of the major issue of competitiveness and convergence with the rest of the EU, in view of the upcoming crucial negotiations for collective labor agreements. The second part will appear tomorrow. Contributors were asked to reply to the question: «What kind of incomes policy will help Greek real incomes converge with those in the rest of the European Union?» Per capita gross domestic product Greece is the poorest country of the European Union. Although the situation is improving, its income is barely over 70 percent of the EU average. Only Portugal’s income is at about the same level. This makes real convergence of incomes very difficult. Even if the other economies stopped growing, Greece would need to grow quickly over almost a decade to catch up. Only Portugal is slightly higher than Greece in terms of capital income; all the others are considerably ahead. Public debt is the third highest Greece’s public debt, as a percentage of the country’s gross domestic product, is the third highest in the EU, behind Italy’s and Belgium’s. As a result, a considerable part of the taxpayers’ money goes toward debt servicing, i.e. the repayment of principals plus interest. This heavy burden of debt is one of the main obstacles to lower taxes, which would increase taxpayers’ disposable income and the return on private capital. The high public debt is one of the results of the years when economic policy was determined by purely political goals. Positive developments on investment front There are positive developments regarding investment in recent years. The considerable influx of EU funds, the increase in the importance of the stock market and the pressing need felt by both enterprises and households to modernize their infrastructures are the reason. Investments could be even higher, however, witness Spain and Portugal. Ensuring that investment remains high over the next several years remains a main prerequisite for Greece in order to reduce the difference in income levels from the other Europeans. Improvements in productivity Greece has the second lowest productivity index among all 15 European Union countries. Only Portugal is lower – and at some distance. There have been some real improvements in recent years, especially since 1998, when privatizations and investment accelerated. Taking an European Union average of 100, Greece’s productivity, which registered at 75.6 in 1998, is forecast to mprove to 85.1 percent in 2002. The data on productivity is taken from the International Labor Organization. Greek unemployment keeps on rising Greece has the second highest unemployment rate in Europe after Spain. This is yet one more indicator showing the Greek economy’s difficult position in relation to the its partners. Worse of all, unemployment in Greece keeps rising, reaching 11.1 percent of the work force in 2000. (The National Statistics Service cannot yet provide reliable data for 2001). It was 9.2 percent in 1996. What is even more disheartening is that unemployment keeps rising even under conditions of high economic growth.