Warning over competitiveness

Bank of Greece Governor Nicholas Garganas warned yesterday that the Greek economy’s competitiveness is declining, partly because of an inflation rate that is persistently higher than the eurozone average, and asked for an acceleration of structural reforms. Garganas yesterday presented the central bank’s interim report on monetary policy, which predicts that the current account deficit will swell even further, reaching 7.5 percent of Greece’s GDP at the end of 2005, from 6.3 percent in 2004. Garganas forecast that average inflation will reach between 3.6 and 3.7 percent this year, higher than the government’s inflation, while core inflation – a measurement that excludes volatile fuel, fruit and vegetable prices – will decline a little, ending at 3.1 or 3.2 percent. That in itself is a welcome sign, because it shows that higher fuel prices have not yet affected the rest of the economy. On growth, the bank is also more optimistic than before, revising upward its 2005 estimate, to 3.5 percent, from 3 percent previously. Recipe for recovery The main preconditions for the economy to recover its competitiveness are, according to the report: – the elimination of budget deficits and the restoration of fiscal health; – achieving price stability (i.e. average inflation below 2 percent); – keeping wage rises sufficiently low to ensure price stability; and – continuing structural reforms. «The efforts towards fiscal adjustment must continue in following years. Besides the significant reduction in the budget deficit, which, according to the draft 2006 budget, will take place in 2005 and 2006, a further improvement of the fiscal position and, therefore, the achievement of substantially primary surpluses is a must. This will be achieved by making permanent cuts in primary spending and increasing revenue. The above must be achieved, not only in order to meet the targets set by the government last March in the updated Stability and Growth Program and comply with the principles of the Stability and Growth Pact, but also to make fiscal policy contribute towards reducing inflation and achieving price stability and to create a climate of confidence and long-term macroeconomic stability, the latter being preconditions for high rates of growth. Moreover, achieving considerable primary surpluses on a permanent basis is necessary in order to reduce public debt to 60 percent of GDP (as mandated by the Maastricht Treaty) by 2015, at the latest, when, due to an aging population, spending on pensions as a percentage of GDP will start to increase. Beyond reducing deficits, changing the composition of public expenditure and revenue will facilitate the financing of necessary public investment in infrastructure and human capital, (also allowing) the further reduction of income tax rates,» the interim report said. Cap on wages The report repeats earlier calls not to peg wage rises to Greek inflation but to the lower eurozone inflation plus any productivity gains. «This must take place until the gap between the eurozone’s and Greece’s inflation is eliminated and price stability achieved,» it says, further arguing that, according to econometric models, lower wage rises help growth and job creation. The report also says that very high profit margins that many Greek companies post are a sign that competition is not working very well and calls for government efforts to promote competition.