ECONOMY

EU approves Greece’s stability pact report

BRUSSELS – As expected, the adoption of Greece’s updated stability pact forecasts by the European Council of Finance Ministers (ECOFIN) yesterday was a formality. Under the stability pact, eurozone member states are require to submit annual medium-term forecasts on basic macroeconomic indicators, showing that they can maintain fiscal and price stability. Economy and Finance Minister Nikos Christodoulakis told a press conference that the European Commission insists on the need for an immediate reform of the social security system, an acceleration in structural reforms, such as privatizations and labor market reform, and a faster decline in Greece’s heavy debt, which is slightly below 100 percent of the country’s gross domestic product. Christodoulakis insisted on the need for increasing budget surpluses to reduce the debt faster. The ECOFIN text modified a European Commission draft, which said that Greece’s budgetary practices «lacked transparency» and «raised questions as to the quality of fiscal adjustment.» The final text makes a general call for more transparency. «Greece does not have the intention to hide anything from the Commission,» Christodoulakis said. Following is the full text of ECOFIN’s opinion, still in preliminary form: «On 12 February 2002 the Council examined the 2001 update of the stability program of Greece, which covers the period 2001-2004. «Real GDP growth remained robust in 2001, at 4.1 percent, although lower than projected in the 2000 stability program, as a result of the deterioration in the external environment. Inflation resurgence under the impact of increasing energy prices in 2000 started to decelerate since summer 2001, but the improvement might weaken in the coming months. The general government accounts are estimated by the updated program to reach 0.1 percent of GDP surplus in 2001 (including non-budgeted UMTS receipts of 0.4 percent of GDP) instead of 0.5 percent of GDP as projected in the 2000 stability program. «The updated stability program projects annual real GDP growth of around 4 percent in yearly average for the period 2002-2004 as against 5.4 percent in the 2000 stability program. The Council considers the projected real GDP growth, which should be underpinned by high private and public investment, as attainable. «The Council notes that the budgetary projections remain in surplus throughout the period of the program in both actual and cyclically adjusted terms and that they respect the close to balance or surplus requirement of the Stability and Growth Pact. The Council notes that the government debt ratio is currently expected to decline from 99.6 percent of GDP in 2001 to 90.0 percent of GDP in 2004 instead of 84.0 percent of GDP as projected in the 2000 stability program. «The Council also notes that the improvement in the government balance in the period from 2002 to 2004 primarily relies on the steady reduction in interest payments; in contrast, no retrenchment in current primary expenditure is expected. Furthermore, the ratio of the general government primary surplus to GDP, although reaching a high level until 2004, progressively declines throughout the period. The Council strongly encourages the Greek authorities to set promptly a clear binding norm for current primary expenditure as it recommended in its opinion on the 2000 stability program. «The Council considers it appropriate to keep high primary surpluses to above 6 percent of GDP and to pursue, if necessary, further budgetary adjustment effort, taking into account the high level of debt. In the short term, vigilance should be maintained regarding price developments, in particular with respect to the forthcoming wage negotiations. Furthermore, taking into consideration the still very high level of the government debt ratio, as well as the perspective of increasing budgetary costs stemming from the aging population, the Council urges the Greek government to take advantage of the current favorable macroeconomic situation to reduce government debt as fast as possible. The Council notes that the debt reduction foreseen in the program is much slower than what would be warranted by expected GDP growth and the projected primary surplus. «The Council invites the authorities to provide more detailed information on financial operations in future program updates in order to allow a better understanding of debt developments. «The Council notes that strengthening structural reforms is a key economic policy objective of the updated program; the Council considers that although considerable progress has been made in recent years in this area, implementation of structural reforms must continue in the product, services and labor markets in order to enhance the efficiency of markets and the competitiveness of the economy; the Council encourages the government to proceed to the necessary reforms rapidly. The Council welcomes the intention of the government to implement reforms in the area of budgeting and management of expenditure in the public sector. «The Council welcomes the information provided in the updated program on long-term sustainability of public finances. The Council considers that there is a serious risk of budgetary imbalances emerging in the future due to the aging population and that there is a need to reform the public pension system. «The Council notes that no progress was made in this area in 2001 and that the updated program does not include any specific plans or timetable for pension reform. «The Council recommends that the government proceeds to the reform of the pension system with no further delay.»