Excessive budget deficits will persist at least through 2007

The European Commission’s annual autumn report on the European Union’s economy contained some good and some bad news first, with the latter being far more significant. The good news: the Commission, in its estimate for this year’s budget deficit, includes the proceeds from the securitization of debt owed the state. It does say, in a footnote, that this would be conditional on Eurostat’s approval, with the decision expected in December. However, this conditional acceptance of the securitization for 2005 has heartened government officials, since the report has been approved by Eurostat’s superior, European Economic and Monetary Affairs Commissioner Joaquin Almunia. As a result, the 2005 budget deficit is estimated to be equal to 3.7 percent of Greece’s GDP, instead of the 4.4 percent announced on Wednesday by Economy and Finance Minister Giorgos Alogoskoufis. The bad news: in its 2006 estimates, the Commission report does not include revenue from one-off measures, such as the securitization, and estimates that the 2006 budget deficit will reach 3.8 percent of GDP, instead of the 2.6 percent Alogoskoufis has promised to deliver (without new taxes, too). Besides the non-inclusion of the securitization, the Commission’s estimate is affected by the fact that it forecasts a slower GDP and revenue growth than the Greek government does in the – twice redrafted, so far – 2006 budget. The worst piece of news is that the Commission forecasts a 3.8 percent deficit for the 2007 budget, as well. This means that Greece will not honor its commitment to lower its budget deficit by the end of 2006. Given that the economy is under close surveillance anyway, this could lead to significant fines and even closer EU monitoring, including mandatory spending cuts. Greece is also vulnerable to possible fines because of its very high public debt. In order to regain some face after the embarrassment of having France and Germany violate the prescribed budget deficit limit of 3 percent of GDP for years in a row without punishment, the EU has decided to place greater focus on its level of public debt. Greece now has the biggest public debt level in the EU. It stood at 109.3 percent of GDP in 2004 although, according to Commission forecasts, it will drop to 107.9 percent in 2005, 106.8 percent in 2006 and 106 percent in 2007. This is considered far too slow a reduction, especially given the fact that, over the past few years, Greece’s economic growth has consistently been higher than the EU average. Belgium and Italy, with total debt level once far higher than Greece’s, have reduced theirs below Greece’s level and under slower growth conditions. GDP growth is estimated at 3.5 percent in 2005 and 3.4 percent in both 2006 and 2007. By comparison, the average EU growth will be 1.5 percent in 2005, 2.1 percent in 2006 and 2.4 percent in 2007 and the average in the 12 eurozone members will reach 1.3 percent in 2005, 1.9 percent in 2006 and 2.1 percent in 2007. The trouble for Greece is that, while the slight growth recovery of its partners will result from higher private investment, Greece’s growth will be almost exclusively based on strong private consumption. And since income growth alone is not so high as to guarantee the estimated consumption level, this means that Greek households will continue taking on additional debt. The report itself notes the post-Olympics collapse in private investment, partly as the result of the government’s decision to make drastic cuts in the public investment program. The report also estimates that the unemployment rate will decline very slowly: 10.4 percent in 2005, 10 percent in 2006 and 9.7 percent in 2007. The EU and eurozone average will decline from 8.9 percent this year to 8.1 percent in 2007. Average inflation will also decline slightly, from 3.7 percent in 2007 to 3.3 percent in 2006 and 3 percent in 2007. EU inflation will peak this year at 2.3 percent, falling to 1.9 percent in 2007. Out of all this, the Economy and Finance Ministry chose to celebrate the fact that «the report… confirms the great improvement in Greece’s fiscal position during 2005, as a result of the effective implementation of the 2005 budget.»

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