Greece has to carry out extensive and well-planned economic reforms or pay a heavy price, Bank of Greece Governor Nicholas Garganas said yesterday. «Structural reforms will secure greater prosperity for the country as a whole but require a cost and will take time to bear fruit,» he said in a speech at Thessaloniki’s Chamber of Commerce and Industry. This short-term cost should not lead society into inertia, as the present situation cannot be maintained for long, he argued. «The reforms already being carried out are anything but insignificant; however, they are still far from being on a par with the size of the challenges Greece is facing,» he said. Everyone must be given incentives, individuals in order to work more and businesses in order to operate effectively, increase their activities and create more jobs. «Greece has achieved a continuous rise in economic activity and real incomes in the last 10 years. In the 1996-2005 period, the average annual growth rate of gross domestic product (GDP) at constant prices was 3.9 percent, the real average gross income (pretax) rose by an average annual rate of 2.6 percent and the real income of the average salaried worker increased at an average annual rate of 2.1 percent,» he said. Nevertheless, despite the overall positive picture, Greeks’ living standards still lag significantly behind those of the inhabitants of the more developed European Union members. «The per capital GDP (in purchasing power units) in 2005 was 23 percent lower than the 15-EU average,» he noted. Garganas outlined the Greek economy’s major problems as follows: First, the high growth rate achieved in the last 10 years was not evenly spread across geographical regions and sectors of economic activity. The rate of those under the poverty line the last 10 years has remained rather stable, varying between 20 and 22 percent. Second, unemployment has been falling very slowly and remains at an unacceptably high level, slightly lower than 10 percent. This means that the problem is structural, linked with the inflexibilities of the economy. Third, the current account deficit has hovered around 7 percent of GDP in recent years (7.8 percent in 2005). Although capital inflows remain adequate and Greece does not have a problem in financing this deficit, the level of the deficit shows that it has a competitiveness problem. Fourth, despite the adoption of the European Central Bank’s single monetary policy, inflation has remained higher than the eurozone average for a number of years. A comparison with Greece’s 27 main trading competitors shows that its consumer prices rose by a cumulative 12.5 percent in the 2001-2005 period (expressed in a common currency), while labor costs per product unit in manufacturing went up by about 27.5 percent. And fifth, more than any other European country, Greece is facing an important demographic challenge, with an aging population, a low birthrate and the prospect of a shrinking labor force. As a result, an increasingly diminishing number of employable people will be required to support more and more pensioners. Slow fiscal adjustment Garganas said stability in public finances is the basis for the whole economic edifice but must be accompanied by price stability and structural reforms. Fiscal policy in 2005 was reversed and became restrictive, contributing to the correction of imbalances and, indirectly, to dampening inflation. «Nevertheless, the process of fiscal adjustment remains slow, which does not allow a reduction of the high public debt. More structural reforms are needed to bolster competition and make the functioning of markets more effective, raise productivity and increase the country’s productive potential,» he said. Finally, he urged the transition to a knowledge-based economy and measures to deal with the social insurance and demographic problems.