Greece’s Balkan neighbors closing the growth gap

Thursday’s meeting in Athens of finance ministers of the countries participating in the loose process of cooperation in Southeastern Europe highlighted Greece’s leading role in this broad region of 140 million people. Nevertheless, judging from the speeches of the participants, Greece must undertake specific initiatives if it wishes to retain this position in the future. Indeed, this leading position has been built, first, on our high rate of economic growth and, second, on our participation in the European Union, especially in the eurozone. Prime Minister Costas Karamanlis said in his opening speech: «Greece now has a significant commercial presence in all the countries of the broader region… It is already one of the biggest sources of investment in most of the neighboring countries. Greek enterprises were among the first which dared invest in the Balkan markets. Greek investment in the broader region exceeds 8 billion euros. More than 3,500 Greek firms and 700 branches of Greek banks are active in the Balkans. Greek invested capital has top spot in the Former Yugoslav Republic of Macedonia (FYROM), Albania and Serbia-Montenegro. And it is in second place in Bulgaria and in third in Romania.» All this data is no doubt impressive. I am afraid, though, that the verve of Greek investment in the Balkans has been showing signs of fatigue in the last two or three years, while competitors from other European countries have been making their presence increasingly felt. At the same time, the high growth rates of Balkan countries is not posing an immediate threat to the Greek predominance, but the balance is rapidly changing in our disfavor. The average growth rates of Albania, Bosnia-Herzegovina, Bulgaria, Croatia, FYROM, Moldova, Serbia-Montenegro and Romania are estimated at 6.6 percent and 4.9 percent in 2004 and 2005 respectively, against Greece’s 4.7 and 3.6 percent. Greece’s per capita income may be between three and five times that of its neighbors, but the gap is narrowing. Another qualitative factor in our disfavor is that these countries still have low production levels but have made spectacular institutional changes. They have fully liberalized their labor markets, have lower tax rates and, most importantly, have formed a friendlier business environment by cutting red tape. As a result, they have been attracting significantly greater amounts of foreign investment than Greece, while Greek businessmen are now investing more there than in their own country. Finally, the relatively easy steps of Greek firms in the Balkan will become more difficult in coming years. The National Bank of Greece aspired to acquire Romania’s biggest bank, BCR, a few months ago, but lost out to the Austrians. Spanish and Portuguese banks are also increasing their presence and seem now to be preferred by Balkan governments in their privatization programs. Rising imports dampen growth rates Balkan economies appear to be at a turning point, as increasing amounts of imports are required to meet the rising consumer demand, exerting a downward pressure on economic growth rates and augmenting their current account deficits, according to a National Bank of Greece (NBG) report out yesterday. The report, in the bank’s January-February issue of the South Eastern Europe and Mediterranean Emerging Market Economies Bulletin, notes that Albania, Bulgaria, Romania, Serbia-Montenegro and FYROM further improved their macroeconomic indicators in 2005. «Economic growth remained at high but markedly lower than 2004 levels, mainly due to the significant increase in imports and unfavorable weather conditions. Inflation remained at the one-digit level (8.8 percent)… A worrying development was the increase in the current account deficit to about 10.1 percent of GDP, against 9.1 percent in 2004, as a result, among other factors, of strengthened domestic demand, the maintenance of high rates of credit expansion (about 50 percent), the real revaluation of domestic currencies and high oil prices,» says the report. Economic growth in 2006 is expected to generally improve to about 5.5 percent, inflation to de-escalate to 7.5 percent and, for the first time, a budget surplus of 0.2 percent is projected. The current account deficit is seen rising further to 10.5 percent of GDP.

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