Greece is poor but the Greeks are rich. This famous phrase by the former Greek statesman Constantine Karamanlis, the uncle of current Prime Minister Costas Karamanlis, depicts a reality that the upward revision of the GDP (gross domestic product) appears to partially capture. Still, the sizable proposed revision may still be small compared to the country’s gray economy and the Greeks should be grateful if Eurostat scales it down considerably to help avoid some negative side effects. Whoever lives in this country knows very well that official statistics underestimate the true level of economic activity and personal incomes to a great extent. Whether this underestimation amounts to 20 percent, 30 percent or even 50 percent of official GDP is open to discussion and is quite subjective. Side effects Undoubtedly, a large revision of the GDP to the tune of 25 percent, such as that proposed by the NSS (National Statistics Service), has some negative side effects. It endangers the EU Cohesion Funds, some 1.4 billion euros, earmarked for Greece since it takes its per capita income above the 90 percent of the average EU level. It also increases its annual contribution to the EU budget and raises the amount of money the state is obliged to pay annually to the main national security fund (IKA) to satisfy the quota of 1 percent. On the other hand, it helps to improve dramatically its public debt-to-GDP ratio to less than 90 percent and the budget deficit-to-GDP to close to about 2.1 percent this year, according to government officials. In other words, Greece’s ability to attain the fiscal targets required in order not to be subject to the EU’s excessive deficit procedure will be no longer in doubt. This in turn makes life easier for the government because it feels less pressure to apply the fiscal brakes as the deadline for the next general elections in the spring of 2008 approaches. On the other hand, theoretically speaking, it makes it more difficult for the main opposition socialist PASOK party to regain power because the government has more of the traditional pre-election goodies, such as additional hirings in the public sector, bigger wage and pension increases, spending on public works projects and more, to hand out and win the elections. It is also understood that proposing such a large revision of the GDP, even if it complies with Eurostat regulations, makes many bureaucrats in Brussels feel uncomfortable. After all, the revision comes only two years after they were called upon to approve the results of Greece’s fiscal audit which took the 2004 budget deficit to above 6 percent of GDP, hurting the credibility of Eurostat which had access to the Greek national income accounts all along, and limiting its objections to a few footnotes. So, it would have been surprising had EU officials failed to express their discomfort with the suggested large size of the Greek GDP revision and it is normal to expect that they will do the best in their power to chop it off, starting with the 5 percentage points or so of the 25 percent increase attributed to the inclusion of the gray economy. And Greece should be thankful if that happens. By limiting the revision to between 7 and 15 percent, instead of the proposed 25 percent, the country can enjoy the best of the two possible worlds, as Voltaire once said. The GDP will underestimate by less the true level of economic activity, and the country’s fiscal indicators will still improve and increase the safety margin enough to ensure Greece is taken out from under the EU Commission’s surveillance. It will also not endanger that much the country’s portion of EU cohesion funds at the 2010 update and limit the budget’s various contributions to EU and IKA Fund. Debt relief Such a revision will also likely justify a tighter bond spread between Greece and its eurozone partners, providing relief to the servicing of its huge public debt. Of course, some major credit agencies have said a mere revision of the GDP does not justify an upgrade of Greece’s long-term credit rating, which is the lowest among the members of the eurozone. However, history shows markets do not wait for the international credit agencies and usually precede their actions by tightening spreads, which amounts to a de facto upgrade. «You cannot have a fast growing country with a primary budget surplus, even if it is smaller than 3 percent of GDP, a budget deficit well below 3 percent of GDP, a falling debt ratio well below 100 percent and still expect markets to price its debt lower than other countries with much worse fundamentals,» says a senior banker at a major bank. Understating activity This optimistic view runs contrary to the opinion of others, who point out that the GDP revision raises questions about the quality of Greece’s national statistics, even more so if it is justified on the grounds that some existing economic activities were not included in the official statistics in the past. That is a valid point but is related more to the degree of understatement of true economic activity by the official GDP than anything else. The suspicion held by many that Greece has one of the largest gray economies in Western Europe simply enhances this point. All in all, Greece should be criticized for failing to live up to its commitment that it revise its GDP every five years based on all available data. It may also be criticized if the NSS turns out to have made a lousy job of updating the official GDP. It would be wrong though to do so before Eurostat comes out with an official verdict. Moreover, the Greeks should be grateful to Eurostat officials if they manage to scale down considerably the proposed revision of the GDP, knowing that even a 25 percent increase in the GDP may be small given the general impression about the large size of the underground economy. It is time that the country’s total wealth as measured by GDP catches up a bit with the true higher standard of living of the majority of its citizens.