Almunia warns that structural deficit, public debt too high

The European Commission should continue to monitor Greece’s finances even after the correction of the country’s deficit to below 3 percent of gross domestic product (GDP), said Economic and Monetary Affairs Commissioner Joaquin Almunia in an exclusive interview with Skai television’s Angeliki Papamiltiadou. A few months ago, you stated that 2008 would be the most critical year for the Greek economy as there is the risk of the deficit rising again. Do you still believe so? Spring forecasts showed that Greece’s deficit will close below 3 percent both this year and in 2008. Yet at the same time I must tell you that not all problems have been resolved regarding the country’s fiscal figures. For example, if you see our forecasts, the structural deficit, that is, the real deficit which emerges when the positive cycle of some economic parameters ends and their effects vanish, then the deficit will still be far above 3 percent in structural terms. This means that greater effort is required and I believe everyone agrees that the monitoring should continue even after the correction of the deficit to below 3 percent. In the 2006 and 2007 budgets, there were some measures of a temporary character. Will you accept such measures in the 2008 budget, as well? The issue is not whether we will allow them or not, but whether we will take into account the real trends when we get to examine sustainability. Therefore, we have to assess the current situation and at the same time see whether that situation can be maintained in the future without any changes in policy. If the Greek authorities use measures of a temporary character to reduce the deficit one year, then the deficit will increase again the following year. So in our analysis of the progress of Greece’s finances in the medium term, we concentrate on the real trends and not those affected by temporary measures. Would you accept measures of a temporary character then? No, in order to calculate the national deficit, I would have to calculate the difference between revenues and expenses regardless of the reasons for which they rise or fall. To assess the sustainability of public finances or their evolution, I do not take temporary measures into account. I will take the real trend regardless of whether temporary measures were used or not. Two weeks ago the data showed that the deficit increased during the year’s first quarter. Does this worry you? Forecasts showed that the deficit this year will be under 3 percent, not in structural terms but in nominal terms. Therefore, we shall continue to monitor the situation, particularly in countries such as Greece, where the structural deficit is not yet under full control, and in countries with very high deficits, which also includes Greece. As you know, in a few months’ time Greece will hold general elections. Are you worried that the election campaign may derail the effort toward fiscal rehabilitation? I am a democrat and I like elections. I like the fact that people can decide who should be elected and who will take the responsibility. Yet political leaders must know the dangerous positions they may adopt when political platforms are decided ahead of the elections. They must know the likely negative consequences of the pre-election cycle, in revenues and expenditure. So regardless of when the elections are to be held, there must be the political will for further fiscal cleanup, for a further reduction in the public debt, for preparing the economy for the challenges of the future, the aging of the population, increasing competitiveness and improving the operation of markets and creating new jobs. These are the main concerns which must not be put at risk under any short-term promises of the election campaign. Has [Economy and Finance Minister Giorgos] Alogoskoufis given you any assurances about the election period? Giorgos Alogoskoufis has repeatedly stated during Eurogroup meetings and in our direct contacts that he is committed to fiscal discipline and that Greek authorities will keep their commitment for further fiscal cleanup even after the end of the excessive deficit procedure. For instance, the Greek government and Giorgos Alogoskoufis recently announced that the structural situation of Greece will be balanced by 2010. This is a very good commitment. Now all Greece has to do is realize it. Do you believe Greece can achieve fiscal rehabilitation by 2010 without resolving the social security problem? I believe the real solution for fiscal problems is the correction of the structural deficit and the reduction of the public debt to more maintainable levels. Greek public debt must be reduced, it is very high. This means that the reforms of the social security and pension system must be realized. More or less everyone agrees that in order to answer the effects of the aging of the population, productivity, unemployment, public finances and growth prospects, the social insurance issue must be solved first. When can a solution be expected? I do not know. Ask your political leaders. My responsibility is to remind all political leaders, from the center-left to the center-right, that these decisions must be realized. When and how is up to them. I insist on asking whether we can meet the target in 2010 without previously resolving the social security problem. Greece needs to take more steps to put in order its public finances because the structural deficit is still very high, because the medium-term target must be considered as important and for it to be successful reforms are needed of the social security issue. When and how is to be decided by Greek politicians. But it cannot drag on for many years… Well, ask them! The revision of the Greek GDP by 26 percent is currently under scrutiny by Eurostat and is expected to be validated in the coming months. Greece will have to contribute to the European budget 2 billion retroactively, so are you worried that the deficit will be burdened by this adjustment and rise again? Eurostat is analyzing the Greek National Statistics Service’s data. This analysis may end between July and October, so when Eurostat decides and informs us of the extent of the adjustment we will calculate the consequences on many levels, one of which is the increase in Greece’s contribution to the EU budget. Have you factored in this prospect in your forecasts? No, we need to know the exact GDP adjustment.