Greece gets fiscal absolution nod

BRUSSELS – The European Commission yesterday officially recommended the end of disciplinary measures taken against Greece two years ago over its budget deficit, after confirming that this has shrunk to well below the prescribed limit of 3 percent of gross domestic product (GDP). The recommendation, announced by Economic and Monetary Affairs Commissioner Joaquin Almunia, is based on the finding that the reduction in the deficit, which last year came to 2.6 percent, is «credible and sustainable» as it is not expected to exceed the cap either this year or in 2008. The Commission said this also applies even if account is taken of the estimated more than 2 billion euros in additional contributions to the EU budget which Greece will have to fork out for past years as a result of the upward revision of its GDP by 26 percent, now awaiting approval by Eurostat. These additional contributions will be one-off and so the percentage deficit figure is expected to improve markedly from 2008. This will facilitate the elimination of the fiscal deficit by 2010 which eurozone members are targeting. The Economy and Finance Ministers Council (Ecofin) will approve the Commission’s proposal on June 5. However, Almunia reiterated that Greece’s exit from the excessive deficit procedure does not signal relaxation in its application of the Stability Pact. «Fiscal adjustment has to continue in order to avoid similar problems in future,» said Almunia, stressing that if things stay as they are, a future economic slowdown is likely to push the deficit up past the 3 percent cap again. The first good step has to be followed by many more until the deficit is eliminated and until the need to further reduce Greece’s «unsustainable» public debt – the second highest in the eurozone after Italy’s – is addressed, he continued. Almunia also noted that the budget deficit may have fallen to under 3 percent but the structural deficit, even though clearly lower than in the past, remains above the cap, largely due to the country’s high indebtedness and the need to service it. He said that Greece annually pays 4.4 percent of its GDP just in servicing its debt, which is one percentage point more than is devoted to public investment. This is «incomprehensible… as regards the general interest of Greek society.» Given the fiscal problems that the projected explosion in social spending due to the aging population is expected to create, the long-term health of the Greek economy necessarily depends on structural reforms, particularly on the country’s pension system, Almunia said. He expressed the hope that all will consent to the adoption of the necessary measures, «to the benefit of the economy and citizens.» Economy and Finance Minister Giorgos Alogoskoufis said the Commission’s decision vindicated «not just the government’s policy but also the efforts of the entire Greek people.» In order to balance the budgets by 2010, «we need to continue reforms… to further buttress growth, deal with unemployment even more effectively and strengthen the social role of the state,» he said. The Commission also proposed ending disciplinary steps taken against Germany and Malta over their budget deficits. Germany, after four consecutive years of breaking the EU limit, nearly halved its deficit to 1.7 percent last year and expects to cut it to 1.2 percent this year. Malta reduced its deficit to 2.6 percent last year from 3.1 percent in 2005. Economy grows 4.6 pct in Q1, beating forecasts Greece’s economy grew faster than expected in the first quarter, fueled by a huge rise in investment, with full-year forecasts likely to be revised upward, economists said yesterday. According to flash estimates by Greece’s statistics service, gross domestic product (GDP) grew 4.6 percent year-on-year, its strongest pace since the third quarter of 2004 and well above the 4.0 percent growth forecast by analysts. Readjustment «I believe we should proceed with a readjustment of our estimates for the growth rate for 2007,» EFG Eurobank economist Platon Monokroussos said. «For the full year, I believe it will exceed 4.0 percent.» The government projects GDP growth of 3.9 percent for 2007. First-quarter growth, which outperformed the eurozone’s 3.1 percent pace, comes as Greeks take advantage of low interest rates to take out mortgages and loans for consumer goods. Quarter-on-quarter GDP grew 3.2 percent, the fastest pace since the first quarter of 2004 when Greece rushed to complete a massive public works program ahead of the 2004 Athens Olympics. Investment grew 15 percent on the quarter, its strongest since the second quarter of 2006 and its second highest since 2003. Housing construction makes up more than half of the investment component, while public spending on infrastructure projects, partly EU-funded, is about 25 percent,and could lead to continued strong 2007 growth, economists said. EU funding «Funding from the EU in the quarter was up 177 percent and there is a great backlog of public works that must be completed by 2008,» Alpha Bank economist Dimitris Maroulis said. «Full year growth will surely be higher than 4 percent.»(Reuters)