Gloomy picture of C/A

An Alpha Bank report paints a gloomy picture of Greece’s prospects of taming its current account deficit, which itself shows the continuing erosion of the country’s international competitiveness. The report projects the deficit to again exceed 10 percent of gross domestic product (GDP) this year, after rising to 10.8 percent in 2006. According to Bank of Greece data, the current account deficit in the first half of 2007 was up 16.5 percent, year-on-year, to -16.7 billion. This was mainly due to the continuing deterioration in the trade balance, whose deficit grew 7.35 percent to -19 billion. Budget deficits are seen as largely responsible for this problematic situation, as they stoke inflationary pressures and reduce the economy’s competitiveness. According to Alpha Bank, reining in the current account deficit would primarily require a rise in the domestic savings rate – which now stands at 15 percent, against the 21.5 percent eurozone average – which would take some of the sting out of imports, which total about three times the earnings from exports. Specifically, the report sees as necessary: Firstly, turning the state budget deficit toward a surplus as soon as possible. And, secondly, private savings have to rise, particularly in the form of retirement savings via substantial reform of the country’s social insurance system. Social insurance On the other hand, reform of the social insurance system requires substantial amounts of capital and its funding appears rather impossible if the public debt is not drastically reduced. According to Bank of Greece officials, viable, long-term pension system reform cannot be adequately funded if the public debt is not brought down to about 60 percent of GDP from about 100 percent today. This would need the budget to record a surplus of about -10-15 billion annually in coming years, when funding requirements for reform are estimated to total about -120 billion. Moreover, it also has to be taken into account that public spending on pensions as a percentage of GDP in Greece is already among the highest among the countries of the Organization for Economic Cooperation and Development, and it is projected to record one of the highest growth rates until 2050 as a result of the aging population – from 12.4 percent of gross domestic product today to 22.6 percent by 2050, a difference of 10.2 percent of GDP. By contrast, public spending on pensions in the eurozone over the same period is expected to rise by about 2.6 percent of GDP on average.