The Greek economy is going to strive to avert a recession and keep the budget deficit to below 3 percent of gross domestic product (GDP), assuming it is asked to do so by the European Commission this year, but may face a bigger challenge in the years ahead. Although few have thought about it, the challenge is not to become a new Portugal. The government may have failed to come up with good estimates of the budget deficits for 2007 and 2008 but has been more accurate in its forecasts of economic growth, with the exception of 2008. One has to admit that the local economy did pretty well in growing by 3 percent last year, given the scope of the global economic crisis. So one has to take the baseline forecast of a 1.1 percent GDP growth rate this year more seriously, although the rapidly deteriorating domestic and international economic environment calls for caution. This is especially true since key sectors of the Greek economy are in or are expected to be in recession in the next few fiscal quarters. By all accounts, construction is weakening fast, with residential real estate hit by a large stockpile of unsold new homes, as well as the expectation of further declines in house prices and tighter credit criteria imposed by banks. The shipping sector has been in recession for some time but this is being felt more and more with time, while the tourist industry is bracing for one of its worst years in decades. On the other hand, one has to take into consideration that employment has yet to be hit hard in Greece, unlike other countries, and wage increases far outpace inflation. Nominal salary increases range between 5 and 6 percent on average, with inflation seen as falling closer to 2 percent this year. In other words, there are incomes being earned that are not put to use to the same extent as in the past, that is, being spent heavily on consumer goods and services because there is uncertainty about the future, but are held in bank deposits. Part of this money could really boost the economy if the uncertainty would recede. In addition, benchmark interest rates, such as the three-month Euribor, continue to ease and have recently fallen to below 1.90 percent. This translates into interest savings for borrowers and enables banks to lower time deposit rates, discouraging customers from putting their savings there. Money from the 28-billion-euro Greek rescue plan has also started flowing into banks, improving their liquidity and facilitating the process of granting loans. Of course, no one knows what the interplay of all these opposite forces will bring about this year and next. The most likely outcome should be GDP growth rates below the trend. In other words, the Greek economy is likely to grow below its estimated 3.5-4 percent potential growth rate in the 2009-2010 period and perhaps even afterward. This is not good because it will make Greece a less attractive destination for international capital flows at a time that financial protectionism is on the rise. On the one hand, governments around the world are exerting pressure on their banks to focus more on their domestic activities, while, on the other, investor risk aversion keeps more capital at home than is invested in foreign countries. All these factors will make it more difficult for Greece to finance its current account deficit, which now amounts to more than 14 percent of GDP and is partly caused by a surge in domestic demand. It will be even more difficult given the country’s annual financing needs to service its large public debt, estimated at more than 94 percent of GDP this year. Moreover, international capital flows to Southeast Europe are expected to slow down considerably in the next few years and this is going to have an adverse effect on the Greek economy and business interests. Different estimates put the worth of Greek investment in this part of the world as more than 13 billion euros, while a great deal of Greek exports also go to these countries. Let us not forget that the Greek growth story, as advertised by local listed companies to the international community, was based upon their expansion into the fast-growing Southeast European countries. All in all, there is considerable risk that Greece may become a new Portugal in the next few years – that is, a small country attracting just a small amount of international capital flows to fund its economic growth. Greek policymakers and the business community need to take this new reality into account and not rely entirely on EU funding to resolve the problem of the likely sharp cutback in international capital flows.