Gov’t fears an imported crisis

The government is concerned about the repercussions of international developments on the Greek economy and on its ability to present a surplus budget for 2003. Economy and Finance Minister Nikos Christodoulakis, who attended the European Central Bank’s Executive Council on Thursday, will meet with Prime Minister Costas Simitis on Monday to discuss possible developments. With the economic recovery in the USA and Europe appearing elusive, the prospect of a US war against Iraq and the consequent increase in oil prices has sent international markets into a spin. The Athens bourse, which has been on a mostly downward course for the past three years, dutifully responded, although the main reason for its decline, troubled OTE Telecom, was domestic. The ASE benchmark index lost 1.87 percent to close at 1,966.74 points, its lowest level since mid-October 1998. It has lost 69.05 percent since the market peaked on September 17, 1999. The government is worried about the effects of international events on inflation. Rising at an annual pace of 3.5 percent (according to Greece’s Consumer Price Index) or 3.8 percent (according to the eurozone’s Harmonized Index of Consumer Prices) at the end of August, it is the third highest in the eurozone. Bank of Greece officials attribute the rise in inflation to the introduction of the euro, unexpectedly high increases in labor costs, and the domination of many sectors of the economy by oligopolies. Central bank officials insist that only measures that boost the economy’s competitiveness will succeed in bringing inflation down. The fear of entrenched interests, notably those of unionists, has resulted in a series of half-measures, as in the reform of the social security system. Now the government fears that persistent inflation will provoke more demands for high pay raises. On the positive side, economic growth seems set to exceed the government’s prediction of 3.8 percent, at a time when the eurozone is expected to grow by a mere 1.2 percent. In fact, it will be the first year in which Greece will lead all developed countries in growth. Partly due to inflows from the EU and the construction boom ahead of the 2004 Olympics, economic growth is also domestically driven. While high growth guarantees increased revenue, the government still worries whether it can meet the target of a 2003 budget surplus equal to 1 percent of gross domestic product. Greece has committed to this target in the estimates it has provided to the European Commission as part of the Stability and Growth Pact. It appears, from what inside sources say, that, at present, the most Finance Ministry officials can come up with is a 0.4-percent surplus. Contrary to EU recommendations, Greece has failed to curb spending and has relied on increased revenue to produce surpluses. Early projections show spending increasing by almost 6 percent next year, double the expected rate of inflation.

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