ECONOMY

Several factors are threatening to worsen the state of the economy

Eurostat’s recent corrections of Greek national accounts have dealt an irreparable blow to the quasi-magical picture that the government has given of fiscal stability in the last two years. The corrections have proved that the arguments about the sound base of the Greek economy were indeed unsound. The blow does not just concern the picture; it is the balance itself that is under serious threat. It is now clear that the maintenance of high growth rates in the economy is neither a guarantee nor proof of prosperity and sustainable growth; the huge inflows of European Union investment subsidies, consumer and housing credit expansion, and the boost to consumption by immigrants do create favorable conditions for the growth of domestic product, but are not sufficient in the long run. The Greek economy is mainly threatened by two developments. The first is linked with the drastic fall in investment in an increasing number of private enterprises; this is coupled with the always thorny problems of attracting foreign investment. The second concerns the danger of an odd combination of inflation in certain sectors of the economy and disinflation in some others. Beyond these serious general trends, the current imbalance is in danger of deterioration by the «holes» in the country’s fiscal system, notably the projected deficit of the social insurance system. Even after the explosive 21 percent rise in state budget contributions to pension funds, starting next year, the funding problem will remain. The need to limit social insurance contributions of both employers and employees in order to boost the competitiveness of firms will lead households to increase their expenses in order to secure a satisfactory level of pensions and health cover; this will reduce their income available for consumer spending. Public debt servicing will also remain a significant burden; the revised Eurostat figures put the annual cost of the long over-borrowing at nearly 9.5 billion euros, which is the same as public investment. Our weakness, indeed, after such a high rate of GDP growth, in tackling public debt, virtually ensures that it remains a high priority for many years to come, certain to absorb a great deal of public revenue and to necessitate the selling of considerable public assets. The rise in public debt at a time when the nominal domestic product is increasing by about 7 percent is itself proof of fiscal failure. A bomb with even more adverse long-term repercussions on fiscal matters is the continuing inefficiency of most public enterprises. Their incomplete privatization through the sale of minority interests has sustained the same wasteful management practices. Finally, the fiscal problem is bound to be adversely affected by the wasteful management of local government organizations. Brussels smiles knowingly at the sudden interest by parties, in almost all member states but much more so in the Mediterranean ones, in mayoral and prefectural authorities. The lack of preventive control and experienced managers, at a time when resources and loans going to local government organizations are increasing rapidly, creates an extremely dangerous situation. The government has evidently realized the problem and has, for this reason, included spending controls and the application of accounting plans for local government entities in its policy measures for 2003. This is necessary; the country must rapidly get beyond the period of the «fiscal bubble.»