Sunday, July 15, 2007

FT REPORT - GREECE: Rising prosperity brings feel-good facto

By Kerin Hope, Financial Times

Published: Jul 13, 2007

Greece's reputation for presenting unreliable statistics that flatter its public accounts has long undermined its credibility with European partners.

Those days may be over, however.

In May, the Athens government received a green light to exit the European Commission's excessive budget deficit procedure, ending almost three years of close scrutiny by Eurostat, the organisation's audit arm.

The 2006 budget deficit fell to 2.6 per cent of gross domestic product - the first time it had fallen within the 3 per cent of GDP limit set for members of the eurozone since Greece joined the currency in 2001. This year, the deficit is projected to shrink only marginally to 2.5 per cent of GDP.

However, backsliding is not an option, says George Alogoskoufis, the finance minister. "We're preparing for larger cuts next year. As a eurozone member, we're committed to balancing the budget by 2010," he says.

Eurostat is expected to approve later this year a revision of the national accounts - the first in more than 20 years - that shows an increase in GDP by as much as 25.7 per cent annually since 1994.

Improved information-gathering has enabled the state statistical service to capture more activity in the fast-growing services sector, along with a larger percentage of the thriving grey economy.

Based on the revisions, the budget deficit would shrink by up to half a percentage point. But the impact on Greece's public debt, the highest in the eurozone as a percentage of GDP, would be much larger. The debt would fall at a stroke from 104 to 85 per cent of GDP.

Greek per capita income would receive a significant boost too. In terms of purchasing power parity, the Greeks would outpace their Mediterranean neighbours Spain and Italy to become almost as well off as the French.

The revisions reflect the impact of a decade of growth at about 4 per cent a year - a rate that should be sustained over the medium-term, Mr Alogoskoufis says. He notes that the economy expanded in the first quarter by as much as 4.6 per cent on an annualised basis.

Growth is driven by strong consumption and high investment, underpinned by transfers worth €22bn over eight years from the latest EU structural package. The jump in Greece's per capita income resulting from the statistical revision is not expected to affect current levels of EU funding.

"There's a feel-good effect and a neighbourhood effect," explains Paul Mylonas, chief economist at National Bank of Greece. "People in the private sector are investing quite a lot, and economies in the neighbouring countries, increasingly important export markets for Greece, are growing fast."

Larger Greek companies are deepening their presence in Bulgaria and Romania following their EU accession. Smaller companies are finding opportunities in the less-developed markets of the western Balkans.

Shipping and tourism,the main growth drivers together with cross-border expansion, are benefiting from a buoyant global economy.

Investment in new tonnage is at record levels. Tourism bookings are at a 10-year high, thanks to a recovery in Germany, the biggest market for Greece, and rising numbers of American, Chinese and Russian visitors.

Mr Alogoskoufis says the benign climate provides an opportunity to crack down on widespread tax evasion among small businesses and Greece's high percentage of self-employed workers, from plumbers to doctors and lawyers.

A previous campaign aimed at corporate tax evaders has borne fruit, thanks to improved electronic cross-checking of invoices and payments, and tighter enforcement by the finance ministry's special police unit.

But as a percentage of GDP, tax receipts are among the lowest in the EU, at a little below 20 per cent according to the revisedstatistics.

"We need to engage both the public and the social partners.

"There'll be incentives for households to ask for receipts, for example, for repair jobs, and measures to encourage the reporting of extortionary practices during tax audits," Mr Alogo-skoufis says.

Yearly reductions have cut corporate tax rates from 27 to 22 per cent. Rates for personal income tax are also being reduced. But the tax code remains complex, with overlapping legislation that is open to different interpretations by middle-ranking revenue officials.

Yannis Stournaras, an Athens University economics professor, says that the tax system needs a thorough overhaul.

He says: "There are some tough choices to be made in order to maintain revenue growth. There are few alternatives to raising VAT, but it also needs to be better administered. And the government has to consider introducing a capital gains tax."

As Greece enters the run-up to a general election, Mr Alogoskoufis faces pressure to loosen fiscal policy. He insists that next year's budget will not contain hand-outs for special interest groups.

But as the election campaign gets under way, it will become clear that the optimistic climate in Athens and other major cities does not extend to smaller towns and places off the tourist track. There are fewer new jobs in the provinces and income disparities are growing.

Although the jobless rate has fallen in the past three years from almost 11 per cent to about 9 per cent, it remains among the highest in the eurozone.

Unemployment is low among heads of households, but among young workers the rate exceeds 24 per cent, the highest in the EU.

"Measures to free the labour market are crucial," Mr Mylonas says.

"The minimum wage is far too high for inexperienced workers: it discourages employers from hiring.

"Such high rates of youth unemployment don't bode well for growth in the future."


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