European Affairs

First of all, I am convinced that the euro has helped promote a more efficient economic environment. The citizens and businesses of the 12 participating countries have experienced a considerable decrease in the costs usually associated with multiple currencies. Cross-border trade and transactions have been further facilitated and have received a significant boost. Most EU member states have benefited from a considerable easing in the servicing of their debt, leaving room for the allocation of scarce public resources to infrastructure projects and to the implementation of more extensive social policies.

The euro has thus led to increased economic efficiency and to the proliferation of sounder economic policies across the European economic and monetary union (EMU) – indeed across the entire European continent. The implementation of the European Union’s Stability and Growth Pact, intended to keep budget deficits in check, has helped achieve the long-needed fiscal discipline necessary for building long-term market confidence, which in turn is a prerequisite for well-managed economic growth.

Despite the euro’s advantages, however, one-off price increases in many countries during the transition from national currencies have created a widespread belief that it has led to inflationary pressures that would not have occurred under the previous monetary regime. Moreover, many people argue that some member countries of the euro zone have become less competitive as a result of the zone’s common monetary policy. In the light of these drawbacks, and also because of sub-par growth rates in many euro zone economies, discussions are taking place on whether the European Central Bank (ECB) should adopt a more accommodative, pro-growth stance. Many of my ministerial colleagues in the Eurogroup are calling for the ECB to be “more responsive” to the economic cycle in formulating monetary policy.

This is a point of tension, because the lack of an independent monetary policy leaves only two other choices to national governments: they can either adjust their fiscal policies or promote structural reforms. The fiscal policy option, however, is limited by the constraints of the Stability and Growth Pact. Structural reform, on the other hand, carries considerable political costs, as people do not usually welcome changes that could alter their lifestyles even for a short time. It thus becomes clear why many governments are asking for a more aggressive monetary policy.

But can the ECB afford to give in to political pressures and adopt a more accommodative stance? Not really. The ECB has to guarantee price stability and long-term market confidence and cannot compensate for EU governments’ lack of will to promote the reforms necessary to stimulate economic growth. Moreover, the impacts of a common monetary policy are not as common as often believed, and a more aggressive policy might not solve the problems that many governments are facing. On the one hand, low interest rates in countries with high rates of growth, such as Ireland or Greece, could trigger inflationary pressures, particularly on asset prices. On the other hand, lower interest rates might not be low enough to boost ailing economies. The ECB cannot address the particular needs of every country but has to check the performance of its policies against aggregate euro area data.

There are also some clearly identifiable reasons why a common monetary policy does not always have the same effect on all participants, the most important of which is the difference in productivity levels between EMU members. These differences are due to variations in internal economic factors, such as the public sector’s contribution to GDP, the regulatory framework and market structures. Economic conditions in the euro zone could be significantly improved by reforms that would eventually lead to higher productivity and to the gradual adoption of more coordinated fiscal policies. Such homogeneity could ultimately shield EMU economies from exogenous shocks, such as a sharp rise in energy prices, which could otherwise destabilize economic activity and reduce economic growth. The main challenge for euro zone governments is thus to enact and implement reforms that will improve their countries’ competitiveness. If that is done, the single currency will work much better and provide our economies with many more opportunities in the future.

In Greece, which joined the euro zone in 2000, the monetary stability and low interest rates associated with the euro have boosted private consumption and investment and facilitated servicing of the public debt. Unfortunately, however, the failure of the previous administration to push a reform agenda and rationalize public spending has led to disproportionate budget deficits and to a decline in the competitiveness of the Greek economy, thereby reducing the possible benefits from the euro. The present government has clear objectives: to contain budget deficits, to make the economy more competitive and to implement long-needed reforms.

We have not wasted any time. Since the new government took office in March 2004, we have introduced numerous reforms in every area of the economy. We have reformed the tax regime by reducing corporate tax rates and making tax procedures simpler and more straightforward. We have introduced a new Investment Incentives Law to promote regional convergence and encourage investment aimed at exploiting Greece’s comparative advantages. We have introduced a Law for Public-Private Partnerships, so that we can build the necessary infrastructure more cheaply, more quickly and more efficiently.

Our ambitious privatization agenda is already ahead of plan. Revenues from privatization in 2005 were estimated to amount to one percent of GDP, or $1.9 billion, but we had already reached $2.5 billion well before the end of the year. At the same time, we have enacted a policy of gradual fiscal adjustment to bring our budget deficit below the three percent ceiling imposed on euro zone members. This year the deficit will fall from 6.6 percent to 3.6 percent of GDP, in line with our commitments to the European Union. In 2006, we expect the deficit to fall below the three percent ceiling, to 2.8 percent of GDP. We have also introduced reforms to make the banking sector more efficient and competitive. We have pushed forward with long-awaited reforms in the labor market and have substantially reorganized the public sector to fight red tape.

It must be remembered that Greece has emerged from an era of heavy government regulation, in which the state was practically omnipresent. This made our task much more difficult. Careful maneuvering was required to ensure maximum possible consensus. Currently, however, the Greek people are in favor of our reform agenda and have realized that increased state intervention would not necessarily lead to optimal economic performance. They have realized that well-targeted reforms are essential to catch up with the productivity and income levels of the more prosperous areas of the European Union.

The Greek economy is responding satisfactorily to our reforms. Despite high energy prices and slow overall growth in the euro zone, the Greek economy is expected to grow by 3.6 percent in 2005, one of the zone’s highest rates. The economy is profiting from strong private consumption, a 7.3 percent increase in exports in the first half of 2005 compared with the same period in 2004 and a double-digit increase in foreign visitors. Unemployment has fallen by more than one percentage point to 9.6 percent, despite the end of all the activity surrounding the Olympic Games, which many economists feared would cause a considerable slowdown.

Greece is also playing an important role in incorporating the surrounding region into the world economy. With the exception of Turkey, Greece’s Balkan neighbors (Albania, the states of Former Yugoslavia, Bulgaria and Romania) have been coming out of a long period of central planning. Their living standards were astonishingly low in the early 1990s. There was practically no infrastructure, and no market mechanisms were in place to sustain an economic recovery. Their social structures were completely outdated. There was no entrepreneurial class, except for those involved in the black economy. In the early 1990s, very few people believed that these countries would manage to recover in just a decade – many, in fact, expected the outbreak of a major humanitarian crisis.

Nevertheless, partly thanks to help from the European Union and Greece, these countries are now staging a recovery. They are enjoying high rates of growth, massive inflows of foreign direct investment and improving social conditions. They are gradually getting used to the requirements of an open economy. The European Union has helped finance major infrastructure projects that aim to make the Balkan economies part of the wider international economy.

Among the measures that Greece has taken to help these countries are the following:

• In less than ten years, Greek direct investment in Southeast Europe has exceeded $10 billion.

• Greece is the leading foreign investor in Albania, Bulgaria and FYROM1 and ranks among the top three foreign investors in Romania.

• The operations of Greek banks in the region are expanding at double-digit rates of growth every year, helping businesses to expand their activities.

• Greece has received more than two million immigrants from Balkan countries, relieving pressures during the transition from a centrally planned to a market economy.

• The Greek government is committed to speeding up the implementation of the Hellenic Plan for the Reconstruction of the Balkans and looks forward to a completely new economic environment in the Balkan economies in the years to come. Greece is not only the gateway for foreign investors to Southeast Europe, but also the gateway for Southeast Europe to the international capital markets. We help our neighbors gain access to international organizations and we fully support their efforts to join the European Union in the future.

At the same time, we commend our neighbors’ efforts to open their economies further to the rest of the world and to introduce rapid reforms. Although it is too soon to talk about the Balkan economies joining the euro, I believe this could be feasible sometime in the next decade.

I am convinced that the wider region will enjoy an even more impressive economic performance in the future, and that it could well become one of the most attractive places for business in the years ahead.

George Alogoskoufis is the Minister of Economy and Finance of Greece. He is a Member of the Hellenic Parliament for the governing New Democracy Party, and was first elected in 1996. He was Opposition Spokesperson on Economics from 1997 to 2004. He served as Chairman of the Council of Economic Advisors at the Ministry of National Economy in 1992, and was responsible for drafting the First Convergence Program for the Greek Economy. He has been an advisor to the World Bank and the European Commission, as well as to other international economic organizations.


This article was published in European Affairs: Volume number 6, Issue number 4 in the Fall of 2005.