|
Partly due to Greek membership of
the euro, for the first time in the last thirty
years the country has enjoyed a very low cost of
borrowing and financial stability. It was not long
ago that interest rates for the business sector
were above 20 percent - now they are about one quarter
of what they used to be ten years ago, and half
of the level of five or six years ago. Low interest
rates and the very low cost of capital is a huge
advantage for the Greek economy and, in general,
throughout the European Union. In conjunction with
higher inflation in Greece, real interest rates
are much lower than they have ever been. This economic
background combined with significant progress on
the fiscal front has been accompanied by a surge
in business confidence, and many entrepreneurs have
begun heavy investments in the domestic economy.
Industry, construction, hotels, shipping and other
service industries were the main growth axes up
until 2004, coinciding with another important factor
- the investment in order to prepare for the Olympic
Games, making for an average GDP growth rate of
3.7 percent over seven years.
European Structural Funds have continued
to support the Greek economy, but net contributions
from the EU have decreased from over five percent
of GDP to less than three percent in the space of
the last five or six years. As the EU expands eastward,
incorporating newer, poorer members, Greece will
continue to receive structural funds for agriculture,
social and regional development amongst others,
but it has to address the fact that this will be
on a declining trend as a percentage of GDP.
Sustaining
growth
Pre-Olympic investment in conjunction
with rising defense spending has placed extreme
pressure on Government finances. The situation deteriorated
with the sudden upward revision in the budget deficit.
More rigorous calculations and changes in methodology
have revealed that the deficit is running at over
three percent of GDP, outside the range set by the
European Stability and Growth Pact. Greece, having
the highest debt to GDP ratio in the EU, recently
held talks that have resulted in an agreement to
pursue drastic deficit reduction policies, although
leniency in their implementation seems to have been
preferred so as not to derail the economy.
Bureaucracy in Greece is one of the
biggest impediments to the creation of jobs and
wealth. Licenses and certificates are required in
so many areas that they hamper investment and efficiency.
One of the main priorities of the Government is
to simplify bureaucracy.
There is dynamism from the private sector in all
areas of business, and with the Government fulfilling
its fiscal and the Lisbon agenda obligations towards
the European Union, we can be confident the economy
will continue to improve in the longer-term.
Financial services play an important
role in the economy. Heavy investment by Greek banks
in the Balkan countries has been helped by the fact
that many people in Greece have extensive knowledge
of the languages and cultures involved, often due
to family connections. Financial services, insurance,
retail and distribution are some of the areas that
Greece has invested most heavily in the Balkans,
and many Greek banks are in market leading positions.
This investment should help benefit the whole region
over the long term.
Promoting the exports of services
and linking it to direct foreign investment will
far outweigh any loss arising from an increasing
trade deficit. Many Greek businessmen have taken
advantage of the fact that wages in Balkan countries
are far lower than the EU (and Greek) average. They
often relocate labor-intensive production plants
within 50-100 km inside the frontier of Bulgaria
and other Balkan countries.
Government
targets to reduce public deficit to 2.8 percent
At least 0.8 percent of GDP can be
easily deducted from the budget deficit within the
coming year. Parallel to this spending on Olympic
infrastructure will stop, meaning an automatic saving
of probably over one percent of GDP. Furthermore,
falling interest payments will arise from old debt
that is scheduled to mature in 2005-2006, and the
new debt is being raised at almost half the old
interest rates. In the past year, public sector
wage increases ran at almost double that of the
rest of the economy. The Government also intends
to restrict nominal wage growth, so that a deficit
of around 3.5 percent of GDP is feasible. Further
efforts in 2006 could push that figure to well below
three percent. High debt and debt servicing costs
currently account for about six percent of GDP,
and any reduction would free up large amounts of
capital to be invested in the domestic economy.
The aim to achieve a balanced budget over the medium-term
will automatically entail a decrease in the debt
to GDP ratio.
Encouraging
inward investment while trying to reduce the deficit
Foreign investors believe that public
finances will come under control, demonstrated by
the low interest rate spread over the German rates
on ten-year bonds. This shows that investors believe
in the capacity of the Greek economy to overcome
its present difficult fiscal situation, and that
there will be a budget consolidation over the medium-term.
Many companies are looking at Greece to be their
headquarters for the Balkan region. However, greater
efforts are needed to reduce corporate taxation
and bureaucracy to achieve such investment. This
could ensure substantial increase in foreign direct
investment in services, similar to the examples
set by the UK and USA, whose production structure
is increasingly leaning towards the services sector.
Greece has no comparative advantage over its neighboring
countries in terms of industry because of wage structures,
but it does have a huge advantage in terms of services,
especially those requiring qualified human resources.
Fluency rates in English are high, a large proportion
of Greeks have lived abroad, accompanied by good
education levels and high numbers of university
graduates.
All in all, Greece’s recent
record (including a rise of more than 100 percent
in real investment and more than 35 percent in real
personal incomes in ten years), combined with policies
aimed at simplifying bureaucratic procedures, reducing
corporate taxation and pursuing fiscal consolidation,
augur well for the economic development of Greece
over the medium to longer term.
Furthermore, Greece is the gateway
for the Balkans and given the extensive presence
of Greek companies in these countries (more than
5,000) it is expected to benefit from the rapidly
improving economies of its neighbors, which, as
the central and eastern European economies, are
projected to grow much faster than the
|
Greece 
