22 September, 2005
Thursday September 22, 2005
THE GREEK MINISTER OF ECONOMY AND FINANCE
Professor GEORGE ALOGOSKOUFIS
CONFERENCE HELD BY THE
EUROPEAN INSTITUTE COSMOS CLUB
IN WASHINGTON, D.C.
“Challenges and Opportunities in the Eurozone and Development Efforts in Southeast Europe: The Greek Experience”
Good evening Ladies and Gentlemen,
Let me say that it is with particular pleasure that I address such a distinguished audience. Let me also congratulate and thank the organizers for their initiative.
As you know, Greece enjoys Eurozone membership since the year 2000. Greece, also enjoys a strategic geopolitical position being located in Southeast Europe, an emerging region with more than one hundred million people. Today, I shall elaborate on the challenges and the opportunities in the Eurozone and on Greece’s experience from joining the Euro. I shall then talk about the economic prospects of Southeast European countries and about the role of Greece in their development.
Ladies and Gentlemen, Dear friends,
The Euro is almost four years old. We now have sufficient input in order to draw some conclusions and answer some more specific questions regarding its impact on the economies of Europe. Has it helped them? Has it led to greater economic efficiency? What are the shortcomings and the advantages of a common monetary regime given the pronounced heterogeneity of the Eurozone’s economies? What are its implications on policy making and how much room for maneuvers does it leave to individual governments? Is there any room for improvement? Can a common monetary policy become more responsive to the needs of individual Member States? And, finally, what’s the impact of exogenous shocks, such as the recent spike in oil prices on EMU Member States?
First of all, let me say that I believe the Euro has indeed helped promote a more efficient economic environment. The citizens and the firms of the twelve participating countries have experienced a considerable decrease in the costs usually associated with multiple currencies. Moreover, cross-border trade and transactions have been facilitated further and they have received a considerable boost since the introduction of the euro. [The euro might have added to the Eurozone’s annual growth rate as much as half a percentage point by encouraging domestic demand (consumption and investment), by facilitating trade and by creating efficiencies and economies of scale]. Most Member States have experienced a considerable easing in the servicing of their debt, leaving room for the allocation of scarce public resources to infrastructure projects and the implementation of more extensive social policies.
I therefore argue that the Euro has indeed led to increased economic efficiency and has led to the proliferation of more sound economic policies across the EMU – and in fact, across the European continent. The implementation of the Stability and Growth Pact has substantially helped achieve long needed fiscal discipline, which is necessary to build long-term market confidence.
Despite the efficiencies it has helped us realize, however, price increases in many countries have led many people shape the belief that, since its introduction, the Euro has led to inflationary pressures that would not have evolved under the previous monetary regime. As a consequence, according to this line of thought, the euro has led to a deterioration of the competitiveness of –some at least of- the countries that adopted it. Moreover, the sub-par rate of growth for many Eurozone economies has sparked some discussion on whether the ECB should adopt a more pro-growth –a more accommodative- stance.
Many colleagues of mine in the Eurogroup would like the ECB, which is responsible for the formulation of monetary policy, to be “more responsive” to the economic cycle. This is indeed a point of tension, because the lack of an independent monetary policy leaves only two other alternatives to local governments: fiddling with fiscal policy and promoting structural reforms. And of the last two options, fiscal policy is not a real one, given the limitations of the Stability and Growth Pact. It thus becomes clear why many governments ask for a more aggressive monetary policy: implementing reforms carries a considerable political cost and people do not usually welcome changes that could alter their lifestyles even for a short period of time.
But can the ECB afford to give in to political pressures and adopt a more accommodative stance? Not really. The ECB cannot compensate for the lack of will to promote the necessary reforms. Moreover, the impacts of a common monetary policy are not as common as people commonly believe. On the one hand, low interest rates in countries that experience high rates of growth (such as Ireland or Greece) could trigger inflationary pressures – and could spark higher asset inflation in particular. And on the other hand, low interest rates might well be not low enough to give a boost to ailing economies. Consequently, the ECB cannot address the particular needs of every country, but it rather has to check the performance of its policies against some aggregate macroeconomic data.
Additionally, there are some clearly identifiable factors responsible for the fact that a common monetary policy does always not work the same for everybody. The most important of them is the difference in productivity levels between EMU members. Differences in productivity originate from different internal economic structures, such as the contribution of the public sector in GDP formation or the existing regulatory framework and market structures. Thus, what is more important –and what in fact I believe could help improve substantially economic conditions in the Eurozone- is the implementation of reforms that will eventually lead to higher levels of productivity and to the gradual adoption of more uniform fiscal policies. Such homogeneity could ultimately shield EMU economies from exogenous shocks –like high energy prices- that could otherwise destabilize economic activity and lead some Member States to insufficient economic performance.
So, the main challenge for the Eurozone’s governments is to materialize the reforms necessary to improve the competitiveness of their countries. In this sense, the single currency will work much better and provide our economies with many more opportunities in the future.
Ladies and gentlemen,
As a conclusion to the first part of my speech, let me say this: EMU Member States have greatly benefited from the common currency, but, alas, they are confronted with challenges that require immediate political action and leadership. Political action and leadership that will secure a more pro-growth and investment-friendly environment. In that respect, the implementation of the National Reform Programs in order to meet the objectives of the Lisbon Strategy, as required by the E.U. Spring Council in March, will help create a more flexible, more responsive, more competitive economic environment in the Eurozone. This is the main challenge we face in order to create a more integrated internal market. This, in turn, will allow us to take advantage of the opportunities ahead, in order to achieve a sustainable rate of growth, higher employment levels and enhanced social cohesion.
Let me now describe the experience of Greece from EMU membership. The monetary stability and the low interest rates associated with the Euro have given a boost to private consumption and private investment, as well as they have facilitated the servicing of the public debt. However, the fact that the previous administration lacked the will to push a reform agenda and rationalize public spending, has led to disproportionate budget deficits and to a deterioration of the competitiveness of the Greek economy, thereby reducing the possible benefits from the euro. This government has a clear objective: to contain budget deficits, to make the economy more competitive and to materialize long needed reforms.
Time was of essence and we did not waste it. From the very beginning, eighteen months ago, we introduced multiple reforms in every field of the economy. We reformed the tax regime. We reduced corporate tax rates. We made tax procedures simpler and more straightforward. We introduced a new Investment Incentives Law, in order to boost regional convergence and encourage investment aimed at exploiting Greece’s comparative advantages. We introduced a Law for Public-Private Partnerships, so that we can build the necessary infrastructure at a lower cost, faster and more efficiently. Our privatizations agenda, albeit ambitious is already ahead of plan. We estimated revenues from privatizations to reach 1% of GDP in 2005 (that is 1.9 billion dollars), and we have already made 2.5 billion dollars.
At the same time, we enacted a policy of gradual fiscal adjustment in order to reduce deficits below the 3 per cent ceiling imposed on Eurozone members. This year our deficit will fall from over 6.0 per cent of GDP to 3.6 per cent of GDP, in line with our commitments to the European Union. In 2006, we expect the deficit to fall below the 3 per cent ceiling.
Moreover, we have introduced reforms in the banking sector, so as to make it more efficient and stimulate competition. We pushed long-awaited reforms in the labor market. And, we have reorganized to a great extent the public sector in order to cut red tape.
We must also bear in mind that Greece has emerged from an era of heavy state regulation. The State was practically omnipresent, and this made our task much more difficult. Careful maneuvering was required in order to ensure maximum possible consensus. Currently, the Greek people are in favor of our reform agenda. They have realized the benefits and they have recognized that for the economy to catch up to the productivity and income levels of the E.U., well targeted reforms are essential.
The Greek economy has responded in a very satisfactory manner to our reform initiatives. Despite high energy prices, the rate of growth will remain one of the highest in the Eurozone. Our economy is expected to expand by 3.6 per cent this year. Solid private consumption, higher exports by 7.3% as compared to the first two quarters of 2004 and a 13% increase in foreign visitors are driving the economy. The unemployment rate has fallen by 1 percentage point to 10.4%, despite the end of the preparation for the Olympic Games that would cause, according to many economists, a considerable economic slowdown.
We have shaped a new economic model, based on the encouragement of entrepreneurship, on international orientation and on competitiveness. We are creating the necessary stability in which to build a favourable business environment. We are fostering a climate of confidence and trust.
Ladies and gentlemen,
At this point, allow me to discuss about the development efforts in Southeast Europe and the role Greece is playing in them.
With the exception of Turkey, our Balkan neighbours (Albania, the States of Former Yugoslavia, Bulgaria and Romania) came out of a long period of central planning. Their living standards were astonishingly low in the early ‘90s. There was practically no infrastructure and no market mechanisms in place in order to sustain an economic recovery. Their social structures were completely outdated. There was no entrepreneurial class, except from the one catering to the needs of the shadow economy.
Back in the early ‘90s, very few people believed that these countries would manage to recover and many, in fact, expected a major humanitarian crisis. However, and partly thanks to the assistance from the European Union and Greece, these countries are now staging a recovery. They enjoy high rates of growth, a massive influx of FDI, improving social conditions and they are gradually getting accustomed to the requirements of an open economy.
Greece has played an important role in the incorporation of our neighbours to the world economy. Greece is playing an increasingly important role in their development. Let me give you some fundamentals:
1) Greek Foreign Direct Investment contributes to the development and the stabilization of the Balkan economies. In less than ten years, Greek direct investment in Southeast Europe has exceeded 10 billion dollars.
2) Greece is the leading foreign investor in Albania, Bulgaria and FYROM and ranks among the first three leading foreign investors in Romania.
3) Greek banks are performing extremely well in the greater region and their operations are expanding at double-digit rates of growth every year, thereby helping businesses operating in the region.
4) Greece has received more than two million immigrants from Balkan countries, thereby relieving the internal pressures they were facing during the transition period from a centrally planned to a market economy.
5) Our government is committed to speed up the implementation of the Hellenic Plan for the Reconstruction of the Balkans. We look forward to a completely new landscape for the Balkan economies in the years to come.
Greece’s role is also of great importance in the efforts currently underway to develop Southeast Europe. At the same time, our neighbours have realized that they have to open further their economies to the rest of the world. They are introducing reforms at an accelerated pace and I am convinced that the wider region will enjoy an even more impressive economic performance in the future. Even though it is too soon to talk about the Balkan economies joining the Euro, I believe that this could become feasible sometime in the next decade.
Ladies and gentlemen,
Greece is moving fast on a path of changing in order to become a more attractive place for business and private investment, in order to make the most of its EMU membership and of its strategic geopolitical position. Let me at this point summarize some important fundamentals, which constitute the main advantages, the strengths and the opportunities, of the Greek economy:
1) Greece offers a stable political and financial environment.
2) Greece is one of the most attractive tourist locations on earth and offers an ideal climate along with a rich cultural heritage (the ratio is 1.3 tourists per inhabitant, one of the highest on earth).
3) The success of the Olympic Games has shown the capabilities of the Greek people and what they can achieve.
4) The investment environment in Greece has drastically improved over the course of one and a half year and it is bound to improve further.
5) Greece is the only country that is both an E.U. and EMU member in a wider region destined to achieve more growth. Greece enjoys the stability of the euro and is thus the only economy in the region that can provide foreign investors with the monetary stability they desire.
6) Greece enjoys one of the highest rates of growth in the European Union. A high rate of growth expected to last for several more years and which will provide the platform for a growing domestic market.
7) Greece enjoys the most advanced infrastructure and the most sophisticated and well-trained workforce in the region of Southeast Europe.
8) The Greek commercial fleet is one of the largest in the world, and it contributed last year more than 15 billion dollars to the Greek economy.
Ladies and gentlemen,
I wish to thank you for letting me share my thoughts with you this evening and I will be glad to answer your questions.
Source: Press Office of the Embassy of Greece