Greece and the euro. Reality check

The post-Olympic glow fades amid a new budget squabble

IT WAS a sad end to Greece's sporting summer. Seven children were killed when a bus taking them to watch the Paralympics in Athens overturned after a collision with a lorry. The closing ceremony for the world's biggest sporting event for disabled competitors was blighted: traffic accidents caused many Paralympic athletes' disabilities. It was the more poignant given the success of the Olympics in August.

Greece's credibility as a modern state, capable of organising a world-class event, soared after the Olympics. Costas Karamanlis, the prime minister whose centre-right New Democracy party defeated the Socialists in March's election, basked in the afterglow. All too briefly. This week's crash, similar to one two years ago, underlined how far Greece lags the rest of Europe. The north-south highway, where both accidents took place, has been improved thanks to EU money, but it is not up to European standards. Checks for roadworthiness are rare in Greece's trucking industry, which is dominated by one-man, one-vehicle businesses.

The government's budget numbers are causing even more embarrassment. A final bill for the Olympics - budgeted at €4.6 billion ($5.6 billion) but now thought to have cost over €7.5 billion - is still being totted up. But it is clear that the budget deficit for 2004 will reach about 5.3% of GDP, well above the supposed 3% ceiling for euro members. George Alogoskoufis, the finance minister, says the deficit can be cut next year to 2.8%. But he will have a hard time convincing anybody that Greece can get below the ceiling in just one year.

That is partly because Mr Alogoskoufis has already shot Greece's fiscal credibility to pieces, by reviewing the budget-deficit numbers for the previous three years. His aim, he says, was to straighten out the public finances and improve transparency. Yet the extent of his upward revisions, which pushed the deficits from below 2% to over 4% of GDP, well above the 3% ceiling, has caused consternation. It has also led rating agencies to put Greece on warning for a possible credit downgrade.

Joaqun Almunia, the EU monetary commissioner, has ordered an investigation into Greece's 1998 and 1999 figures, which were used as the benchmark for its euro entry in 2001. There is some talk in Brussels of suspending EU grants to Greece. But Yannos Papantoniou, the Socialist finance minister who oversaw the country's preparations to join the single currency, is outraged. He says Mr Alogoskoufis has breached the EU's own guidelines so as to make the Socialists look bad and to help the New Democracy government to keep below 3%.

At issue are defence outlays that account for most of the increase in the deficit in Mr Alogoskoufis's review. The Socialists splurged on a $10 billion modernisation of the armed forces at the end of the 1990s, but there was no sign of this in the national accounts. Mr Papantoniou says the government acted under guidelines from Eurostat, the EU's statistical arm, allowing the amortisation of military purchases after equipment has been delivered and certified as being in working order. The equipment payments were to appear in the budget between 2005 and 2007 - until Mr Alogoskoufis decided differently.

This Greek quarrel has ramifications for would-be euro members from central Europe, most of which have deficits far above 3%. Already the gutting of the sanctions under the euro-area's stability and growth pact had given them cheer. Now they have seen yet another instance of a country apparently fudging its numbers to qualify - after such big countries as France and Italy resorted to one-off measures to the same end. Do not be surprised if central European countries, like some exemplars in western Europe, miraculously start to report deficits of 2.9% of GDP just when they are seeking to join.

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