‘Striking progress’ gives Greece a seat at the table

Date: 01/06/2000

By Tim Jones

GREECE'S entry to the euro zone seven months from now will be both an extraordinary turnaround in the fortunes of the EU's economic laggard and an object lesson for east European applicants.

After all, it was only ten years ago that the Greek economy was not growing at all while, at the same time, inflation topped 20% and interest rates 23%, the budget deficit was eating up 16% of gross domestic product and the government was forced to plead for a Union loan to pay for imports. This cocktail inflated public debt from 50% of GDP in 1985 to 111% just a decade later.

By the time the European Commission gave its blessing to Greek euro-zone membership on 3 May, the story could hardly have been more different. The deficit last year was 1.9% of GDP and falling, inflation was 2.1% and interest rates 9%. The EU executive consequently reversed its spring 1998 decision to exclude one of the founts of European civilisation from its new currency area.

Greek legislation is compatible with the Maastricht Treaty's strictures on central bank independence and - belatedly - on prohibitions against allowing the state "privileged access" to private finance. New draft laws passing by parliament will remove the last glitches.

"During the last two years Greece has achieved striking progress towards convergence," said the Commission's report. Economics chief Pedro Solbes has even spelled out the rate at which he expects the little-mourned drachma to be folded into the zone: 340.75 per euro.

Everything sounds perfect until you open the German newspapers. The first 'hellasceptic' to be wheeled out is the trusty Klaus-Dieter Kühbacher, the Bundesbank councilman who can always be relied upon to provide a usable quote. Lamenting the euro's weakness, Kühbacher questioned the wisdom of announcing Greece's membership at this time, arguing that letting in 'unreliable' Greeks could only undermine international investors' faith in the euro.

Hans-Olaf Henkel, president of the Federation of German Industry (BDI), went further. In the current climate, he said, Greek entry would be a "devastating signal" to the markets.

The European Central Bank, which can only give an opinion on membership, praised the "substantial progress" made by Greece towards improving its fiscal situation but signalled its "ongoing concern as to whether the ratio of government debt to GDP will be sufficiently diminishing and approaching the reference value at a satisfactory pace and whether sustainability of the fiscal position has been achieved".

The ratio of Greek public debt to GDP was 104.4% last year, a substantial reduction from a high of 111.3% in 1996, and is expected to dip below 100% next year. Not only does this easily out-class anything achieved by the Belgians and the Italians but, in absolute terms, any default on the €150-billion-plus of public debt would have a pinprick impact on the euro zone's giant €6-trillion economy.

The ECB, which seems to be the only agency in the world that still reads the Maastricht Treaty like 'bible-belters' read Genesis, warned that the Greek government will have to produce huge budget surpluses over the coming years if it is to get its debt-to-GDP ratio down to 60% "within an appropriate period of time".

The impact of early membership on Greece itself is another matter. Athens has seven months to get interest rates down at least four percentage points. That will not come free of charge, as the Irish - inflating at more than 5% so far this year - can testify.

Despite the mass of evidence showing that the Greeks are as ready as they will ever be, sceptical market analysts were quick to conclude that this premature entry was a signal that ill-prepared eastern Europeans would soon follow.

While they should not hold their breath, Greece's success will show applicants that there is no bias against late-coming southern Europeans - a message Solbes was keen to sell to eastern European ministers at the annual meeting of the European Bank for Reconstruction and Development in Riga last week.

ECB President Wim Duisenberg has, however, laid down his marker, telling a press conference last month that "we are talking about a process which, to my mind, will take at least a decade to be fully completed".

Greece's entry to the euro zone in 2001 will be both an extraordinary turnaround in the fortunes of the EU's economic laggard and an object lesson for east European applicants.