CURRENT ECONOMIC ISSUES THAT GREECE STRUGGLES

What are the Current Economic Issues That Greece Struggles?



What are the Current Economic Issues That Greece Struggles?

Over the past decade, expansionary fiscal policies and inappropriate government interventions in markets have generated mounting macroeconomic imbalances and microeconomic distortions, impeding the resumption of sustained non-inflationary growth. Not only was the growth of GNP extremely slow in the 1980s by international standards and compared with previous long-term trends, but it was also accompanied by sizeable foreign borrowing, with the result that Greece is not burdened with heavy external debt. In the last couple of years there was a growing recognition that the unsatisfactory configuration of slow growth, high inflation and large balance-of-payments deficits was no longer sustainable and that a change in policy course was urgently needed. Moreover, whereas in the past foreign credits were relieving the external constraint, in the last year foreign creditors appeared to be hesitant to continue to finance large external deficits stemming from the Greek economy's strong consumption bias, especially in the public sector.

The situation was critical when the new government was formed in April 1990. The PSBR at 22 per cent of GDP and inflation that was running at 23 per cent were seemingly out of control, undermining confidence and exacerbating balance-of-payments tensions. The new government took certain measures of fiscal and monetary restraint to begin with, but as the size of the imbalances started to become evident, macroeconomic policies became increasingly restrictive during 1990. In addition, the new government has embarked on a wide-ranging programme of market-oriented structural reforms, which together with the macroeconomic targets and policies were embodied in the Medium-term Adjustment Programme, 1991-1993, presented in February 1991.

The principal objective of the Adjustment Programme, on which the realisation of the other targets depends, in the reduction of the PSBR (cash basis) from 19.5 per cent of GDP in 1990 to 3 per cent in 1993. Parallel to this is the fall of inflation from 23 per cent at the end of 1990 to 7 per cent at the end of 1993, accompanied by a swing from a large deficit to a small basic balance of payments surplus before the end of the period. These very ambitious targets also reflect the government's concern that, unless inflation and the PSBR converge to EC levels before the mid-1990s, Greece would not be in a position to participate in the next phase of the economic and monetary union of the EC. To achieve these targets the authorities intend, apart from fiscal consolidation, to maintain tight credit conditions, and these combined with the positive effects of supply-side reforms are expected to reduce the economy's inflation proneness while boosting profitability, a prerequisite for sustainable growth.

The OECD short-term projections point to a market improvement in underlying conditions helped by growing business confidence and a better social climate following the recent conclusion of a two-year wage pact entailing a sharp de-escalation in wage growth. However, given delays in curbing tax avoidance and fraud and in privatisation, the official ...