A great lurch forward
Oct 10th 2002
From The Economist print edition
Squeezing into the euro has done wonders for the economy
ALL of a sudden, the naughtiest pupil in the class is getting top marks. It wasn't that long ago, in 1990, when Jacques Delors, the then president of the European Commission, scolded Greece for mismanaging its economy and questioned its future in Europe. But now that economy is growing by more than twice the EU average, at a forecast 3.8% in 2002.
This partly reflects a virtuous circle created by Greece qualifying to join the euro zone; interest rates have tumbled, and there is no longer any risk of devaluation or a sudden change in economic policy, which used to make business planning next to impossible. Cheaper credit has tempted more people to take out loans for houses or simply for buying things. Consumer spending this year is running at nearly 10% above last year's levels. Personal debt is still low by European standards, so no one is worrying—yet.
Less encouragingly, inflation is also well above the European average, at 3.5% in the year to end-August, though far below the double-digit figures of a decade ago. There is plenty of anecdotal evidence that the cost of small items has risen even faster since the beginning of this year because of rounding up of euro prices. In September, Greece's main consumer organisation proclaimed a shopping boycott to shame retailers who had used the euro to introduce sneaky price rises.
Unemployment has also remained stubbornly high, at 9.6% for the population as a whole and over 20% for those under 24. On the face of it, the combination of rapid immigration and a high jobless rate should lead to social tensions. But many newcomers to Greece do the kind of work at which locals turn up their noses, such as farm labouring or domestic service, so there is little competition for jobs between natives and migrants. A household in the provinces may have an unemployed 25-year-old son at home who is looking for a nice job in the public sector, and at the same time employ an Albanian or Bulgarian who does the hard physical labour on the family farm.
One reason for the high jobless rate may be the collapse of public-sector patronage as a means of gaining favour with voters. With the utilities under pressure to balance their books, and ministries subjected to more fiscal discipline, politicians have less chance to dole out jobs to their friends. The earlier experience of Spain suggests that after a time of high growth and high unemployment, as some sectors modernise and others decline, the jobless rate will eventually fall; but until that happens, job-seekers with the wrong qualifications may have a tough time.
The trouble is that the main engines of Greece's rapid growth are temporary. One is the EU structural aid that continues to cascade into the country, enriching the politically influential construction industry. This source of cash will tail off significantly after 2006, when the current funding programme runs out and the Union will have new members to worry about. The other, related, one is the vast amount of private and public money that is being spent on preparing Greece for the Olympic Games in just under two years' time.
Under the so-called Third Community Support Framework, a piece of Euro-jargon that trips easily off the tongue of many a Greek taverna-owner or village mayor these days, no less than euro27 billion, from a mixture of EU, Greek government and private sources, will be spent between now and 2006 on projects ranging from air-traffic control to motorways.
Although the management of these European funds has become more efficient since Greece's early days as a member of the European Community, there have been a number of embarrassing spats between the government in Athens and the European Commission. In one incident, funding that was supposed to assist the creation of a land registry had to be paid back because it was not properly used. The registry—a difficult project in a country where every stony field is the subject of a family argument or a tussle with the state—is at last being established, albeit more slowly than the bureaucrats in Brussels would like.
Until recently, Greek governments had a poor record for carrying out public works, which were often discussed for decades on end until the money mysteriously vanished. But in part because the Olympic Games are concentrating minds, it seems likely that the current building programme will have concrete results.
The old behemoths of the Greek public sector, long bedevilled by overmanning, political interference and poor administration, are getting a bit leaner and meaner, often through an injection of private capital. The state telecoms operator, OTE, used to be plagued by strikes and provided notoriously poor services. But at least until recently, OTE and its mobile-telephony offshoot, CosmOTE, have been among the best-performing telecom stocks on European bourses. The group has expanded its empire across the ex-communist states of the region, although with mixed financial results, and created opportunities for Intracom, the Greek electronics and digital-equipment group which is OTE's main supplier. Only a third of OTE remains in state hands, and some of its bolshiest union leaders have turned into sleek corporate executives.
But labour relations in Greece are still far from perfect. Last summer, strains in the socialist cabinet began to show as the interior ministry offered the civil servants' union a wage deal that was promptly over-ruled by the economy ministry. A strike by seamen, which could have disrupted the tourist season, was averted by a civil mobilisation order. Trade unionists were furious, but did not stage any big protests.
The best parts of Greek industry are of world class; the trouble is that they account for only a smallish sliver of national income. There are now Greek companies that control cement factories in Florida, bakeries in Russia and mines in China. The opening of passenger shipping to European competition will put some Greek owners on the spot, but the best of them have already looked ahead and are now ferrying travellers across the North Sea.
At the other extreme, the back streets of Athens and Salonika are home to thousands of small businesses that will be hard pressed to survive the full brunt of European competition. Some of them, indeed, live on the corruption and chaos of Greece's bureaucracy, and their disappearance would be a positive gain. The financial police say there are hundreds of businesses whose sole activity is to practise or abet some form of tax fraud. Some do nothing but issue and sell false invoices for imaginary services, which companies can use to keep down their paper profits; others make fraudulent demands for the reimbursement of value added tax.
Despite the continuing problems of bureaucracy and a dysfunctional legal system, “This is, comparatively speaking, a great time for Greece,” says Dimitri Papalexopoulos, managing director of the Titan cement company. Firms like Titan, whose manufacturing empire stretches from the eastern United States to Egypt, still face huge hurdles as they struggle to satisfy inspectors and obtain quarrying permits, but at least they can count on a more business-friendly political climate and stable interest and exchange rates.
That stability also benefits tourism, which accounts for 15% of GDP. Unhelpfully, the industry is concentrated in certain regions, such as the islands of Rhodes, Corfu, Mykonos and Crete and the northern Halkidiki region. The economy in large parts of the Peloponnese, Epirus and Western Macedonia is still stagnating, even though these regions have huge potential to attract visitors who prefer scenery and wildlife to pools and discotheques.
Greek hoteliers can point to a long-term rise in the number and spending power of foreign visitors which might continue for a few more years. However, the management of the country's priceless tourist assets has been haphazard. There is a small number of luxury hotels, of which only a few have real character; at the other end of the scale, every connoisseur of Greece knows remote hideaways where visitors can live simply and blissfully. In-between there are thousands of dullish establishments whose owners seem to care more about catering to the mass market than about aesthetics or cuisine. Now that the euro has made comparisons easier, north Europeans will become more picky as they assess the value for money offered by Greece's traditional resorts. But if Greek hoteliers can diversify away from the standard beach offering into eco-tourism, bird-watching, hill-walking and so on, there is plenty of room for expansion.
Tourism is one of many sectors of the Greek economy where foreign investment has always been low, partly because of economic instability and partly because of bureaucratic obstacles. “By entering the euro, we have dealt decisively with the first factor and now we are working to get rid of the second,” says Nikos Christodoulakis, the economy minister, a British-trained academic and a pragmatic number-cruncher.
Among the problems Greece has yet to tackle are an urgent need to update company law; an excessively burdensome and complex tax code; and an arcane and badly functioning pension system, combined with a rapidly ageing population, which could bankrupt the state in the decades to come unless something is done.
In September Mr Simitis announced tax breaks for individuals and families worth euro1.4 billion, and simpler company taxes and book-keeping obligations. A move in the right direction, said Ulysses Kyriacopoulos, head of the industrialists' association; the opposition, predictably, called for bolder measures, including a cut in the corporate tax rate.
As for the pension problem, the government earlier this year made some tentative moves to reorganise the system, but had to retreat from radical reform under heavy pressure from unions and other lobbies. It will take huge political courage—or the threat of more wrath from Brussels—for a Greek government to grasp this nettle.