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Country review: Greece

Date 18/06/2001

The success story of the Greek economy is continuing, and entering a new, more mature phase. Much of this success is attributable to immense benefits arising from membership of the EU and this relationship, too, is changing.

Entry into the euro-zone in January 2001 was a landmark, and the process of meeting the Maastricht convergence criteria has put Greece's public finances and economic indicators on a sound footing. Between 1994 and 1999 the budget deficit fell from 13.8%/GDP to 1.6%/GDP, for example, and is now heading towards surplus. Inflation was strangled, the tax base widened and government debt fell.

But the euro carries with it risks, not least that the European Central Bank (ECB) faces difficulties in setting interest rates to take account of diverse economic conditions. Greece, like Ireland and Spain, is enjoying strong growth (the OECD Economic Outlook for 2001 forecasts growth of 4.3%, and 4.2% in 2002) but this of course carries inflation risks. For now the ECB seems to be following a middle path, but Greece will be hoping that the major economies of the EU, especially Germany, do not succumb to a slowdown, and impose interest rates unfavourable to Greece. Conversely, Greece will have to exercise its own fiscal discipline to prevent such a situation occurring.

Another source of controversy with the EU is the subject of aid. Greece receives the second-largest EU aid contribution after Spain, most of which is targeted at less developed rural areas. But the accession of new members from Central and Eastern Europe will impose new stresses on the EU budgets - large amounts of aid will need to be disbursed to countries possessing regions far less developed than Greece, yet the EU's budget will not be significantly bolstered by the new members. Clearly Greece will see a substantial fall in its EU aid, and this will probably be announced in 2003, to take effect from 2006.

This, however, fails to take into account new opportunities that EU enlargement offers to Greece, especially in the Balkans, opportunities that should outweigh loss of subsidy. Ten years of war and the malign influence of Slobodan Milosevic have kept legitimate Balkan trade to a minimum. But although serious problems remain, especially in Macedonia, the new regime in Yugoslavia is giving hope for Balkan economic regeneration and moves towards EU accession. Greece is well-placed to benefit from this - the fraternal links between Greece and the various Yugoslav peoples can be seen, for example, in Belgrade, where thousands of Greek students study, and in Greece's foreign policy.

Despite difficult conditions, in the last ten years Greek companies have invested an estimated USD4bn in Balkan countries. The leaders in this have been the National Bank of Greece (NBG) and the semi-state telecoms utility OTE, which has large stakes in mobile phone systems in Serbia, Romania, Albania and Bulgaria. NBG owns the largest bank in Macedonia and a Bulgarian bank. Other sectors in which Greeks companies have invested include tourism, food processing, tobacco, and cement.

This figure should start to rise dramatically as prosperity and stability return to the region, especially with attractive privatisations slated in several countries.

Already the Athens Stock Exchange (ASE) is positioning itself to capitalise on a new order in the Balkans. In April 2001 it announced the formation of a new bourse to trade in shares of companies in Albania, Bulgaria, Macedonia and Bulgaria, possibly with more to follow. The market will be named 'Eagek' and will be base in the northern city of Thessaloniki. The domestic markets of some Balkan countries lack liquidity and regulation, making the Eagek market a potentially appealing way of accessing companies for foreign funds. The mechanism to be used in order to allow foreign companies to list will be secondary listing or a global depository receipt (GDR). A minimum equity level of just USD2.6m, and minimal administrative charges, should prove attractive to companies.

The Cyprus Stock Exchange (CSE) is also a likely candidate for closer ties, and possibly a merger, with the ASE as the prospect of Cypriot EU accession approaches.

The ASE itself, in the shape of the holding company Hellenic Exchanges, is one of the best-regarded companies on the exchange. It is the only large state company so far to be less than 51% owned, reflecting the government's acceptance that the bourse must operate in an efficient and competitive way. As well as the Thessaloniki market, it is planning a market for fledgling companies similar to London's Alternative Investments Market (AIM), and to promote better flows of information between the ASE and small investors.

Reflecting Greece's transition to one of the middling prosperous states of the EU is its reclassification from emerging market to developed market in April 2001. The Morgan Stanley Capital International (MSCI) index includes a Greek index from May 31st, which carries market stars such as telecoms and IT companies and banks. This should ensure stronger international involvement in the market, especially from tracking funds, more than compensating for the departure of emerging-market funds.

The index should give the ASE a shot in the arm after lacklustre market figures in 2000 and 2001. There was a substantial dip in 2000, and in the first four months of 2001 it lost 10% of its value. However, another factor ought to help shift savers' money out of banks into the stockmarket in the course of 2001: entry into the euro-zone in January caused interest rates to plummet.

As mentioned above, the OECD predicts 4.3% growth for Greece in 2001, the highest predicted rate in the euro-zone, and making eight years of consecutive growth. However, according to the IMF, if Greece accelerates structural reforms it could expect yet stronger growth. The areas singled out by the IMF were ones where considerable progress has already been made, such as tax, labour reform, and privatisation. It also recommended lowering the external account deficit, currently at 7%, and inflation from its level of 3%. However, given the stunning progress that has already been made during the 1990s, it is realistic to expect improvements in these areas.

Recent developments in pension reform show the government's commitment to reform, even where there is an obvious short-term political price. According to studies the current pay-as-you go pension system will cease to function effectively by 2010 as claims outweigh funds available. As pension reform is a central part of Greece's commitment to the EU stability and growth pact, the government is pressing ahead in the face of union demonstrations. Among other things, the reforms will raise the retirement age to 65 from 55 and will consolidate inefficient pension funds.

The transformation of Greece from one of the less developed EU states to an emerging leader of the post-communist, post-war Balkans shows how far the country has come. Now, assuming that government fiscal discipline combined with a compromise policy from the ECB can avoid the peril of inflation, Greece's impressive growth should continue unhindered, giving a sunny outlook for the economy and for investors.