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Interview of Bank of Greece Governor Yannis Stournaras with Giorgos Fintikakis for

03/05/2024 - Articles & Interviews

Last Wednesday, the Fed extended its wait‑and‑see stance and left key interest rates unchanged, citing a lack of further progress towards its inflation target. What should we expect from the ECB?

In the past few years, the drivers of inflation have been quite different between the US and the euro area.

US growth remains high, primarily due to a huge fiscal stimulus package, which Europe does not have, and secondarily because the US is a net exporter of energy, whereas the EU is a net importer and has been heavily hit by the energy crisis, in particular concerning gas. 

In the case of the euro area, we still have a much weaker economy, barely growing at just over 0%, and although data published by Eurostat on Tuesday were more optimistic, we are still quite different from the US.

Accordingly, in the euro area we will probably start cutting rates in June and, depending on incoming data on the path of inflation, a further cut could follow in July. After the summer, we will see.

Nevertheless, it is true that Eurostat data published earlier this week now make likely three cuts, rather than four, within 2024. I mean especially the euro area growth data.

Recently, Joachim Nagel, the German central banker, suggested that, even if we do see an interest rate cut in June, we should not be expecting a series of aggressive rate cuts, as we are still not done with inflation...

No one has talked about a series of aggressive rate cuts. But once we start reducing rates and inflation continues to evolve in line with our latest projections, we cannot stop until we reach the equilibrium rate.

I believe we will see the cost of money fall significantly, without this meaning a return to the levels prevailing before the war in Ukraine.

Some time ago, you expected we could see up to four interest rate cuts this year. Do you still expect that?

Following Eurostat’s releases earlier this week, we at the Bank of Greece analysed the data on euro area growth and inflation. On the basis of these data, we now consider that the most likely scenario is one of three interest rate cuts in 2024. 

Eurostat’s April inflation figure, at 2.4%, unchanged from March, is consistent with the ECB March projections.

However, growth developments are more encouraging; in fact, the Q1 growth figure surprised on the upside. If we continue at this pace, it is likely that the increase in consumer prices will marginally exceed our March projections, without jeopardising the achievement of the 2% target by mid-2025. 

For years, there has been much talk about the famous convergence of the Greek economy with the euro area. The Bank of Greece’s models suggest that it is not the amount of EU funds that will make the difference, but rather how they will be used; what reforms we are implementing, whether this money goes to high value-added investments. Do you see such investments coming up?

Yes, I see that happening gradually. Moreover, there has been real convergence towards the euro area in recent years. In 2021, the Greek economy grew at 8.4%, compared with 5.9% in the euro area. In 2022, Greek growth was at 5.6%, compared with 3.4% in the euro area. In 2023, growth was 2% in Greece, against 0.4% in the euro area. For 2024, our projections suggest growth of 2.3% in Greece, compared with 0.6% in the euro area, and similar are the projections for the next few years.

In other words, we have been catching up in real terms. If, over the next 20 years, we are able to sustain an average annual growth rate of one and a half percentage points above the euro area growth rate, then we will have almost closed 90% of the average GDP per capita gap.

However, aren’t these projections conditional on a drastic pick-up of productive investment in Greece? 

Yes, they are. And I must say that, although it may not be widely felt, private investment is growing and increasingly spreads to productive sectors, such as industry, with a renewal of machinery and equipment. 

After all, we should not forget that in certain sectors, such as food and medicinal products, we produce and export even to western countries. It is not true that Greece does not produce and export technology products. It is just that we have not yet reached a critical mass of productive investment to drive the economy.

Are you optimistic that we will see this some day? 

Yes, I am. What needs to be done is keep boosting our export growth, so that we can finally substitute part of our imports. Increasing our exports of goods and services alone is not enough; we must finally start reducing imports. This is very important.

The current account deficit turned out at 6.4% of GDP last year; there’s much work to be done on this issue. For instance, rather than keep importing large quantities of agricultural products, it would make much more sense if we looked at how to develop greenhouses at a mass scale in Greece.

Looking at the big picture, i.e. the country’s growth model, some rightly point out that we continue to rely on private consumption, by about 70%, compared with 50%-52% in the rest of the euro area. This has not changed much since the pre-crisis period.

Clearly, we need a shift of resources from consumption towards private and public saving. We will not see the big rise in investment we are aiming for, unless we deliver a large increase in saving as a share of GDP.

Unless this happens, i.e. a shift of resources from consumption to saving, the current account deficit will remain a drag on achieving a high investment rate in Greece.

Are you concerned about the tourism monoculture? 

This is a myth, there is no tourism monoculture in Greece. Of course, tourism is a large exporter of services, as is also shipping, but these are not all our exports. We export manufacturing products too, including pharmaceuticals and processed food, which are at least in the medium-tech category. We have also made substantial progress on renewables to substitute fossil fuels.

Greece simply needs to significantly accelerate the change in the growth model, to speed up the gradual shift to tradables observed since 2010. 

Are these changes enough in a world where everybody is sprinting, growing and attracting investment? 

If we continue at this pace, that is if we can maintain a growth rate of one and a half percentage points above the euro area average, then we will definitely close the per capita GDP gap by the mid-2040s. This calls for maintaining political, fiscal and financial stability.

Yet, the FT, in a recent article, while highlighting Greece’s strong growth performance, point out that we are way far from 90% of the euro area GDP, where we stood in 2009. What is your view?

This comparison is not fair. While in 2009 we stood at 90% of the euro area average GDP‑per‑capita, let’s not forget that we still had the huge twin deficits (budget and current account) amounting to some 15% of GDP.

In fact, the economic boom of that period was just a bubble that burst. And the very large fall in GDP experienced by Greece was the cost of the adjustment. Science has not found another way for economies to correct their mistakes. Some had then suggested Grexit as a solution, but this would have been a national disaster/catastrophe. The Bank of Greece was key to preventing such a development back in 2015.

But what will happen when good times and the RRF are over, when the Greek Spring runs out of steam?

Greece currently has a number of very positive conditions in place. First, Greek public debt sustainability has been ensured for many years to come. Second, we have much more funds available from the NSRF and the Recovery Fund. Third, the country benefits from a period of political, fiscal and financial stability.

In other words, we have an important window of opportunity, which we cannot afford to miss. We have the potential, with the right reforms, to raise productivity and GDP growth, so that we can keep converging even after the RRF is over.

It is totally up to us to continue the reforms for improving the structural competitiveness of our economy, i.e. finally reducing delays in the delivery of justice, addressing labour market problems so that businesses can find workers with the right skills and of course better aligning our education system with the labour market requirements. At the same time, we need to achieve primary surpluses of at least 2% of GDP every year. It’s as simple as that.

Could this window of opportunity be missed under certain circumstances?

I don’t think it is likely, we have learned from our past mistakes. I can see maturity in the Greek people, who have shown with their choices that they want to maintain political and economic stability, as well as growth, in order to increase their prosperity. I don’t think we want to get back into trouble.

Are you concerned about the gap between disbursements and the total budget of approved RRF investment projects, as also noted in the Annual Report of the Bank of Greece?

Greece is one of the top absorbers of RRF funds; we may be facing problems, but so are the other European countries.

In our case, the problems are well-known, having to do with poor efficiency in parts of public administration, as well as in businesses themselves. Of course, such problems need to be addressed so that resources can be disbursed within the time frames. I am referring mainly to grants, as the time constraints for loans are less tight. 

One last question, Mr Governor: what are you concerned about the most right now?

Geopolitical developments in our neighbourhood, which create very high uncertainty, and the fiscal situation in the United States.

To start with, these twin wars raging in the Middle East and Ukraine form an arc, with Greece in the centre. Two asymmetric threats, with no de-escalation roadmap in sight.

But I also refer to broader geopolitical issues, such as the ongoing trade war between the United States and China, which weighs on the global economy and fuels stagflation trends. 

I am particularly concerned about the current budgetary situation in the United States, mainly in view of the dominant role of the dollar in the world economy or, as former French President Valéry Giscard d'Estaing put it, the US dollar's “exorbitant privilege”. However, this privilege must also be accompanied by obligations. The most important is the sustainability of US public debt; if this is jeopardised, then we would see financial stability problems around the globe. 

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