It is a great pleasure for me to participate in the Frankfurt European Banking Congress, which has become such a major international financial forum. The theme of this panel – Europe Emerging – is broad, involving various important issues which have become topical following the introduction of the euro this year and in view of the EU enlargement process underway. I have been asked to talk about a seemingly specific topic: the integration of Greece into the European economic and monetary union. This topic could be rephrased as the emergence of Greece in the emerging Europe. It will become evident, however, that the issues I will address are of general interest: for many of the problems we have confronted successfully and many of the challenges we still have to deal with are basically similar to those faced by several other European countries.
The integration of the Greek economy into EMU has been a rather gradual and complex process, which started in the early 1990s. It has now reached a critical stage, as Greece plans to enter the euro area in January 2001. It is also a process that will not be completed with the adoption of the euro by Greece, as our economy will have to continue to adapt significantly in order to perform efficiently within the increasingly competitive environment of the European monetary union. I will focus my remarks on three issues. First, the progress made towards attaining nominal convergence and the factors accounting for the effectiveness of the policies pursued. Second, the prospects for adopting the euro in 2001 and some policy challenges associated with the transition to the euro area. Third, the general thrust of the policies required for the successful performance of the Greek economy in the emerging Europe with the single currency. I will draw some general conclusions of relevance to other countries, especially those aspiring to join the European Union.
Greece was unable to adopt the euro with the first wave of countries, as it could not fulfil the convergence criteria in May 1998. This outcome was, of course, disappointing but it was expected, since Greece had embarked quite late on its adjustment process and from a very unfavourable position. In the late 1980s and early 1990s Greece’s economic situation was far from ideal. In 1990, for instance, a year of especially poor performance, inflation was about 20%, the budget deficit of general government as a percent of GDP had reached a peak of 16%, economic growth was nil and the balance of payments was fragile, with the current account deficit at 4.3% of GDP. Consequently, Greece’s immediate economic outlook was rather bleak and its participation in the planned EMU seemed a very distant and doubtful prospect. At the time, the Greek economy had been described by a leading financial newspaper as the basket case of western Europe.
Since then, the economic situation in Greece has improved enormously. Inflation, as measured by the EU harmonised CPI, has dropped to below 2% since June. The general government budget deficit is about 1.5% of GDP this year and the public debt-to-GDP ratio is diminishing at a satisfactory pace. Moreover, economic growth is robust and the balance of payments is improving. In fact, the progress made over the past four years in lowering inflation, curbing the budget deficit, stabilizing the exchange rate and reducing interest rates has been greater than that achieved by most of our European partners.
Progress towards stability and faster growth has been the result of a fundamental change in the direction and implementation of economic policy. It is also a consequence of the influence of some social and political factors. First, the realisation, by both the public and policy-makers, that expansionary fiscal policy or, to be more precise, the stop-and-go policies of earlier years, had failed to deliver steady and satisfactory economic growth; instead, they had led to high inflation and growing fiscal imbalances. But another, more significant factor, was the European integration process itself. Participation in EMU became the central and overriding policy objective reflecting the overwhelming support of the Greek people for European integration in general and monetary union in particular.
The economic policy pursued in recent years has been characterized by four mutually reinforcing elements:
- first, a continuous and systematic effort to reduce the government budget deficit relative to GDP;
- second, a stability-oriented monetary policy relying primarily on the exchange rate as an intermediate objective;
- third, a labour market policy which has gradually been adjusted to the need for fiscal discipline and for enhancing international competitiveness in an environment of relative exchange rate stability and prospective adoption of the euro;
- fourth, structural reforms, including the privatisation of state-controlled enterprises, aimed at improving the functioning of markets and the efficiency of production as well as at speeding up fiscal consolidation and public-debt reduction.
What conclusions can be drawn from the recent Greek experience regarding the effects and effectiveness of stability-oriented policies? Let me briefly focus on three:
- A first conclusion is that stabilisation policies need not affect economic activity adversely, even in the short-run. A feature of Greece’s recent economic performance is that substantial progress towards monetary stability and fiscal rigour has been accompanied by faster economic growth. This was partly a consequence of public infrastructure investment supported by EU structural funds. But it was also a consequence of the policies pursued. An appropriate macroeconomic policy combined with structural reforms has created conditions conducive to increased private investment by reducing the overall cost of capital, boosting confidence and generating favourable expectations about the future course of the economy.
- Second, policy effectiveness - the speed at which objectives are achieved at the lowest possible cost - is enhanced when macroeconomic policies are mutually compatible and when they are implemented in a steady, consistent and transparent manner. For instance, our experience clearly demonstrates that incompatibility between fiscal and monetary policy, on the one hand, and labour market policy, on the other, can lead to delays in the adjustment process and unsustainable outcomes.
- A third conclusion is the importance of market expectations in the transmission of the effects of monetary policy. In an environment of global markets and high capital mobility, the effectiveness of monetary policy depends crucially on its credibility, both at home and abroad. Securing conditions of internal price stability is indispensable for a credible monetary policy, even when the exchange rate plays an anchor role.
Let me now turn to an assessment of Greece’s prospects for joining EMU and to an overview of the main policy challenges which must be faced during and after the final phase of the economy’s transition into the euro area. Greece’s objective to join EMU in January 2001 implies that we must fulfil the convergence criteria in early 2000, so that a formal evaluation can take place in the second quarter of the year. The prospect of adopting the euro in 2001 is favourable and highly likely, but it is not taken for granted. Average annual inflation, as measured by the harmonized consumer price index, is forecast to be at or very close to 2% by next March. The other Maastricht criteria are also expected to be met. It is, of course, essential that price stability be maintained not only over the next few critical months but throughout the year 2000 and beyond. As the disinflation process has relied to a great extent on monetary policy, a problem which must be addressed relates to the fact that domestic monetary conditions will inevitably have to be progressively eased next year, because the national monetary policy will be replaced by the European single monetary policy in January 2001. The magnitude of the effects of monetary easing on prices is uncertain, as there are partially offsetting forces at work, and there are time lags involved. Nevertheless, it is clear that greater reliance will have to be placed on fiscal policy and structural reforms in order to sustain price stability and enhance international competitiveness in the future.
Such a rebalancing of the economic policy mix is also vital to the successful performance of the Greek economy after it joins the euro area. The main challenge for economic policy over the coming years will be to achieve full employment and convergence of Greece’s living standards towards the average in the European Union. Despite the progress made since the early 1990s, per capita income in Greece is still about 30 per cent below the EU average. Real convergence, that is convergence of real income, must be attained in the context of the European single monetary policy, which is based on the economic and monetary conditions prevailing in the euro area as a whole and not in individual member states. The pivot of the appropriate strategy for achieving sustained and rapid growth within the euro area should be a further strengthening of the Greek economy’s international competitiveness. This can and must be achieved by completing fiscal consolidation and implementing structural reforms aimed at improving productivity and the efficient functioning of markets. To this end, a number of specific and difficult structural problems must be tackled. These relate to: the social security system in view of unfavourable demographic trends; remaining rigidities in some markets, including the labour market; inefficiencies in public administration; and inadequacies of the educational system.
Implementation of structural reforms is not always straightforward and it often takes longer than initially envisaged. I am confident, however, that the structural policies required for higher employment and real convergence will be implemented. This confidence is based on two premises. First, there exists the necessary human potential and determination to achieve the real convergence of the Greek economy, which after all is the ultimate policy objective. Second, the adoption of the euro and the constraints on budgetary policy imposed by the level of public debt and the Stability Pact imply that Greek society will not opt for seemingly easy but inappropriate remedies for fundamental structural problems. We have gradually learned that easy solutions are often not the right solutions. Over the previous years, the adoption of the euro became the policy objective which acted as a catalyst that facilitated the nominal convergence of the Greek economy. In the future, the introduction of the euro in Greece will create a reality which is expected to promote the implementation of the necessary structural reforms for real convergence. I believe, therefore, that both in Greece and in the emerging Europe we can rely on the euro or, to use the title of this Congress, we can bank on the euro to help us achieve higher employment and sustainable economic growth.