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Prime Minister's address at the 75th anniversary celebration of the Bank of Greece, 3 November 2003

03/11/2003 - Speeches

Prime Minister’s address at the 75th anniversary celebration of the Bank of Greece, 3 November 2003

 Your Excellency the President of the Hellenic Republic ,

Ladies and Gentlemen,

It gives me great pleasure to be here with you today, to take part in the celebration of the 75th anniversary of the Bank of Greece. In the years that have elapsed since the Bank was established, Greece has undergone radical changes. The most important one in recent years is our entry into the euro area.

Greece and 11 other countries of the European Union chose to give up their national currencies in favour of a new single currency, the euro, and have entrusted monetary policy to a European institution, the European Central Bank. Following the Accession Treaty, which was signed in Athens last April and provides that 10 new members will join the European Union, it is expected that these countries will also adopt the euro. The euro area will thus become one of the largest multinational monetary areas in the history of mankind.

Many people take Greece ’s participation in EMU for granted. But all of us who have worked towards this goal know that the initial outlook was very different. In the early 1990s, Greece was sliding into economic instability and was diverging from the European Union. Very few could have assumed then that Greece would become a member of EMU by the end of the decade.

However we persevered. We carried out one of the most ambitious programmes of fiscal consolidation, and, indeed, we did this without jeopardising Greece ’s growth potential. We secured the consensus of all citizens and we combined our consolidation programme with policies aimed at structural reform as well as with the steady monetary policy of the Bank of Greece. We thus achieved the reduction of inflation and of interest rates, and Greece became a full member of EMU.

The celebration, today, of the Bank’s 75th anniversary gives us an opportunity to take stock of what the Bank has accomplished since its establishment and to consider its role under the new conditions brought about by EMU participation and the changes in the global financial environment.

 The Bank of Greece was established in the late 1920s, at a time when Greece was in great need of fiscal consolidation, monetary stability and a solution to its refugee problem. Following exhortations by the Fiscal Committee of the League of Nations , and in order to secure a loan from the League, the right of money issue was transferred from the National Bank of Greece to a new bank, whose exclusive mandate was to be the conduct of monetary and exchange rate policies. This is how the Bank of Greece came into being in 1928, while at the same time the drachma was pegged to gold.

 During those first years, the Bank of Greece was forced to operate under adverse conditions with limited resources. Nonetheless, it was able to rise to the occasion. During the early 1930s and in the midst of a deep crisis in the world economy, the Bank helped bring about the smooth exit of the drachma from the gold standard. In the same decade, the Bank became a key institution for the management of the economy, helping to attract savings to the banking system.

 During World War II, the legitimate Administration of the Bank rescued the Bank's foreign exchange and gold reserves and worked together with the Greek government in exile. After the hyperinflation, which made the country suffer during the Occupation, the Bank contributed greatly to restoring monetary and economic stability. By the early 1950s, inflation declined dramatically and the drachma was successfully pegged to the dollar, something which would last for about 20 years.

 Despite the successful stabilisation of the currency, the Greek credit system came up against insurmountable difficulties. In fact, in the post-war period the operation of the credit system was subject to a strict regulatory framework established by the Monetary Committee. Given the shortage of capital, the Committee aimed at allocating finance to selected sectors of the economy. This policy was initially successful, but the restrictions eventually turned the credit system into a mere instrument of the Monetary Committee.

 During the 1980s and the 1990s, the Bank proceeded to the gradual deregulation of the financial system. The modernisation of the financial system was rendered necessary by Greece ’s membership of the EEC and by the prospect of the creation of the single market. Modernisation was a prerequisite, so that domestic banks could stand up to cross-border competition and could face the consequences of the liberalisation of capital movements. Thus, for the first time in the post-war period, banks began exercising their traditional function, i.e. to raise funds and to allocate them to the most productive sectors of the economy according to criteria of private economy.

 The deregulation of the banking system coincided with the implementation of a fiscal consolidation programme and with the “hard-drachma” policy. These policies were crucial for ensuring a smooth entry into the Exchange Rate Mechanism of the European Monetary System in 1998 and into EMU on January 1, 2001 .

 At the same time, Greece fulfilled its obligation under the Maastricht Treaty to grant political and economic independence to the Bank of Greece. In our country, the law granting independence to the Bank of Greece was passed in December 1997. Of course, in a democracy independence does not mean absence of accountability. The democratic control of the Bank of Greece is ensured, inter alia, through the submission to Parliament of two reports each year on monetary developments and policy, and through the testimony by the Bank’s Governor before Parliament on matters within the Bank's mandate.

 The past 75 years have taught us a good deal about what a central bank can and should do. Foremost, experience has taught us that monetary policy and fiscal policy are interconnected factors, which are instrumental in ensuring price stability and a country's welfare. In an economy, citizens need to have confidence in the value of the currency. The citizens who live in the European economy need to have confidence in the ability of the monetary authorities to ensure price stability and promote prosperity in the Union .

 Today, the Bank of Greece is an integral part of the Eurosystem and contributes to the exercise of its functions. As a member of the Governing Council of the European Central Bank, the Governor of the Bank of Greece takes part in the formulation of the single monetary policy.

 In Greece , the Bank continues to be responsible for the smooth operation of payments systems and for the implementation of monetary policy. Most importantly, it is responsible for banking supervision and for safeguarding the stability of the Greek financial system.

 The experience we have acquired over the last few years from the operation of the financial sector leads us to conclude that this sector is strongly inter-linked with the real economy. This means that whenever one branch of the financial sector faces difficulties, it can easily “bring down” the entire sector with it, with serious negative consequences for the economy and for growth. This is why, in addition to banking supervision carried out by the Bank of Greece, the Government has strengthened the supervisory powers of the Capital Market Committee and plans to set up an independent authority for the supervision of insurance companies. It is important that these authorities work together harmoniously so as to better safeguard the stability of the financial system.

 Ladies and Gentlemen,

 After Greece joined the euro area, a stable macroeconomic environment has been established in our country, which is guaranteed by the Government’s sound fiscal policy, by the Bank of Greece’s prudent supervision of the banking system and by the European Central Bank’s steady monetary policy.

  Greece 's next target is to achieve real and social convergence. To achieve real convergence, we must accelerate economic growth. This is why we are carrying out one of the largest infra-structural investment programmes that our economy has seen in the post war period. At the same time, we are deregulating all sectors of the economy, we are privatising public enterprises and we are modernising the institutional framework that governs the operation of individual markets. “Competition” and “competitiveness” have become key words in our everyday policy vocabulary.

  Greece has recorded significant economic and social achievements in recent years. The standard of living of Greeks has increased remarkably, while Greece ’s growth rate is currently the highest or second highest in Europe . But this is not enough for us. We want this high growth rate to persist. And we concentrate all our efforts on our next major challenge: the achievement of real and social convergence.

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