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Sep 24, 2004 | 19:51 GMT

4 mins read

Eurozone: Learning a Lesson From Greece

Summary
An investigation by the European Union found Greece deflated its deficit figures by as much as 40 percent from 2000-2003 in order to gain entry into the eurozone. Though Greece will not be ejected from the monetary union, its actions could provoke a closer investigation into other new EU member states that want to adopt Europe's common currency.
Greece has upwardly revised its figures on deficit spending for 2000-2003, causing concern within the European Union over the capability of its statistical agency and raising questions about the EU monetary authorities' ability to properly police the finances of member states. Despite the underreporting of its deficit-spending figures, Greece will remain a member of the 12-country eurozone. As a result of Greece's actions, the 10 new EU members looking to join the eurozone as soon as 2007 will be subject to more stringent investigations into their finances, while the economic situations of existing member countries are likely to be reviewed. In order for an EU member country to join the eurozone, it must first adhere to several regulations under the EU's Growth and Stability Pact. Deficit spending must be kept under 3 percent of gross domestic product (GDP), and the national debt-to-GDP ratio must be less than 60 percent. Countries must also maintain inflation under 2 percent and set interest rates close to those established by the European Central Bank (ECB). In preparation for joining the eurozone, Greece reported its 2000 deficit to be less than 3 percent, which met EU rules. After Greece joined the eurozone on Jan. 1, 2001, the country reported that its deficit remained within EU limits for 2001-2003. On Sept. 21, the European Commission said Greece's deficit figures would be revised. Eurostat, the EU's statistical arm, released the new figures Sept. 23. Eurostat revealed that Greece had underreported its deficit figures by as much as 40 percent for the past four years, and that it would begin an investigation into the figures reported before 2000. The agency and the European Commission have come under fire for failure to adequately investigate the numbers provided by Athens, and are expected to draft minimum standards for EU statistics reporting by June 2005. The some 8 billion euros Greece spent to finance the 2004 Athens Olympics did not help matters much. Greece already has upwardly revised its deficit figure for 2004 to 5.3 percent, and it could go higher. Greek Finance Minister George Alogoskoufis has placed the blame for the fudged numbers squarely on the shoulders of the country's previous Socialist administration, charging it with "financial alchemy." The previous government reportedly overestimated income from insurance programs and omitted some defense purchases. But the Greek debacle raises even more questions in light of the 10 new EU members that are hankering to join the eurozone. Estonia, Lithuania and Slovenia are all aiming to join by 2007 and are preparing for the changeover by trying to stabilize the exchange rate of their currencies to within 15 percent of the euro. Meanwhile, the Czech Republic, Hungary and Poland — the EU's arguably more developed new members — are the least ready to join with their high levels of deficit spending and public debt. The Czech Republic and Poland, for example, both have a projected 2004 deficit of 6 percent of GDP. Despite these figures, the countries will no doubt press for early acceptance into the monetary union. Some of these countries, as former Warsaw Pact states, are not exactly known for their financial transparency, leading to concerns that they, too, might try to gloss over their numbers to gain entry into the eurozone. The Greek brouhaha is likely to lead to a much closer examination of the monetary reporting of the central European nations. A European Commission investigation into the way Eurostat collects and analyzes the information provided by member countries also is likely. Although Eurostat investigations will continue, the crisis might be tempered in light of proposed reforms to the EU's stability pact. Changes to the pact were proposed by Economic and Monetary Affairs commissioner Joaquin Almunia on Sept. 3, and will likely be voted on once the new European Commission takes office in November. This could lead to less stringent enforcement of the rules. The reformed pact would allow nations with "extraordinary circumstances" to have extra time to fix their finances and delay punishment for those who cannot achieve their goals within the time recommended. If the pact is indeed changed, aspiring eurozone countries might find it easier to join the monetary union. Ultimately, problems in tracking accurate financial statistics mean European authorities are under more pressure to enact substantial monetary reforms if the international community is to trust the long-term value of the euro. If the eurozone is seen as being soft on controlling deficits, an interest rate hike by the ECB or changes in countries' credit ratings will soon follow.

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