Greece has serious fiscal problems and will be in a better position to deal with them as a member of the euro zone than outside the currency club, the country’s central banker said today (22 January).
Bank of Greece Governor George Provopoulos sought to allay fears that the financial crisis could force the country to default on sovereign debt or leave the euro.
“The problems faced by the Greek economy are extremely serious. However, the key question is whether it will be easier to solve them from inside or outside the euro zone,” said Provopoulos, who is also a European Central Bank Governing Council member.
“My answer is that it will be unequivocally easier to solve these problems from within the euro area,” he said.
Provopoulos said the argument by some commentators that Europe’s single currency project was destined to become unstuck and that Greece would suffer the fate of undisciplined countries that previously adopted hard currency pegs was flawed.
“According to this line of reasoning, the fiscal crisis in Greece is unfailingly pushing the country towards an exit from its immutable fixed exchange rate arrangement within the euro zone. This view is based on flawed reasoning,” the central banker said.
He said those who argue that Greece would wind up leaving the euro zone believe it lacks the will to slash structural fiscal deficits and implement cost adjustments and reforms needed to restore its competitiveness.
“The Greek economy currently stands at a crossroads. The fact of the matter is that it will be immensely less costly for Greece to eradicate its problems from within the euro zone,” Provopoulos said.
He said the future of Greece’s economy was unwaveringly tied to the single currency.
“Rather than a Greek tragedy, a more appropriate analogy for the Greek economy stems from Homer’s Odyssey. In that epic, the enchanting sounds of the sirens enticed sailors to jump to their deaths in the sea,” Provopoulos said.
“Those who suggest Greece might leave the euro zone are like Homer’s sirens. Greece will not be tempted by these short-term options, but will undertake the necessary, bold adjustments,” he said.
IMF ‘does not expect aid request’ from Greece
Meanwhile, in Washington, the International Monetary Fund (IMF) said it does not expect Greece to request IMF financing but the Fund will help the government implement a deficit-reduction plan, a spokeswoman said.
The IMF mission to Greece had completed discussions with the authorities, which had focused on “technical measures where we can give advice about how the authorities can best implement its stabilisation programme, which is between them and the EU,” according to the Fund.
Greek Finance Minister George Papaconstantinou said on Wednesday that Greece is looking at all its borrowing options including issues a bond directly to the population.
Asked if Greece would consider selling such bonds, also known as popular bonds, Papaconstantinou said: “Greece is looking into everything. However, this is not the only solution. We have not taken any decision.”
Greece paid a hefty premium on Tuesday to borrow €1.2 billion on the bond markets, a further sign of how wary investors are about lending to what many see as the eurozone’s weakest fiscal link.
‘Actions speak louder than words’
The doubts about the Greek government’s appetite to restore fiscal stability – which will inevitably involve deep spending cuts – have been a matter of grave concern for the European Central Bank (ECB).
Yesterday, European Central Bank Governing Council member Axel Weber urged Greece to stop talking and start taking action to rectify its troubles. He also defended critics who say the situation could destabilise the common European currency.
“The euro zone does not have a credibility problem that concerns the currency. There is a problem of the credibility of the fiscal policy of one member state and the government of that state has to act,” Weber told reporters, referring to Greece.
Weber warned Athens had to back up its recent fiscal policy pledges. “Actions speak louder than words. The financial market agencies and ratings agencies must be convinced by the Greek government about its will and readiness to pursue this tough consolidation path,” he said.
Weber, who heads Germany’s Bundesbank, also urged Greece to pursue budget consolidation efforts on the expenditure side as well as the revenue side.
Spanish Economy Minister Elena Salgado expressed confidence that Athens would take decisive action to quell concerns that it could miss debt repayments. “I think Greece is going to do all that is necessary so we’re not worried about that,” said Salgado, who chaired a meeting in Brussels of the 27 EU finance ministers in Brussels this week.
Rating agency Moody’s said in a statement that uncertainty remained over implementation of a Greek government plan that “aims to partly address formidable and long-standing problems, such as endemic tax evasion and misreporting of financial data, which have undermined the government’s credibility and contributed to the government’s fiscal problems”.
(EURACTIV with Reuters.)
The outbreak of the financial crisis has had a devastating effect on economies across Europe, with public deficits rising due to dramatic declines in tax revenue.
Some countries have been hit harder than others, with banks in Eastern Europe under particular pressure. Meanwhile mounting debts in Spain, Ireland, Portugal, Italy and Greece are causing particular anguish in the euro zone.
Of these, Greece has come under the spotlight in recent weeks due to a perceived reluctance to introduce unpopular measures to restore order to its public finances. This has driven up the cost of borrowing on bond markets, further exacerbating the crisis.
Earlier this year it was reported that the International Monetary Fund (IMF) visited Greece to offer advice on how Athens can dig itself out of the financial mire. Observers see the Greek situation as a test of whether the EU has the appetite to bail out a struggling member state.
Relations between Athens and Brussels have been strained in recent days as Greece was accused of presenting inaccurate statistics, disguising the true extent of the crisis.