Greece Faces Slowdown but C/A Gap a Bigger Threat

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Greece Faces Slowdown but C/A Gap a Bigger Threat

Global economy woes are starting to catch up with Greeece, which has been growing faster than its euro zone peers, but all eyes are on a much bigger problem -- a bloated current account gap reflecting structural weaknesses, Reuters reported.

The Greek economy, which accounts for about 2.5 percent of euro zone gross domestic product (GDP), expanded by an annual 3.6 percent in the first quarter.

Although growth projections were trimmed due to the global slowdown, this year's goal of 3.5 percent is still above the euro zone average, the Guardian added.

Economists say Greece is heading for a soft landing in the short term, thanks partly to robust tourism and shipping. What worries more is eroding competitiveness fed by high inflation and labour costs.

On the sidelines of the ECB's Governing Council meeting in Athens earlier in May, Vice President Lucas Papademos said competitiveness erosion was an "an Achilles heel" that requires reforms to raise productivity.

Greece's current account deficit ballooned last year to 14.1 percent of GDP, topping economists' expectations, a long term threat to growth and jobs.

"Continued erosion of Greece's competitive position due to strong wage increases, also exacerbated by the strong euro, is worrying in the longer term," said Deutsche Bank economist Theodor Schonebeck.

As Greece's economy expands faster than its euro partners demand for imports increases. Inadequate domestic savings, public and private, to finance consumption results in increased foreign borrowing.

The result is that Greece is increasingly becoming a debtor nation -- net private and public sector debt owed abroad grew to 93.7 percent of GDP in 2007 from 51 percent in 2001. Credit expansion is running strong and banks have been funding abroad.

To reverse the trend, the central bank says Greece needs to change its economic growth model to one based more on exports and less on domestic consumption.

"Reforms that reduce handicaps in attracting foreign direct investment should be pursued," said EFG Eurobank economist Platon Monokroussos, meaning less bureaucracy and a more flexible labour market.

The conservative government, which won a second term in office last year repeating pledges to reform the state, has pushed some privatisations and tidied up public finances but has done little to cut red tape -- consistently listed among average Greeks as one of their top problems.

Setting up a business in Greece is a Herculean task, businessmen say, due to red tape, inflexible labour laws and ever changing tax rules.

"There are too many signatures needed to obtain whatever licences. Other impediments include frequent changes in taxation and laws," said George Galanakis, former chief executive of casino operator Hyatt Regency, which set up from scratch in Greece.

He said foreigners would rather buy a set-up business than go through the difficulties, which makes for less foreign direct investment (FDI).

"Serious FDI is not taking place, we are rather seeing indirect investment, meaning buyouts," Galanakis said. "The Greek businessman goes through the grinder to set up a business but foreigners opt to buy a ready business to avoid the drill."

Cushions to slower growth such as below average reliance on exports and incoming European Union structural funds, as well as Greek businesses tapping the faster growing east European markets, can't protect Greece from its chronic ills.

"Prospects for a shrinkage in the current account gap are not favourable in the coming years ... in fact the deficit may increase," the central bank said in its annual report in April.

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