Olli Rehn: The Greek crisis came as no surprise
Reporter: Vesa Puoskari is a freelance journalist living in Paris and a regular contributor to Tieto&trendit magazine. This article was published in Statistics Finland's Tieto&trendit magazine, Vol. 4-5/2010.
The basic problem in the eurozone is a lack of any common economic policy in the Common Economic Area, says Olli Rehn, the European Commissioner for Economic and Monetary Affairs. The mess-up over the Greek statistics came as no surprise to Rehn, who also has responsibility for EU national statistics. The Commission, however, was toothless, as it lacked the powers to examine the statistics more thoroughly. Now the Commission is quickly trying to enhance Eurostat's auditing powers.
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The confidence of the financial markets in the ability of countries to manage their debt weakened when it became evident that Greece had distorted the statistics on its economy. Just how big are Greece's problems, what does the country intend to do to balance its budget and will this be enough to restore confidence in Greece's solvency?
Greece's budget deficit and the amount of public debt proved to be much greater than had been indicated previously. For example, the prediction of the deficit for 2009 was raised from 5% to 12.5% of GDP. Greece's statistics were not compiled with sufficient independence to respond to political pressures; instead, there was an attempt to cover up the problems of the Greek economy on the eve of the elections.
Greece is committed to economic restructuring to get back on its feet and to pay its debts. This is a condition of the loans it has been granted by the euro countries and the International Monetary Fund to help the country get through the worst. Under the EU/IMF joint programme, it must be the aim of the Greek Government to reduce the public sector deficit to less than 3% by the end of 2012. It is an enormous challenge and will require extensive structural changes.
At what stage did the situation regarding Greece's membership of the EMU get out of hand? When should something have been done about it?
Greece joined the EMU at the beginning of 2001. Long before the current crisis erupted, the Commission on several occasions openly issued warnings about the Greek public economy and the problems connected with its statistics. It particularly expressed its view and gave recommendations when it was conducting the annual evaluation of the country's stability and growth programme.
The Commission's evaluation led to the Eurogroup stating in April 2009 that Greece's public finances were unsustainable and urging the Greek authorities to embark on a stabilisation strategy.
There were two massive problems with the monitoring system. First of all, it was impossible to delve deeply enough when monitoring the legal requirements under the Stability and Growth Pact in order to get to grips with the budget deficit beforehand. Secondly, the Commission did not have the authority to audit the Greek statistics, based as they were on systematic falsehoods.
Has any similar sort of distortion of the statistics on the economy occurred - or do people suspect they have - in other countries?
There are no signs of any sort of similar situation in other EU countries. In some Member States the new government has questioned the actions of their predecessors, but this is often a way for them to try and legitimise their own policies.
For example, at the start of June there were claims that the debt crisis in Hungary had been obviously exaggerated. The fact is that Hungary has pursued a policy of making savings in the past five years to help its public finances recover and the country's economy also showed strength during the first quarter of this year.
What is the role of the EU bodies (European Commission/Eurostat, the Statistical Office of the European Communities) in the monitoring of statistics?
The practical rules on European statistics constitute an important legal basis that guarantees Eurostat, as part of the Commission, an independent role in the production of statistics. The Commission's task is also to ensure that the Member States of the EU follow these same rules when they compile their own statistics.
How can the reliability of statistics be enhanced in the future?
Up until now Eurostat has not had the powers to audit the public accounts submitted to national statistical authorities. The events in Greece demonstrated a need for this. The first proposal of the new Commission that began work in February also related to increasing Eurostat's auditing powers. In June the finance ministries of the Member States accepted this proposal. Once the European Parliament delivers an opinion on it, we will soon see this enter into force. This means that in future Eurostat will have the right to examine public accounts directly if there is reason seriously to doubt the reliability of the statistical data submitted by national statistical authorities.
A joint action plan has been drawn up for Greece containing several concrete measures in order to put the country's statistics in order. One of these is a new, transparent and open system for selecting the director of the National Statistical Service of Greece.
How big a problem is the indebtedness of the countries in the eurozone and their budget deficits at present?
The global financial and economic crisis revealed the hollowness of the growth in some countries and of the balance in public finances. The basic problem is a lack of any common economic policy in the Common Economic Area.
Since the introduction of the euro, internal development has become differentiated. The Stability and Growth Pact, which applies to the whole of the EU, has not been adhered to strictly enough. Furthermore, the Lisbon Strategy, which aimed at improving competitiveness, is still a long way off its targets. In addition, there are huge current account deficits and differences in competitiveness. The savings packages adopted in recent weeks by several Member States give some indication of the scale of the problem.
Within what sort of timeframe should the euro countries endeavour to balance their budgets?
If a Member State goes over the ceiling for the deficit allowed under the Stability and Growth Pact (3% of GDP) it triggers a process within the EU to deal with the situation. This involves a number of stages and possible penalties. Meanwhile, the Member State concerned is encouraged to implement measures to correct the situation. Each Member State therefore has its own recommendations and timetable for correcting its budget deficit.
For example, the crisis resulted in an overlarge deficit for Finland's public finances. Because of this, on 15 June 2010 the Commission proposed that Finland should take steps to reduce it. It is important that the deficit should be charting a clear and credible downward course as from next year. The countries being monitored at present include 24 EU Member States, that is to say all of them except Luxembourg, Estonia and Sweden.
In several indebted countries (Greece, Spain, the UK) there are plans for major cuts in the public sector. Are cuts the solution to the economic problems or will the recession deepen as public demand falls?
There is no alternative if the deficit in the heavily indebted countries is to be reduced. The savings programmes that are under way in indebted EU countries are a sign that the Member States are heading in the right direction. If the instability of the financial markets is brought under control, the economic recovery will continue, albeit modestly and gradually.
For example, the action that Spain has taken and the targets it has set for this year are appropriate and adequate, but ambitious budget cuts need to be continued in order to shrink deficits next year. Cuts are now urgently needed in the badly indebted countries, whereas for others it is possible to take steps to balance their budgets a little later.
How does the economic situation in the indebted countries (Greece, Spain, Italy) differ from the others?
Though many EU countries have problems, especially in public finances, as a result of the crisis, it would be a mistake to lump them all together. The situation, say, in Spain, Portugal or the UK, for instance, cannot be compared to that in Greece.
The Greek economy has weaker structures than the other EU countries and its approaches to policy and administration have for many years now been unlike anything else that we have seen in other EU countries. Greece's special situation has been made apparent through the distortion of its economic indicators, for example.
Differences in public debt are wide, crisis
worsens the situation everywhere.
General government gross debt in EU Member States in 2007 and
forecast for 2011, share of GDP
Source: EU Commission's economic forecast, spring 2010
As a result of the debt crisis, confidence in the euro has also weakened and the currency has lost value. Is a weaker euro something we can benefit from in the EU or will it harm the European economy?
The recent fall in the value of the euro has meant that the currency has reached an exchange rate level that is close to its historical averages. Taken as a whole, the macroeconomy of the eurozone is not in any significant state of imbalance in relation to the rest of the world. A healthy balance of payments, in fact, has almost been achieved.
Although the euro has weakened in recent months, it is still quite close to the level we may regard as stable. The weak euro of course has both good and bad effects on the economy. It puts up the cost of energy, which leads to rocketing inflation. On the other hand, it helps exports, which right this moment is important.
The euro's exchange rate is therefore not a problem, but sharp fluctuations are obviously something we do not want to see either.
What sort of political impact do you think the economic measures will have? For example, it is easy to criticise assistance such as the Greek aid package and use it to one's own political advantage in the Member States that have to foot the bill (e.g. the Finnish Government versus the opposition). On the other hand, in countries that are making budget cuts people are opposed to savings measures (Greece, possible general strike in Spain).
The Greek aid package is not a gift - it is a loan on which they will pay interest. The loans to Greece are to protect the financial stability of Europe as a whole. This is crucial if we are to prevent the recovery that has now at last got under way from slowing right down and if we want to see employment rise again.
The reforms are not easy for any Member State. Viewed more widely, the events of this spring have highlighted the need for close coordination of economic policy in Europe and, ultimately, budgetary discipline in the Member States.
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Globalisation is a challenge for statistics on the economy
The globalisation of companies - internationalisation - poses challenges for the reliability of statistics and for economic statistics in general. Foreign trade statistics concerning multinationals are not correct and that affects the figures for GDP.
As the number of multinationals and their importance are growing, is there a threat that the basis for national economic statistics is being eroded?
- "Globalisation poses additional challenges," says Olli Rehn. "But the statistics on the foreign trade in commodities are still based on mobility and not on changes in ownership. Consequently, the physical transfer of commodities is still visible in national statistics.
- Nevertheless, it is true that the internal commercial operations of multinationals have also put new demands on the compilation of statistics," he goes on.
What are the Commission and Eurostat doing to respond to the challenge?
- A Commission/Member State joint working group was set up in April 2007. Its task was to analyse the effects of the operations of multinationals on national accounts. The recommendations made by the working group in 2009 are now being taken forward," says the Commissioner for the Economic and Monetary Affairs.
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Last updated 21.7.2010