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    Greece is definitely European Union’s concern

    Güven Sak, PhD04 February 2010 - Okunma Sayısı: 1239

     

    Public finance problems of Greece are an issue not only for Greece itself. In this context, the declaration made by Papaconstantinou, Finance Minister of Greece is not wrong. Declarations by France and Germany however, do not completely reflect the truth. Greece is a concern for the European Union. It is of course bad that Greece used creative accounting methods and made the budget seem better than it actually was. But the fact that the process of convergence to the European Union reduces the domestic savings rate in late-comer countries should be addressed as a structural issue. This issue is closely related also with Turkey. After this incident in Greece, EU accession discussions for Turkey will move toward a different platform. The statements presented in Radikal daily on last Monday prove that the administrators managing the EU negotiation process should monitor the potential impacts of the Greek crisis even more closely. Let us see how budget problems of Greece, Portugal and Italy, which has recently come up in the agenda, have the potential to hinder European Union's enlargement process and Turkey's accession target. Let us realize how senior administrators of Turkey are daydreaming.

    At the source of Greece's problems lies high public deficit. As it came to light that Greece put extensive make up on its public accounts, the ability to roll over the public debt stock was hindered. The source of the problem appears to be the fact that budget deficit, which was declared to be 6 percent in official figures, was actually 12 percent. Market agents now started to discuss the public finance disaster in other European Union countries like Portugal and Italy along with Greece. But why do the named countries like Greece and Portugal come to the fore in such discussions? The reason is quite simple: These are the European Union countries with high current account deficits and low domestic savings rates. As a result, growth is highly tied with "foreign" savings. And due to this exact reason, growth process proves highly vulnerable and instable. As per 2009 figures, current account deficit is around 10 percent in Greece and in Portugal and 6 percent in Spain. These figures in fact signal an improvement when compared to 2008 figures, which indicated 14.4, 12.1, and 9.6 percent current account deficits in Greece, Spain, and Portugal, respectively. Despite this there prevails a vulnerability, the source of which is evident. The graph below shows savings rates for some European Union countries. As can be seen, high current account deficits mainly reflect low domestic savings rates.

    So, the question to be asked is; since when current account deficits rise and domestic savings rates fall in Greece, Portugal, and Spain? Studies reveal that along with the European Union membership, domestic savings rates tended to fall and current account deficits tended to rise in these countries. It is seen that in the process of becoming a single market, the late-comers adjust through high current account deficits. What does this imply? The country in the phase of convergence is compelled to invest more than domestic savings allow during the process of attaining Union standards and integrating into the single market process. Therefore, foreign savings inflows are one of the key adjustment mechanisms for single marketization. This is the first point to state. The fact that domestic savings fall during the same process is another cost incurred by the adjustment process, which is the second point to underline. And the third point: European Union has to realize the elements of structural vulnerability, which tend to increase due to the convergence process in the countries at the convergence phase, and has to establish mechanisms that will control these elements. So, is any step taken in terms of materializing the frequently discussed common fiscal policy or of establishing a mechanism that will control such imbalances, such as Fiscal Market Board? No. And this is the fourth point. Then, if the process of convergence deepens the structural vulnerabilities in the economy of the late comer country, can we expect that Turkey also faces such a risk? Yes, absolutely.

    The fifth point is evident: Then, Turkey's European Union accession negotiations will now be harsher given the burst of the Greece crisis. Turkey had better take this issue into account when designing its communication strategy.

    Submitted to the information of the administrators who try to convey the impression that the world is still the same.

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    This commentary was published in Referans daily on 04.02.2010

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