Brussels knew about staggering Greek budget deficit in July

By Caroline de Gruyter in Brussels

European finance ministers put on surprised looks in October when Greece announced its budget deficit over 2009 would be twice as high as it had reported earlier, but they had known about the Greek predicament for months then.

Greek finance minister Giorgos Papaconstantinou will not soon forget his first Ecofin meeting. This assembly of European finance ministers and the European commissioner for economic and monetary policy, currently Joaquín Almunia, was held in Luxemburg last October, shortly after the socialist election victory in Greece.

In a private conversation, Papaconstantinou told Almunia the Greek budget deficit for 2009 would amount to 12 percent of its GDP, and not 6 as had earlier been estimated.

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Almunia became livid, and many of the European finances minister followed suit. They condemned the Greeks’ "statistical chicanery" and "fraud" in unison. Jean-Claude Juncker, prime minister of Luxemburg and chairman of montly meetings of the 16 countries that have the euro currency, grumbled at the Greeks. "The game is up," he exclaimed.

Almunia said the "statistical discrepancies" in Greek budget predictions worried him. A six point error in estimates of the 2009 deficit was hard to explain. "These serial discrepancies will require opening a deep investigation into what has happened."

These reactions would seem to betray anger and surprise. Yet a document of which this paper NRC Handelsblad has now obtained a copy proves the commissioner and the finance ministers had known about the sorry state of Greek finances for a long time already by last October.

Lies, damn lies, and Greek statistics

Greece was admitted into Europe’s common currency group at the end of 2000. By 2004, it turned out it had painted too rosy a picture of its budget deficit in 2000. The deficit hadn’t been 2 percent like the Greeks had reported, but 4.1 percent, far above the European norm of 3 percent.

Last fall, history repeated itself when the socialist government announced that the budget deficit over 2009 would amount to 12 percent instead of 6. Tax revenue has collapsed, costs ran higher than expected and, again, costs were hidden. As was the case in 2004, the former government was blamed for the mess.

The European statistical agency is now screening Greek economic data on a monthly basis. Greek prime minister Papandreou presented a new budget last Monday, aiming to reduce the deficit to 9 percent of GDP by next year, and to 3 percent by 2013.

The document, a seven page memo circulated by Almunia on July 2, 2009 shortly before the Ecofin met in Brussels, contains a critical appraisal of economic data provided by the government of Kostas Karamanlis in June. These data had been provided at the express request of European finance ministers, after the former Greek finance minister Yannis Papathanassiou refused to shed light on the Greek financial situation at an earlier Ecofin meeting in Prague in April.

The document notes the Greek government had seriously underestimated the impact of the recession. The budget deficit for 2009 was adjusted from 3.7 percent to 5 to 6 percent. The memo said the Greek government had failed to carry out some of the required measures to reduce the deficit and had not supplied all data requested. "Should these trends continue over the year the central government deficit would exceed 10% of GDP, which contrasts with the official annual target for the central government deficit of 5% of GDP," the memo stated.

This means Ecofin already knew the budget deficit for 2009 would be double the amount predicted earlier, and was very aware it might double again. Why then did it take the European finance ministers months to express their indignation about the matter? In Brussels, speculations abound that the timing of Greek elections played a part in this delayed reaction. Some think Greece’s European partners withheld the incriminating information until after the Greeks went to the ballot box, in a failed attempt to help the conservative government stay in power.

There is no direct evidence to support these rumours, but still, in light of other recent events, the proposition does not seem far-fetched. Germany, which violated European regulations on state aid to the private sector when it bailed out car manufacturer Opel this summer, was only reprimanded by the EU for its bad behaviour after its September elections, which many wanted German prime minister Angela Merkel to win. Did Karamanlis receive similar support from allies in Europe?

Probing questions are met with denial and indignation from those involved. However, European diplomats from various countries confirmed their respective ministers had already begun voicing their criticism of Greek financial policy as early as last spring. In April, at the Prague Ecofin meeting, they condemned their Greek colleague when he refused to give details on Greek financial affairs. The same month, Juncker filed a formal, written request with Papathanassiou to the same effect. The Greek minister reaffirmed the Greek deficit would not exceed 3.7 percent of GDP and would return to three percent by 2010. Only in June did the Greeks announce that their deficit would probably amount to 6 percent.

The same diplomats confirmed the European statistical agency Eurostat had received data from Athens in 2008 that it found so peculiar it had suggested leaving the pages dedicated to Greece blank. A suggestion rejected by the European Commission.

It turns out conservative finance ministers have been meeting for breakfast before Ecofin summits. According to their spokespeople, these breakfast meetings serve as a means of coordinating political strategy. José Manuel Barroso, chairman of the commission, and Jean-Claude Juncker are both members of the conservative European People’s Party.

Still, any comparison between Karamanlis and Merkel runs afoul at a certain point, those involved say. "Karamanlis has been screwing us over for years," an official working for the European Commission said. "Merkel is a reliable European."

Still, Papathanassiou warned several people last summer that the socialist opposition in his country was "anti-European." It is unlikely that Almunia – himself a socialist – would have believed this, but decisions regarding the eurozone are made by the member states. The European Commission can only report the facts and propose measures to be taken, but the European finance ministers decide in the end.

The memo circulated in July would have been enough for them to open a frontal attack on Greece, but they held back until the socialist Papaconstantinou’s first met with his Ecofin colleagues last October. After that verbal aggression continued right up until last week, when Greece’s prime minister, George Papandreou, presented proposed cutbacks to other EU leaders.

If the rumours are false, and Karamanlis’ Ecofin colleagues were not keeping mum to help him out at the polls, they were either careless or it was Papaconstantinou himself who went public with the information that the budget deficit had doubled.

This would have put the Ecofin members in a difficult position. Admitting to months of inaction would have made them look stupid for not taking action sooner while a European country was so close to bankruptcy. Journalists asked why Eurostat hadn't done anything about the situation before, how the European Commission could have let things get so out of hand and why the Greeks hadn’t been placed under closer supervision.

Almunia’s answer that intervention by Eurostat or the Commission with national statistical agencies would have been a violation of sovereignty did little to appease the press. So the European commissioner and ministers went on the counter-offensive, distancing themselves from the Greeks. Papaconstantinou might not have been to blame, but the euro was at stake here, so the Greeks were going to get it.

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