Costas Simitis, prime minister of Greece from 1996 to 2004, was the architect of the country’s joining the common European currency, the euro. [AP]
Greece’s inclusion in the eurozone in 2001, during the premiership of Costas Simitis, is, in my view, the greatest achievement in the country’s modern economic history. Its value became evident a few years later, when the institutions and governments of eurozone countries intervened to prevent Greece’s bankruptcy – a result of an unjustifiably expansive fiscal policy. They did so by refinancing almost all of the country’s public debt on highly favorable terms, ensuring its sustainability for many years.
This is a historic accomplishment, especially when considering:
First, the initially unfavorable economic conditions and their distance from the reference levels of the corresponding convergence criteria, as well as the skepticism of Greece’s European Union partners. This skepticism stemmed from Greece’s poor economic policy performance from the late 1970s to the late 1980s, with only a brief period of improvement in which Simitis also played a leading role.
Second, the widespread mistrust originating from various sources, amplified by numerous reports in the domestic and international press, even shortly before Greece’s official acceptance into the eurozone by the European Council in Santa Maria da Feira, Portugal, in June 2000.
The Greek economy achieved entry into the euro area by meeting all five convergence criteria. This was the result of a successful six-year trajectory from 1994 to 2000, particularly during the 1996-2000 period. During this time, extraordinary events with significant economic costs occurred, such as the Imia crisis in 1996, the global emerging-markets crisis of 1997-98, the earthquake of September 1999, and the Kosovo war in 1999.
But how was this Herculean feat accomplished, and what valuable lessons can be drawn for the future?
First, there were clear targets: the five convergence criteria that were quickly adopted as political and economic priorities. Although it was unpleasant for many to prioritize nominal over real convergence, it soon became apparent that achieving these five criteria and ensuring timely eurozone entry were matters of major political and economic importance. The updated Convergence Programs from 1994 onward recognized fiscal consolidation as a priority – something far from self-evident at the time.
Second, there was political leadership, decisiveness, coordination, continuity, consistency, and perseverance. From 1994, the same team from the Ministry of National Economy, the Ministry of Finance, and the Bank of Greece, with only minor changes, was tasked with executing this project at both political and technical levels. After 1996, with (fortunately for Greece) the election of Simitis as PASOK leader following the death of Andreas Papandreou, and his subsequent assumption of the premiership, the goals became far more ambitious and cohesive, their pursuit much more determined, and the political backing of the economic team significantly stronger. This last element is particularly important, as the economic team represents the most sensitive pillar of any government. The media and the general public typically evaluate not based on long-term prospects and goals but on immediate realities, where positive economic developments often go unnoticed, while negative news frequently dominates the headlines.
Third, dogmatism and rigid (academic) approaches were avoided. Instead, realistic and flexible tools, along with updated timelines, were adopted as part of the rolling Convergence Programs. The successful trajectory of the economy and the simultaneous achievement of economic stabilization and growth also dismantled certain entrenched dogmatic beliefs in Greece. At the time, widely held views that needed to be ideologically, technocratically, and politically challenged included assertions like: “Inflation in Greece cannot drop below 10% due to structural rigidities and the large agricultural sector,” or “economic growth cannot coexist with economic stabilization.” These ideas may sound peculiar today, but they were dominant back then.
Fourth, with the most pivotal budget being that of 1997 – Simitis’ first as prime minister – the social and developmental dimensions of economic policy were not neglected. On the contrary, relatively high rates of economic growth were achieved by the end of the period. Social protection expenditures as a percentage of GDP increased by at least three percentage points, tax evasion was significantly curtailed, the balance between direct and indirect taxes improved substantially, and real wages rose annually within the limits of productivity growth. These developments enhanced the social acceptance of the economic policy being pursued. It is true that inflows from the second Community Support Framework (CSF II) played a significant role in the developmental aspect of economic policy. However, the developmental effort was primarily underpinned by a substantial increase in private investment. This was driven by lower interest rates, the gradual stabilization of the economy – particularly the reduction of inflation and public deficits – and the improvement of the business climate alongside the restoration of confidence in economic policies.
Fifth, the economic team, with the unwavering support of Simitis, maintained open channels of communication with markets and international organizations. They continuously explained the rationale and medium-term objectives of key economic policy decisions. As a result, expectations were shaped positively based on fundamental economic trends rather than short-term fluctuations. This element is particularly significant for two reasons: first, because foreign exchange and capital markets (as they still do today) tended to overshoot; and second, because critical moments are often dominated either by the strategic maneuvers of dominant players or by herd behavior driven by panic.
Yannis Stournaras is the governor of the Bank of Greece.
