Speech

Greece and the Euro GlobalInterdependenceCenter(GIC) AnnualBlackTieGalaInCelebrationofGreece Philadelphia,Pennsylvania July25,2007 Iam honored to be here this evening to muchtobedesired:Inflationandinterestrates accept the Fred Heldring Award from the bothtopped20percent.Highinflationtypically Global Interdependence Center. I applaud damageseconomicgrowth.Greecewasnoexcep- theworkoftheCenterinpromotingevents tion.ItsrealGDPgrowthaveraged0.7percent andcommunicationaboutinternationaleconomic annualratebetween1980and1994. and financial interdependence. Highinterestratescompoundedthegovern- Becausetonight’sfestivitiescelebrateGreece, ment’sfiscalproblemsbyraisingborrowingcosts IthoughtthatImightsayafewwordsaboutthe onitsverysubstantialdebt.Annualgovernment remarkableturnaroundofGreece’seconomic budgetdeficitsoftenexceeded10percentofout- performance,asuccessthatiscloselylinkedto put.Annualpeacetimebudgetdeficitsinexcess entryintotheEuropeanMonetaryUnionatthe of10percentofGDParelargeforanycountry. startof2001. Asaresultofmanyyearsoftheselargedeficits, Asusual,Iwanttoemphasizethattheviews theGreekgrosspublicsectordebtstoodatabout Iexpressherearemineanddonotnecessarily 88percentofGDPby1995.In1995,theGDP- reflectofficialpositionsoftheFederalReserve weightedaverageratioofdebttoGDPinthe System.IthankmycolleaguesattheFederal EuropeanUnionwas73percent;othercounties ReserveBankofSt.Louisfortheircomments. withhighratioswereBelgiumat135percent, ChristopherJ.Neely,assistantvicepresidentin Italyat122percentandtheNetherlandsat90 theResearchDivision,providedspecialassistance. percent.1 Iretainfullresponsibilityforerrors. In1992,theMaastrichtTreatysetforththe Iknowthatthiseventisnottheoccasionfor mechanismsbywhichmemberstateswouldtran- aformallecture,butonceyougivealawyer’sson sitiontoasingleEuropeancurrency,theeuro. andformerprofessorturnedcentralbankera Specifically,thetreatylaiddownso-calledcon- soapbox,youhaveacceptedacertainrisk.Iprom- isenottopresentalecture,butcannotresistafew vergencecriteriatowhichallcountrieshadto remarks.Andwhatisonmymindishowvery conformbeforejoiningtheEuropeanMonetary wellthecreationoftheeurohasworkedout,for Union,theEMU.Thecriteriarequiredthatevery Greeceandtheothermembercountries. memberstatehaveinflationandinterestrates ConsidertheGreekeconomicsituationin similartothoseofthebestperformingmembers, the1980sandearly1990s,priortothedecision soundpublicfinances,aperiodofexchangerate toattempttojointheeurozone.Duringthis stabilityandappropriatelegislationwithrespect period,Greekmonetaryandfiscalpolicyleft toitscentralbank. 1 ThefollowingcountriesweremembersoftheEUin1995:Austria,Belgium,Denmark,Finland,France,Germany,Greece,Ireland,Italy, Luxembourg,Netherlands,Portugal,Spain,Sweden,andtheUnitedKingdom.Theparagraphcitesdebt-to-GDPdatafromtheOECD.Eurostat, however,reportsamuchhigherestimateofGreece’s1995debt-to-GDPratio,109percent.TheOECDnumberismuchlowerbecausetheOECD reportslargeupwardrevisionstoGreekGDPthatEurostathasnotyetaccepted. 1 INTERNATIONALTRADEANDFINANCE WhileGreeceexpressedinterestinmonetary smallcountry,likeGreece,tryingtojoinamone- unionevenbeforetheMaastrichtTreatywas taryunionoflargerandwealthiercountries. signed,thecountrywasplainlyunabletomeetthe Fiscalpolicy—governmenttaxesandspend- convergencecriteriaintheearly1990s.Asalready ing—isoftenconsideredanothertoolofmacro- noted,inflationandinterestratesexceeded20 economicmanagement.TheEMU,however, percentandpublicfinanceswereinterribleshape. adoptedthe“StabilityandGrowthPact,”a1997 Someobserversevensuggestedthatbytheearly treatythatwasdesignedtoensurethatgovern- 1990sGreecehadthelargestimbalancesofany mentswouldcontinuetobehaveinwayscon- industrialcountry(HochreiterandTavlas,2004). sistentwiththestabilityoftheeuro.Thepact Inthemid-1990s,therewasnoguarantee effectivelylimitsgovernmentdeficitsto3percent thatGreecewouldsucceedinmeetingthecon- ofGDP,whichrestrictscountercyclicalfiscal vergencecriteria,despiteageneraldesiretointe- policy.Thus,euroskepticswereconcernedthat gratemorecloselywithEuropeandtoachieve theEMUwouldhandcuffbothmonetaryandfiscal bettereconomicperformance. policy,fosteringunstableeconomicconditions. AlthoughGreecehadbegunreducinginflation EvenGovernorPapademos(WallStreet intheearly1990s,in1995thegovernorofthe JournalEurope,February12,2001)admittedto BankofGreece,LucasPapademos,tookaserious someconcernonthispoint:“I’malittlebitcon- steptowardeconomicreformbyintroducingthe cernedthatinthecourseoftheyearthatifthere’s “HardDrachmaPolicy.”Thismonetarypolicy asevereshockoranunanticipateddomestic program,whichentailedannualtargetsforinfla- development,itmaynotbepossibleforfiscal tionandexchangerates,maderapidprogress policytobeimplementedwiththerequireddegree againstinflation,reducingitfromover10percent ofprudence.”Therequirementofrestrictivefiscal in1995tolessthan5percentbythestartof1998. andmonetarypoliciestojointhemonetaryunion Yet,despitethefactthatGreececouldnot drewthemostdirectcriticism.Laborunions,in immediatelymeettheconvergencecriteria, particular,foughtthenewpolicieswithstrikes Greece’ssocialistprimeminister,CostasSimitas, andpoliticalrallies. madecomplyingwiththemapoliticalpriority. Thenationalairline,OlympicAirways, Joiningthemonetaryunionwouldhelpintegrate becameafocalpointofthestruggleasthegovern- Greece’seconomywiththoseoftheothermem- mentsoughttocutcostsandturnitintoaprofit- bers.Itwouldlowerthecostsofinternational makingenterprise.Employeesatthefirm tradeforconsumersandbusinesses,facilitate respondedwithfrequentworkstoppages.In1998, internationalpricecomparisons,andraiseliving Greece’sforeignminister,TheodorosPangalos, standards.Thepolicypackageincludedanumber evenjokedthat“nologicalperson”wouldride ofcomplementarystructuralreformstoGreek OlympicAirways,giventhepoorservice(Laredo energyandtelecommunicationsmarkets. MorningTimes,May1,1998). TheGreekpubliclargelysupportedthese CriticismofGreece’sentrytothemonetary governmentreforms.Asonemightexpect,sup- unioncamefromoutsidethecountryaswell. portwasstrongestamongthebusinesscommu- Earlyin2000,theGermanChambersofIndustry nity,butmoderatesocialistsalsosupportedthe andCommerceurgedtheGermangovernmentto plan.Farmersandleft-wingactivistsconstituted blockGreece’sentrytoEMU,citingGreece’s themainopponents,fearingjoblossesfrom extremelylargepublicdebt.Thesegroupswere increasedcompetitionandcapitalmobility. concernedthatGreece’slargepublicdebtmight Someobservers,includingmanyeconomists, createpressuretoinflatetheeuro. alsoexpressedthetraditionalconcernabout Theeconomicreformsofthe1990swere monetaryunions:thattheyrequirea“onesize ultimatelysuccessfulinbringingGreeceinto fitsall”monetarypolicyamongthemembers. compliancewiththeconvergencecriteria.On Thisconcernseemedespeciallypressingfora January1,2001,Greeceofficiallybecameamem- 2 GreeceandtheEuro beroftheeurozone.Aswithpreviousmembers, expressedtheirintentiontojointhefullmonetary thedrachma-denominatednotesandtheeuro unionwithintenyears.Slovenia,whichjoined notescirculatedsidebysidefortwomonths, theeurozoneonJanuary1ofthisyear,wasthe untiltheeurobecamethesolecurrencyon firstofthesenewmembers. March1,2001. IwasfortunatetostudyunderMilton TheGreekeconomyhasflourishedsinceit Friedman,andIrememberwelloneofhisfavorite enteredtheeurozonein2001.Inflationhas sayings:Theproofofthepuddingisintheeating. averaged3.3percent,comparedwiththe1990- ForGreece,theEMUpuddinghasbeenvery 2000averageof10.4percent.GDPgrowthhas tastyindeed. averaged4.4percent,comparedwith2.2percent inthepriorperiod.Unemploymenthasfallen fromits1999peakof12.3percentto8.6percent REFERENCES bytheendof2006.Whilethisjoblessfigureis Hochreiter,E.andTavlas,G.TwoRoadstotheEuro: higherthananyonewants,itislikelytodecline TheMonetaryExperiencesofAustriaandGreece. furtherintheenvironmentofpricestabilitythat ConferenceProceedingsAdoptingtheEuro— theEuropeanCentralBankfosters. ChallengesandOpportunitiesforNewMember InSeptember2004,theGreekgovernment StatesoftheEuropeanUnion.Washington,DC: releasedrevisednationalaccountsthatshowed InternationalMonetaryFund,2004. thatGreecehadactuallyenteredtheeurozone withabudgetdeficitthatexceededthelimitof LaredoMorningTimes.“GreeceUrgedtoClose 3percentofGDPsetforthbytheStabilityand Airlines.”May1,1998,p.16A. GrowthPactguidelines.Theserevisionshave causedsomeconsternationamongthemember Sims,G.Thomas.“NewlyEuro-LinkedGreece states.Still,itcannotbearguedthatentryinto ExpressesFewInflationFears.”WallStreetJournal theEMUwasamistake.TheGreekeconomyis Europe,February12,2001,p.13. notperformingjustmarginallybetter,butenor- mouslybetter. Europeancountriescontinuetoseebenefits fromadoptingtheeuro.The10countriesthat enteredtheEuropeanUnionin2004haveall 3

William Poole (2007, July 24). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20070725_poole

@misc{wtfs_speech_20070725_poole,
  author = {William Poole},
  title = {Speech},
  year = {2007},
  month = {Jul},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20070725_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}