An issue of statistical significance in Greece

A Greek flag flies behind a statue to European unity outside the European Parliament in BrusselsThe head of Greece’s statistics agency, Andreas Georgiou, is to face a criminal inquiry. An ex-employee of the Hellenic Statistical Authority (ELSTAT), Zoe Georganta, has accused him of colluding with the European Union’s statistical arm, Eurostat, to inflate Greece’s deficit figure for 2009, thereby justifying Greece’s EU-IMF bailout, signed in May 2010, and  its drastic austerity measures. Georgiou vehemently denies the charges.

Financial prosecutors have referred the matter to a special magistrate and the Greek justice system will have to decide on the validity of each side’s arguments.

Beyond the judicial process, some observations about the case are needed as it goes to the very heart of understanding how Greece’s public finances veered dramatically off course and the country turned to the eurozone and International Monetary Fund for emergency loans.

Georganta argues that Georgiou’s main offense was to incorporate 17 public enterprises (known as DEKOs in Greece) into the general government budget, thereby inflating the 2009 deficit by 18.2 billion euros. She claims that Greece’s deficit for that year should have been just under 4 percent of GDP, rather than the final figure of 15.6 percent, which came about after several revisions. Georganta, an econometrics professor at the University of Macedonia, says the final figure, which was announced on November 15, 2010, was pumped up so it would be bigger than Ireland’s, which was 14.3 percent, and therefore the biggest in the eurozone. According to Georganta, this inflated figure was used to justify the tough austerity measures demanded by the troika.

Some Greek commentators and politicians have seized upon these allegations as evidence of a wider plot against Greece or proof that the country was a victim of sinister forces from within and abroad. The strength of their argument does not stack up against the facts and feeds a misleading narrative in the public debate. This prevents a proper appreciation of the grave economic and fiscal errors made in the buildup to the crisis.

Firstly, there are a few procedural points to clarify. Greece’s statistics were repeatedly questioned between 2004 and 2010 by Eurostat. It was only after several checks by the Luxembourg-based statistical agency that the 2009 figure was approved, seeming to leave little scope for claims of it having been manipulated by Greek authorities. With regard to the inclusion of public utilities, Eurostat provides a manual (ESA95) that member states follow. It defines entities that should be part of the general government budget and appears to cover the inclusion of Greek public enterprises in the country’s deficit calculations. It should also be noted that regardless of the merits regarding the addition of DEKOs to the budget, there can be no doubt that their debts were being paid from central government coffers. Even after the Private Sector Involvement (PSI) early in 2012, the Greek government is still paying in full the holders of bonds issued by the Hellenic Railways Organization (OSE), who refused to submit their paper for a haircut. Lastly, it is worth pointing out that Georgiou took over at ELSTAT in August 2010, three months after Greece had signed its first memorandum of understanding with the troika. While the final deficit figure published by Eurostat in November 2010 did play a significant part in the calculation of fiscal targets and austerity measures of 2011, it was not applicable to the terms of the first bailout.

Beyond these basic matters, it is important that there is an awareness of the magnitude of Greece’s fiscal derailment in 2009. If for no other reason than that it is important to appreciate what led to the country and its people experiencing the most extensive economic crisis a developed economy has suffered for decades. The events of 2009 should be looked at with a critical eye so Greeks come out of this turbulent period not just battered but also wiser.

It is worth taking the sequence of events from the start.

In November 2008, just two months after the collapse of Lehman Brothers in the USA and as the financial crisis was unfolding around the globe, the New Democracy government of Costas Karamanlis submitted the 2009 budget to Parliament. It estimated growth of 5.9 percent of GDP and a state deficit of 8.8 billion euros or 3.4 percent of GDP.

Two months later, as the crisis was sweeping through one country after the other, the government was forced to submit an updated Stability and Growth Program. It revised the prospects of the Greek economy for 2009, lowering the growth rate to 3.8 percent of GDP and raising the state deficit to 12.7 billion euros. With a budget based on such a macroeconomic and fiscal framework, the Karamanlis government was setting itself up for a spectacular failure and, perhaps unknowingly, laid a foundation stone for the deepest crisis in the country’s modern history.

Even as early as May 2009, the budget’s unrealistic projections were exposed and it went off the rails. The state budget deficit was already at 14.4 billion euros, with 43 percent of the budgeted expenses already used up while revenues stood at just 31 percent of the annual target.

In September 2009, before the elections that brought George Papandreou’s PASOK to power, the state deficit was at 23 billion euros, almost twice the projected amount for the entire year.

With the inclusion of 1.5 billion euros for hospital arrears payments – the only decision of the newly elected Papandreou government contested by New Democracy – the 2009 deficit closed at 30.9 billion euros after a complete collapse of revenues, missing the annual target by 11 billion euros. Expenses increased by 10 billion euros compared to 2008. At the same time, Greece entered the first year of its long recession, with GDP contracting by 3.1 percent.

Sometimes the simplest explanation is the correct one. Even without the subsequent revision of the figures under the supervision of Eurostat, the 2009 public deficit reached double digits very early in the year and missed the initial budget targets by some distance because it was based on an unrealistic framework to start with. Also, by that time, the Karamanlis government had been shaken by a series of scandals, was trailing in opinion polls and had a very loose grip on the wheel.

The argument that had the shortfall been smaller than Ireland’s, Greece might have avoided the bailout or an austerity package is unconvincing. Firstly, it should be pointed out that Ireland did not escape a bailout or austerity measures. Beyond that, the two countries were suffering from vastly different problems. Greece’s debt was much larger than Ireland’s. Whereas Greece owed 112.9 percent of its GDP in 2009, Ireland’s debt-to-GDP ratio was just 44.5 percent. The Irish problem was in the financial sector, Greece’s was predominantly fiscal and macroeconomic. By May 2010, Greece had a financing gap of 35 billion euros for the rest of the year, so it is difficult to see how there was any prospect of Athens borrowing from international markets at reasonable rates, staving off a financial assistance program.

Of course, if the Greek deficit for 2009 had been 3.9 percent of GDP, as Georganta has recently claimed, then events would certainly have turned out differently. It seems to be the wildest of claims considering the confirmed macroeconomic data from 2009 and the fact that Greece’s interest payments alone for that year ended up at 5.2 percent of GDP. This means Georganta’s scenario implies that the country ran a primary surplus of more than 1 percent of GDP in 2009.

To put things in perspective, the only period in the last 20 years that Greece produced a deficit under 4 percent was between 1999 and 2001, after a period of austerity to ensure the country met the criteria to join the euro. After joining in 2001, Greece’s fiscal discipline slipped ever more dramatically as the decade progressed. To a large extent, this period of economic boom fueled by cheap credit and  unsustainable fiscal laxity is where the narrative for Greece’s troubles today can be found. To suggest otherwise is to dabble in fairy tales.

Greece and Greeks have suffered because of questions about the reliability of the country’s statistics. This has included repeated misinformed and erroneous accusations concerning Greece’s entry into the euro.  It will take a long and consistent effort to restore credibility over this matter and the latest developments in the ELSTAT case are a serious blow.

There appears to be little that has been presented publicly so far to suggest there is any strength to the allegations of a conspiracy that intended to inflate Greece’s deficit and lead the country into the arms of the troika. Perhaps the criminal inquiry to come will produce more compelling evidence that will shed new light on this issue. In the meantime, though, it is vital that there is a better appreciation of the circumstances surrounding the Greek fiscal disaster. A diet of half-truths and red herrings will only succeed in apportioning responsibility wrongly and planting the seeds for the next catastrophe.

Nick Malkoutzis & Yiannis Mouzakis*

*Yiannis Mouzakis is an economics content specialist for a global content supplier. He blogs at Prodigal Greek.


29 responses to “An issue of statistical significance in Greece

  1. So exactly where does this lead us? Why were no questions asked in Greece during the tenure of Zoe Georganta? (You say that Eurostat was questioning Elstat’s figures.)

    Her accusations now against Georgiou could be a pre-emptive strike to draw attention away from her actions in disregarding Eurostat definitions as to what should be included in national deficit calculations. By not including the 17 public enterprises, whose debts were being paid out of government funds she misled Eurostat and the Greek people.

    • To be clear, Georganta joined ELSTAT in 2010 so there is no question of her having any responsibility for previous errors, whatever they may have been. There is also no suggestion of a case being brought against her, as far as I know.
      The issue here is the validity of the argument that Greece had a deficit so small the country would have been in fine fiscal health in 2010. I think it’s clear that this wasn’t the case.

      • dendrolivanos

        Thank you, I understand and agree.

      • I know the manufacturing side of the private business sector had problems from 2002, we discussed this at an exhibition abroad. Our export sales could not compete with Chinese products and Germany became the main distributer for the majority of Chinese, Asian, Australian and even USA products. Mostly due to it’s geographical position and it’s state of the art logistics. At the same time from 2004 onwards it became increasingly difficult to get bank finance even for production, they also stopped pestering us all with their credit card promotions. When banks draw back you know that there are problems.

  2. Quite frankly Nick, this looks amateurish to me either way.

    When you introduce metrics changes which make the debt to GDP shoot from 3.5% to 15% + overnight, you do it gradually and with a lot of explanations and subject to conditions precisely so as not to disturb the markets.

    The way it was done caused Greece’s sovereign lending rate to explode from circa 3.0 % to over 30%. Let’s forget about the 10 time lending increase burden for a second. When your borrowing rate doubles you are toast everywhere in the world.

    This is lack of coordination and extreme lack of skill on the part of ELSTAT any which way you cut it.

    Abrupt changes in statistics, followed by a tsunami of negative market assessments which lead to the implosion of your country is neither “following Eurostat rules” nor a matter of professionalism.

    Who appointed this fellow to lead such an agency with the power of locking out Greece from world markets without any oversight? This is unbelievable stuff. That the actions of a bureaucrat could cause an entire system collapse. Where are the safety valves?

    • The deficit figure didn’t go from 3.5 to 15.4 overnight. That’s ridiculous. It was clear at the time of the elections that it would be in double digits.

      • That’s Karamanlis’ problem. Isn’t it? Also the Bank of Greece was saying that the debt to GDP was 12% or so. Where was Karamanlis in all of this?

      • Any metric based on % is the most misleading indicator you could ever find in macroeconomics.

        Say for example you have 10 eggs and you drop and break them all except one. You then find another egg so now you have 2 eggs for a 100% increase from your base(1 egg).

        Say now that a country next to you has 1000 eggs and drops 20 of them (twice your loss). This represents a 2% loss to them but a 1000% loss to you.

        The point here is that for metrics to be meaningful you need to define your base. And unless you are comparing equal bases the comparisons are meaningless.

        By accepting this little trick measurement called debt to GDP and with Germany assuring a decade of negative growth, is there any surprise that you are off the charts?

        But what does it mean really? It means nothing in the context used. It only means something as part of an overall EU-27 GDP. If the US kept comparing the GDP of Nevada vs. the GDP of its north East, then the US would have voluntarily shed half of its territory as underperforming.

      • For sure Nick we must have been heavily in debt after the Olympics. Look at the amount of foreign technicians we brought in at the last minute or the venues wouldn’t have been finished. From what I recall when ND came to power in 2004 most of the PASOK records had been destroyed, leaving them without data. Don’t think that I’m supporting Karamanlis because I’m not, or his government, but the height of corruption was definitely 2002 to 2004, and I don’t mean MP’s but ministries and high ranking public servants that knew PASOK would lose the next election. I still say though that we should be looking forward and not always to what happened in the past. We get too bogged down with one subject which then gets churned over and over again with no clear result. Planning for the future and what we can do now is more important.

      • Ann:

        Things are best explained when you look at the big picture. Europe is a mess because of the Merkel woman. That’s all. Short and sweet.,1

  3. If one could only do what you suggest, Dean! You can put the deficit number wherever you want it to be but you can’t really play around with the nominal sovereign debt (well, I guess you could keep part of new issues secret but that would be a real challenge to keep secret!). And it was really the increase in nominal sovereign debt of Greece which could no longer be explained with the reported deficit percentages.

  4. And now look at this. Greece did not have an explosion of debt. Germany though did. When German extreme austerity policies had the effect of severely contracting Greek GDP, of course the debt to GDP went galactic. Kindergarten students know that. How come the Germans don’t know it?!ctype=l&strail=false&bcs=d&nselm=h&met_y=gd_mio_eur&scale_y=lin&ind_y=false&rdim=country_group&idim=country_group:non-eu&idim=country:de:el:fr:it:nl&ifdim=country_group&hl=en_US&dl=en_US&ind=false

    • Dean, below are the annual increases in Greece’s sovereign debt according to ELSTAT (in MEUR)

      2001: 10.898
      2002: 7.345
      2003: 8.811
      2004: 15.162
      2005: 29.231
      2006: 12.458
      2007: 14.614
      2008: 23.294
      2009: 36.391
      2010: 29.831

      So if the budget was as much under control as some suggest, why did the state borrow so much and what did it do with the money if it didn’t need it for the budget?

      One doesn’t have to be a rocket scientist to ask these questions.

      • Klaus:

        That’s the whole point. ELSTAT is a joke and the fellow who heads it a clown.

        The data I am using are the official Eurostat data. My graphs are Google public and official figures based on Eurostat(can’t change them even if you wanted to), not some fellow who is a martial arts enthusiast and not a hint of statistical background on his resume.

      • Klaus:

        If instead of posting Elstat’s whatever, you took the time to research this fellow’s background you would have found:

        “He was born in Patra (Greece) in 1960. He completed his secondary
        education in Athens College in Greece and he continued his studies in
        the USA. He studied at Amherst College, where he received his Bachelor
        of Arts (Summa Cum Laude, Phi Beta Kappa) in Economics and in
        Political Science-Sociology. He went on to receive his Ph.D. in
        Economics from the University of Michigan with specialization in
        Monetary Theory and Stabilisation Policy as well as in International
        Trade and Finance.”

        In other words, Georgiou is nothing more than an Athens College graduate (like Papandreou and Samaras), went to Amherst(like Papandreou and Samaras) and at least educationally he is not a statistician.

        What this ought to tell me is that Georgiou belongs to the same cast of people you call the corrupt Greek elite(he has all the necessary labeling to belong in such class). To top things off Georgiou got his training in statistics at the IMF and as such his bias is all from a creditors’s point of view looking for countries to discipline.

        In other words it’s like Satan with a diabolic education.

        Find him some work in Germany, will you? We can only employ, to paraphase Churchill, “one sh$t at a time” in Greece. Even Greece has its limits you know.

      • Dean, you need to understand that all I know about this issue is what is said in the above article and, to me, this article is absolutely plausible and convincing. Everything else I have heard falls into the category of myths.

        I don’t follow your logic that getting a summa at Amherst and a PhD at Michigan labels someone as being part of a corrupt elite but, then, your logic is often far ahead of mine. In my book, that sounds like a fairly outstanding academic career path (and Phi Beta Kappa is sort of the icing on the cake…).

        And as regards his alleged bias to see all from a creditors’s point of view looking for countries to discipline, I would say – yeah, that’s a good bias when one is dealing with official bodies who seem to have been record holders for corruption. It’s not the country which needs to be disciplined; it’s the corrupt officials.

      • Klaus:

        Look at the Varoufakis article for more on this issue. At Yanis’ blog I level 3 charges on the guy plus evidence that he is a lousy leader.

        A statistician is basically a mathematician. This fellow has zero education on mathematics and perhaps an aversion to algebra. That’s not who you want to head a statistical agency.

        My own interfaces with ELSTAT are confirmations of lack of relevance, delayed reporting and extremely poor informational value.

        Even yourself when you need relevant figures you tend to consult the Bank Of Greece.

        Quite frankly I have no idea what sort of service Elstat renders. Here we are at the end of 2012 they have no petroleum sales info (which is about 20-25% of all Greek exports) and their numbers are a mess. They can’t even explain the basics to what really is going on in the Greek economy. ELSTAT in my opinion should be disbanded.

        I can show you at least 10 of my e-mails to ELSTAT and the resulting incomplete answers or no answer at all. I have no idea what sort of service these people render to the state and its citizens.

      • Dean, I don’t think it’s any secret that, back in 2010, decisions regarding Greece were taken not only keeping Greece in mind. In your link they call it ‘guinea pig’; I would call it ‘precedent setting’. That’s really less a morality play than common sense business tactics. Contagion was the word that scared everyone from the start.

        Consider the competence of the people who are quoted. Anyone who read newspapers in 2010 knew that 99% of Greece’s debt WAS NOT held domestically. I remember that there were even detailed break-downs by the major creditors (French creditors were by far the largest ones).

        Bear in mind: had 99% of Greece’s debt indeed been held domestically, there would have been very little excitement between Paris/Brussels/Berlin at the time. Similar to Japan: if Japan defaulted, Japanese savers would foot most of the bill.

      • I think the stats you used in your blog “observing Greece” need double checking. According to this link below the ELSTAT figures for 2011 show a trade deficit of -20.85 Bil. (vs. -16.6 Bil. you are reporting). Check it out. All figures here are ELSTAT based:

  5. To show you how abominable is the state of ELSTAT. Today, I had to go to TURKSTAT (Turkish Statistic Authority) to get the final 2012 figures of Greek trade with Turkey. Turkey exported to Greece $1.4Bil worth of products and Greece $3.54 Bil. worth of products to Turkey. The total trade between the 2 countries approached approx. $5 Bil. (an event by itself) and Turkey probably became the #1 export market for Greece.(higher than Italy and Germany which are the usual #1 and #2 largest export markets for Greece)

    You go to Elstat and you can confirm none of this. No totals, no breakdown, no Turkey as the #1 export Greek market. Furthermore Elstat can not even tell you what the breakdown consists of. What is the #1 Greek export product to Turkey? It appears that it might be fuel or energy related but Elstat can’t prove squat.

    Just a self-absorbed bureaucracy of the worst quality, publishing not what would be of value to Greek trade but whatever nonsense and under whatever unusable format Elstat chooses to do it at. The following comes to mind when one speak of Elstat: “asleep at the switch”, “irrelevant”, “too late”, “lack of basic feedback”, “way too slow”.

    I am asking you this simple question:

    Is it possible that a Greek citizen accessing more value information from the Turkish statistical authority on matters of bi-lateral trade? Didn’t we say we have to increase exports in order to get out of this crisis? How are we going to do this if we have no data, no feedback, no targets, no nothing. Just a reprocessing of Bank of Greece data whenever we are not asleep and in manner which is both unfriendly and rude. Rude because the data is basically garbage.

  6. Dean & Klaus, you can quote statistics and balances until the cows come home, but we all know that figures can be manipulated to the results we want to see. I’m talking practical from the point of business in Greece and can assure you that our problems started long before 2009. From the time we entered the Euro, we had problems in the private sector. Two reasons, one being the rate Drachma against Euro was unrealistic and many of us stated this at the time. Secondly, Euro coins for one and two should never have been in coins but in paper just as the one dollar note. Coins automatically are seen as low currency and for Greece this was an excuse for rising prices. Three, Chinese products flooded the European market selling at prices that factories in Italy, Greece, Portugal all over Europe could not compete with. We ahad small factories and used contractors which meant that between us we employed a good number in the private sector. However, with this system if one company goes to the wall, you break the chain. Germany over the next three to four years became the main distributer for Chinese products due to its geographical position and excellent logistics. This slowly over 10 years destroyed our manufacturing, clothes, shoes, toys, electronic products, etc. Banks didn’t help by endorsing loans against post dated cheques, high interest rates (Greek companies paid twice the interest of Italian and Spanish) lack of support to the private companies,, preferring to lend for mortgages to properties. No way did this start 2009, we noticed this from 2000 seeing one company after another closing shop. If we had gone into the Euro and if the government at the time had claimed funds available from the EU to build up small companies, assist with costs for exhibitions abroad, it would have helped. However, when you consider that before the Euro we were charging over 70% on imports from China, USA etc. and suddenly this dropped to simply VAT tax, this is where the problem started. Please don’t keep repeating this 2009 rubbish, look at the private sector, it was downhill all the way.

    • Annie, this is what we need. Very well written indeed!

      Dean and Klaus have given us an indigestible dose of erudition which has nothing to recommend it as far as Greece’s future recovery is concerned. Their fixations and counterarguments have been mildly entertaining, but far far removed from any practical consideration and advice..

      • And here comes further evidence for the amateurism of ELSTAT:

        “The IMF is summoned because used the wrong recipe in the case of Greece with the assumption that the strains IMF forecasts for recession were based on fiscal multipliers were much lower than those actually applied in countries like Greece!

        ELSTAT revised wrongly the budget deficit and public debt upwards including the definition of general government utilities that their income was below 50% of their operating costs!

        The consequences of these false maneuver resulted in the country in misery, and thus the exit from the crisis will come from the treatment of these factors led to a deepening of the recession! ”

        According to analysts, the Bank based on empirical measurements for the height of fiscal multipliers, the unprecedented worldwide decline in domestic demand and GDP in Greece in the last three years and in 2013 only about half can be attributed to fiscal policy adjustment.

        For example, assuming a reasonably high FP of 0.8, the fall of the country’s GDP will surpass the € 20 billion decline in the primary deficit of G at € 24,7 billion.

        Given this it is evident that the excess decline in GDP (in € 27,1 billion in the period 2010-2013) is not due to fiscal adjustment. Probably due to the collapse of expectations which occurred in parallel with the fiscal adjustment something that fiscal multipliers are not able to take into account.

  7. This is what I have been saying for quite some time now.

    But wait! This is what Turkstat says. And ElStat can’t verify any of it. And the majority of Greek exports to Turkey are petroleum products.

    Which goes to show you why petroleum and hydrocarbons are the big pre-occupation of the Greek deep state and that everyone on the Greek side wants to get involved in this game(which appears to offer unlimited opportunities for unjust enrichment):

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