Greece and Europe appear prepared to deal with the economic consequences of the crisis in the Middle East, according to the governor of the Bank of Greece, Yannis Stournaras, who emphasized that alternative scenarios have already been drawn up regarding the trajectory of oil prices, inflation, and growth.
In his remarks at the 7th OT Forum, he emphasized that the relevant authorities have prepared alternative scenarios for the trajectory of oil prices, inflation, and growth, noting, however, that uncertainty remains high.
The Governor of the Bank of Greece referred to the European Central Bank’s recent decisions on interest rates, the outlook for the European economy, and the risks arising from international developments.
At the same time, he emphasized that continuing fiscal responsibility, maintaining financial stability, and promoting reforms are the key prerequisites for sustaining the country’s growth momentum.
The discussion also addressed demographic and housing issues, tax policy, and the challenges the Greek economy continues to face as it converges with the more developed economies of the eurozone.
Below is the full text of Yannis Stournaras’ remarks:
X. KOLONAS: We have here Mr. Yannis Stournaras, Governor of the Bank of Greece. Welcome.
Y. STOURNARAS: Thank you very much. It’s a wonderful place.
E. STERGIOU: A comment on the 100th anniversary we’re celebrating, “Economic Courier,” an institution? A comment on our anniversary.
G. STOURNARAS: Should I say “may you celebrate a thousand more”? With the advances in technology and medicine, I don’t think that’s unreasonable.
C. KOLONAS: Quite right. You returned early this morning from Frankfurt, where the European Central Bank met to discuss interest rates. What does its new decision to raise rates signify, what is the prevailing mood among central bankers, and what will determine future decisions?
G. STOURNARAS: The decision was unanimous because our new inflation forecasts indicate significantly higher inflation. Let’s look at December, not March. In December, we projected inflation for the eurozone in 2026 at 1.6%–1.7%. Now we’re forecasting 3%. For next year, we’re forecasting 2.3% for the eurozone again. For the year after that, 2%. And that’s toward the end of the year.
So, conditions have tightened quite a bit for inflation, but we had no choice but to raise interest rates. Now, the truth is that this was a shock on the energy front due to the closure of the Strait of Hormuz.
If there is indeed an agreement, as is being reported this morning, and this causes a sharp drop in oil prices, nothing prevents us from considering our next steps. But we are open to it. There is no commitment for either July or September, just so you know.
As the president said yesterday at the press conference, there are no commitments regarding the future. We will see how conditions develop, assess them, and then decide.
E. STERGIU: Based on what you’re saying, how do you expect conditions to develop? Do you have any projections for the baseline scenario, the moderate scenario? Which do you see as more likely? So we know how to proceed...
G. STOURNARAS: Of course we have forecasts. Right now we have four scenarios. We have the baseline scenario, a milder version of the baseline, and two worse-case scenarios for the European Central Bank, and the Bank of Greece will publish corresponding scenarios in the coming days, as will every eurozone member country.
Everything is very fluid; there is a great deal of uncertainty. I want to hope— I am always one of those who see the glass as half-full rather than half-empty, that it is in everyone’s interest to have an agreement that will lower energy prices, lead to the reconstruction of the region, and benefit everyone.
X. KOLONAS: When the war broke out in the Middle East, economists and analysts said at the time that even if it ended in 3–4 weeks, the repercussions would be significant. Is this prediction accurate?
G. STOURNARAS: They will be minor.
C. KOLONAS: They said the impact would continue, even though the war might end in 3–4 weeks.
E. STERGIOU: That they are proportional to the duration.
G. STOURNARAS: Look, let it end and then we’ll see. I believe that if there is an agreement that will be adhered to by all parties and will include both Lebanon and Iran, then I believe there will be a period of optimism.
Let’s not forget that the economy and expectations, as Keynes said, are largely a matter of animal spirits. Let’s never forget that. After all, no one expected either the pandemic or the invasion of Ukraine.
In other words, since 2020 we have been experiencing a series of supply-side shocks, which have made the work of monetary policy extremely difficult, because monetary policy is not suited to addressing supply-side shocks; it is forced to address them through the interest rate, which is a very powerful tool but does not, so to speak, do the rest of the economy any good. It only serves to halt the secondary effects on inflation. Not even the primary ones. Interest rates do not create oil supply.
E. STERGIU: And since everything is fluid, as you said, and you can’t predict many things in the economy, that’s why we make our assumptions. Is Europe prepared for this?
G. STOURNARAS: Yes.
E. STERGIU: Has Greece prepared for this? Because it seems to me that we’re scrambling at the last minute.
G. STOURNARAS: We are prepared. We have scenarios for oil, because, as I said before, that’s where it all starts; the scenario for inflation and growth is built on oil. Oil still plays a very important role. Not the role it played in the ’70s and ’80s. Natural gas and liquefied natural gas play a role now, but this is a market where prices are set more or less uniformly.
X. KOLONA: You are among those who frequently speak of the need for reforms in the Greek economy. During your tenure as Governor—which was recently renewed—have you seen significant progress? Or are there certain reforms that should have been implemented years ago, yet for some reason you’ve observed that they aren’t being carried out or aren’t moving forward?
G. STOURNARAS: I have seen a great deal of progress; in fact, if you look at an OECD chart published a few days ago on progress in reforms, Greece has made significant progress. We are not very far from the eurozone average. But there is still a long way to go—a significant way.
For example, let me mention bureaucracy in the public sector, court rulings, and the speed of the administration of justice. Let me also mention that the education system still does not produce the skills required by the labor market. Also, public infrastructure—public infrastructure still needs work. We have a long way to go.
But that’s a good thing, because when you have room to grow, you can move forward. So all we need to do is keep going. The political system needs to agree on three things: to continue fiscal policy, because that is the foundation of the Greek economy’s progress; to continue progress in the banking sector and financial stability; and to continue reforms. Three things.
D. MANIATIS: Are housing and demographics two areas that play a direct role in what is referred to as productivity, the productive model, and the country’s development? Or are they still secondary issues in policy-making?
G. STOURNARAS: Demographics are an important issue because the birth rate has fallen in Greece. It has fallen everywhere. All over the world. And there are many theories that explain it. But all over the world. We are not a unique case. Both in Europe and the rest of the world. Look at South Korea—see how much it has fallen.
Demographics depend on housing because when young people are forced to live with their families until quite an advanced age, it’s not easy for them to have children. So, housing is a matter of both supply and demand—I’d say mainly supply. Therefore, all our efforts must be focused on increasing the housing supply.
Don’t forget there are also thousands of vacant apartments. For many reasons. Reasons of age, reasons of renovation. For many reasons. So there is room here to improve the housing situation and, in this way, the demographic situation as well. Of course, the demographic situation requires other measures as well. We need to implement policies that allow women to balance family life with their professional lives. I see this because I’ve recently become a grandfather.
E. STERGIOU: Let’s move on a bit to the area of taxation and the plan, the economic policy regarding this aspect. You’ve made many statements. You’ve spoken about tax breaks and you’ve also spoken about taxes.
What do you believe the formula should be for the coming years? We won’t be discussing the past, but rather the present and future of taxation and the tax justice that society is calling for, right?
G. STOURNARAS: The number one priority is for the Independent Authority for Public Revenue (AADE) to continue making progress regarding electronic transactions. I would say that is the most fundamental element—namely, cracking down on tax evasion so that new revenue flows in, allowing the government to have fiscal space and implement targeted social policies.
Now, moving beyond that, as you know, the Bank of Greece has raised the issue of the many tax exemptions. I repeat, we are not saying we should abolish them; after all, it is not our job to propose to the government issues that are purely its own concern, such as taxation. But what we are saying is, let’s take another look at them. There are too many of them now. Are most of them useful? Could they be better targeted?
And I clearly see that both the Organization for Economic Cooperation and Development and the International Monetary Fund have recently raised the issue of reviewing the many tax exemptions. Perhaps this would be beneficial, that is, to find fiscal space for those who truly need it.
E. STERGIU: What about other taxes? Indirect or direct? Are any changes needed?
G. STOURNARAS: I think the government is doing the right thing regarding indirect taxes, because we are still a country that has only just emerged from the crisis a few years ago, and the number one thing we must focus on is fiscal responsibility. As long as tax evasion is being cracked down on, there will be opportunities later to further reduce tax rates.
D. MANIATIS: Mr. Governor, since you mentioned the term “fiscal” at least twice, and since we have entered a trajectory of constitutional revision both politically and constitutionally, there is a provision that one of the clauses, concerning Article 79, requires further safeguarding of the country’s fiscal balance through the Constitution.
Is your opinion that such a measure is necessary, or do we have sufficient tools for fiscal stability and control in this area?
G. STOURNARAS: Look, since the fiscal problem has come close to causing Greece’s ruin in the past—several times in the past and in the very recent past—I would say that it would be right, in my view, to include something sensible about this in the Constitution.
After all, no one disagrees today—at least I hope not in Greece—with the new Stability and Growth Pact; let it become a constitutional requirement.
X. KOLONAS: You listed three things earlier that the political system must adhere to. Perhaps it has the leeway to agree. One was the fiscal issue.
Given that the country has entered an election cycle, in terms of the economy, does the possibility of us facing another round of government formation—or failure to form a government—concern you? Could such a scenario now harm the economy?
G. STOURNARAS: If such a scenario were to occur, yes, it would harm the economy. Of course, the electoral cycle exists; we are a democracy. What is required is consensus on the three points I mentioned. We have learned these lessons the hard way.
Because if we stop showing fiscal responsibility, if the banking system stops improving and we revert to old ways—I mean, a “I don’t pay” payment culture, etc.—and if the reforms stop, then we’ll be back where we started. The Bank of Greece considers these three things to be the minimum requirements for political consensus among the parties.
D. MANIATIS: And one last question regarding the Supreme Court’s decision on the interest accrual under the Katseli Law. We’re a bit confused. What does this ruling entail, and what should the banking system be mindful of?
G. STOURNARAS: It is not a clear-cut decision. At the very least, it is open to many interpretations. So, we need to see exactly how this problem will be resolved, because right now, some people interpret it one way, while others interpret it another. This issue needs to be resolved.
X. KOLONAS: Excellent. Let us thank the Governor of the Bank of Greece for being here and honoring us with his presence.
G. STOURNARAS: Thank you very much. And may you live to be a thousand, as I said.