Greek Financial Audit, 2004

Context

Entry into the Economic and Monetary Union of the European Union depends on the deficit and debt, as well as the inflation and the stability of the national currency exchange rate of a European Union member state. Requirements are for instance a deficit below 3% of Gross domestic product (GDP) and debt below 60% of GDP, or if above, declining.

Up until 1995, Greece recorded very high deficits, for some years above 10% of GDP. Then it miraculously melted down. In 2000, given a deficit below 3% of GDP, Greece was accepted as the 12th member of the European monetary union.

Doubts about quality of numbers, and first major revision

The quality of numbers were a source of suspicions among the European statistical community. However, nobody dared to publicly raise doubts about the quality of the numbers compiled by the National Statistical Service of Greece (NSSG).

In March 2002, Eurostat refused to validate data transmitted by the Greek government. In reaction, the NSSG revised the debt level by several percentage points. In September 2002, Eurostat again refused to validate the data. The debt was revised upwards once again, and the government balance, which the Greek government had presented as a surplus, became a deficit.

Most recent revision

In March 2004, Eurostat refused again to validate the Greek numbers. This was shortly before Greek elections and a new government (New Democracy) was inaugurated.

When the conservative party New Democracy won the March 7 elections in 2004, said it would start an objective financial audit of the government accounts. George Papandreou, president of PASOK which was the main opposition at that time, and the other 2 smaller parties, initially agreed with the need for an audit. But it lasted a very short time during which neither outside auditing firms nor the central bank were asked to carry out such an audit. Instead, the government produced new estimates while investigating the years 1997 - 2003, and the resulting data was given to Eurostat, which then went on and published a [http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/GREECE/EN/GREECE-EN.PDF report] .

It appeared that the Greek government accounts were falsified (Eurostat diplomatically avoids this word), mostly by "postponing" accounting for huge military expenses, since at least 1997. It was reported that if the true deficit figures were known, Greece would have not joined the European monetary union. This argument was technically not correct, as it was based on calculation of the corrected deficits employing the newer ESA95 methodology; however, when calculated with the ESA79 methodology, in force at the time of the Greek application, even according to the revised numbers Greece had met the deficit criterion for its reference year of 1999 and thus, since the remaining criteria had also been met, was [http://www.hri.org/news/greek/ana/2004/04-12-08.ana.html#09 properly] accepted into the Eurozone; ESA79 was also the methodology employed to calculate the deficits of all other Eurozone members at the time of their applications. Greece, like other Eurozone members, benefitted from cheaper interest rates than it would have received otherwise.

A few commentators found it surprising that the Greek public prosecutor did not start an investigation into the crime of falsification of documents. Others, though, held a completely different viewpoint. "Irregularities" (the word falsification never officially used) in deficit reporting were also revealed for other Eurozone members, most notably Italy and Portugal, with significant revisions imposed. Also, there were arguments about massive "creative accounting" employed by many states in order to meet the deficit criterion for entry into the Eurozone. Even the practice of one-off measures by so many states has been criticised, since in several cases their deficits rose back over 3% soon after the reference year, while big economies like Germany and France seem to defy the rules ever since. Last but not least, changes in accounting method often seriously affected the deficit numbers (Spain and Portugal had, like Greece, marginally exceeded 3% in their reference year for entry, when their deficit was revised according to ESA95). It was argued that New Democracy government simply miscalculated the consequences of its actions, which brought a strong reaction by Eurostat - stronger than that for other violators.

Political dispute

New Democracy's government then accused Costas Simitis and PASOK, who was the prime minister and president of PASOK at that time, of having falsified Greece's macroeconomic statistics, on the basis of which the European institutions accepted Greece to join the Eurozone. All the opposition parties accused New Democracy's government on making an audit that was not a real one. Moreover PASOK said that it never falsified any data, and that New Democracy's government just changed the way costs (mostly military expenses) were accounted for through the years and some other accounting techniques, and that the way PASOK used to do it was known to the Eurostat and Eurostat was never opposed to it.

Costas Simitis wrote in an [http://www.costas-simitis.gr/index.php?option=com_content&task=view&id=97&Itemid=110| article] in the Financial Times claiming that Greece's deficit revision damaged Europe. There Simitis states among other things that "The Commission must design an auditing system that is the same for all EU countries and guarantees objectivity and impartiality, while ruling out domestic political interference." Some days later FT received a [http://news.ft.com/cms/s/745b2b44-5874-11d9-9940-00000e2511c8.html| comment] by the Director General of Eurostat.

As a result of that financial audit, Greece fell in the list of the loan creditability and now pays more taxes on the loans it has with other countries. EU Commission warned Greece about future problems if Greece, now with the new data, does not comply with the Eurozone requirements.

Recently, [http://www.hri.org/news/greek/ana/2006/06-03-10.ana.html#16] (March 2006) Eurostat has made changes to the system of defense expenditure calculation, which seemed to legitimize some of the practices of the previous Costas Simitis government of PASOK. This caused criticism of the Financial Audit of 2004 and the New Democracy government by PASOK and parts of the press. New Democracy responded that the defense expenditures covered by the 2006 changes constituted only a small part of much more substantial expenditures that were fraudulently concealed by the previous PASOK government.