After many years of high inflation, the Greek economy appears to have settled since 2000. Inflation is above the EU average but is under control and expected to remain that way in the near future. Reducing inflation rates has been a success of Greece's recent reformist economic measures.
Inflation, consistently above 10 percent in the past, has fallen due to government fiscal policies, wage restraints, strong monetary policies, and debt consolidation. By mid-1999 inflation fell to 2.0 percent but later rose again because of a sharp easing of Greece's monetary policy when it joined the EU's Economic and Monetary Union (EMU). Fortunately, this did not cause a huge inflation increase as had been feared.
In January 2001, Greece became a member of the EMU after 4 years of careful fiscal planning by the government of Prime Minister Costas Simitis. Greece is expected to relax its monetary policy as its short-term interest rates converge with euro zone rates. The government views the economic forecast favorably, but progress could be slowed if it remains committed to tax cuts.
Greece's banks consist of 3 kinds of institutions. The first is the Central Bank of Greece, which controls and manages the country's money supply and currency exchange rates. It does this by regulating the cash flow of other banks and by direct intervention in money markets. It also operates as a regulatory agency for commercial banks and protects the monetary system against banking catastrophes. In conformity with EU rules, the bank should be a separate entity from the state to keep the government from borrowing bank funds. A large number of Greece's banks remain under state control and in the early 1990s state-controlled banks held some 70 percent of deposits.
Commercial banks also operate in Greece and are the second type of banking institution. Both foreign and domestic commercial banks operate in Greece, and New York-based Citibank is one of the largest banks in Greece. Traditionally banks have been depositories for the people but have recently expanded their operations to include wholesale and retail banking services. Commercial, industrial, consumer, and mortgage loans are issued through these institutions. They can also issue credit cards
|Exchange rates: Greece|
|drachmae (Dr) per US$1|
|SOURCE: CIA World Factbook 2001 [ONLINE].|
and letters of credit as well as exchange foreign currency. Some banks also offer brokerage services.
A third part of the Greek banking system is made up of specialized credit institutions such as investment and mortgage banks. Examples are the Agricultural Bank of Greece and the Postage Savings bank. Many of the credit institutions are directly or indirectly controlled by the state; however, legislation in the 1990s sought to limit its influence. While these banks already offer credit services, EU standards have forced them to offer a wider range of banking services so that they do not have a monopoly on one specific area. Likewise, other banks are now permitted to offer these banks' specialized services, such as entering the agricultural credit market.
Since the late 1980s, the Greek banking system has undergone a process of liberalization , and Greece's EU membership has pushed modernization of the banking system. Interest rates are now set by market conditions, foreign exchange and capital movements have been deregulated , and credit quality controls were abolished. As a result, banking in Greece has become a modern and competitive industry. Proving its capability in this new environment, the Bank of Greece successfully managed a monetary crisis, protecting the drachma by tightening its monetary policy and raising interest rates to high levels. In less than 2 months, interest rates returned back to normal.
The Athens Stock Exchange (ASE) has been modernized and revitalized since 1987. Recent changes include the formation of brokerage firms participating as members of the exchange, the introduction of an automated trading system, and the establishment of a Central Securities Depository. The early 1990s saw 118 public companies on the ASE. Traditionally, many Greeks are reluctant to invest in stocks and shares, preferring to invest their money in real estate, foreign currency, gold, and jewelry.