Greek Financial Audit, 2004 - 2004 Financial Audit

2004 Financial Audit

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, it said it would start an objective financial audit of the government accounts. George Papandreou, president of Panhellenic Socialist Movement (PASOK) which was the main opposition at that time, and the other two 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 report. The requirement that the 1999 budget deficit should have been below 3% of GDP was one the key criteria for Eurozone entry; thus, its revision to 3.38% led to a controversy about Greece's admission.

Most of the differences in the revised numbers were due to a temporary change of accounting practices by the new government, i.e., recording expenses when military material was ordered rather than received. However, it was the retroactive application of ESA95 methodology (applied since 2000) for the years 1997-1999 by Eurostat, that finally led to a reference year budget deficit of 3.38% of GDP in 1999, leading to claims that Greece had not actually met all the accession criteria.

In the 2005 OECD report for Greece (p. 47) it was clearly stated that “the impact of new accounting rules on the fiscal figures for the years 1997 to 1999 ranged from 0.7 to 1 percentage point of GDP; this retroactive change of methodology was responsible for the revised deficit exceeding 3% in 1999, the year of EMU membership qualification”. The above has led the Greek minister of finance to clarify that the 1999 budget deficit was below the prescribed 3% limit when calculated with the ESA79 methodology in force at the time of Greece's application, and thus, since the remaining criteria had also been met, was 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.

The original accounting practice for military expenses was later restored in line with Eurostat recommendations, theoretically lowering even the ESA95-calculated 1999 Greek budget deficit to below 3% (an official Eurostat calculation is still pending for 1999).

An error very frequently made in press reports, is the confusion of the discussion regarding Greece’s Eurozone entry with the controversy regarding usage of derivatives’ deals with U.S. Banks by Greece and other Eurozone countries to artificially reduce their reported budget deficits. A currency swap arranged with Goldman Sachs allowed Greece to “hide” $1 billion of debt, however, this affected deficit values after 2001 (when Greece had already been admitted into the Eurozone) and is not related to Greece’s Eurozone entry.

Several arguments have been expressed about the implications of the audit. Some commentators talked about data falsification. 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 for years. 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.