The Greek Financial Audit was a 2004 investigation into the true extent of
Greece
Greece,, or , romanized: ', officially the Hellenic Republic, is a country in Southeast Europe. It is situated on the southern tip of the Balkans, and is located at the crossroads of Europe, Asia, and Africa. Greece shares land borders with ...
's public finances. It examined government revenue, spending and the level of
Greek government borrowing.
Background
Within the European Union, entry into the
Eurozone
The euro area, commonly called eurozone (EZ), is a currency union of 19 member states of the European Union (EU) that have adopted the euro (€) as their primary currency and sole legal tender, and have thus fully implemented EMU policies ...
depends on the applicant nation meeting certain economic criteria.
Measures such as
budget deficits
The government budget balance, also alternatively referred to as general government balance, public budget balance, or public fiscal balance, is the overall difference between government revenues and spending. A positive balance is called a '' ...
and
public debt
A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
levels are assessed, as well as the
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
situation and the stability of the national currency
exchange rate
In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of ...
of a
European Union
The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been des ...
member state. Requirements include a budget deficit below 3% of
gross domestic product
Gross domestic product (GDP) is a money, monetary Measurement in economics, measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjec ...
(GDP), and debt below 60% of GDP, or if above, declining.
Up until 1994, Greece recorded very high deficits, for some years above 10% of GDP.
During the late nineties, according to the figures submitted by the Greek government to the European Union, Greece's high budget deficits were significantly lowered.
In 2000, given a deficit below 3% of GDP in 1999, Greece was accepted as the 12th member of the European monetary union.
Eurostat refusal to validate Greek figures
In March 2002,
Eurostat
Eurostat ('European Statistical Office'; DG ESTAT) is a Directorate-General of the European Commission located in the Kirchberg, Luxembourg, Kirchberg quarter of Luxembourg City, Luxembourg. Eurostat's main responsibilities are to provide statis ...
refused to validate data transmitted by the Greek government. In reaction, the NSSG (
National Statistical Service of Greece
The Hellenic Statistical Authority ( el, Ελληνική Στατιστική Αρχή ), known by its acronym ELSTAT ( el, ΕΛ.ΣΤΑΤ), is the national statistical service of Greece.
The purpose of ELSTAT is to produce, on a regular basis, o ...
) 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.
In March 2004, Eurostat refused again to validate the Greek numbers. That was shortly before Greek elections, and a new government by
New Democracy
New Democracy, or the New Democratic Revolution, is a concept based on Mao Zedong's Bloc of Four Social Classes theory in Chinese Communist Revolution, post-revolutionary China which argued originally that democracy in China would take a path ...
was inaugurated.
After the
March 7 elections, the new government said that it would start an objective
financial audit
A financial audit is conducted to provide an opinion whether "financial statements" (the information is verified to the extent of reasonable assurance granted) are stated in accordance with specified criteria. Normally, the criteria are internat ...
of the government accounts.
George Papandreou
George Andreas Papandreou ( el, Γεώργιος Ανδρέας Παπανδρέου, , shortened to ''Giorgos'' () to distinguish him from his grandfather; born 16 June 1952) is a Greek politician who served as Prime Minister of Greece from ...
, of
Panhellenic Socialist Movement
The Panhellenic Socialist Movement ( el, Πανελλήνιο Σοσιαλιστικό Κίνημα, Panellínio Sosialistikó Kínima, ), known mostly by its acronym PASOK, (; , ) is a social-democratic political party in Greece. Until 2012, it ...
(PASOK), the main opposition at that time, and the other two smaller parties initially agreed with the need for an audit. The agreement lasted a very short time, and outside auditing firms and the central bank were not asked to carry out such an audit.
New government audit
Instead, the government produced new estimates while it investigated the years 1997 to 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 of the key criteria for Eurozone entry. Its revision to 3.07%, according to Eurostat (AMECO), led to a controversy about Greece's admission.
In th
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 it was calculated with the ESA79 methodology in force at the time of Greece's application. Since the remaining criteria had also been met, wa
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 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 US banks by Greece and other Eurozone countries to hide their reported budget deficits.
arranged with
Goldman Sachs
Goldman Sachs () is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered at 200 West Street in Lower Manhattan, with regional headquarters in London, Warsaw, Bangalore, H ...
allowed Greece to 'hide' 2.8 billion euros of debt, but that affected deficit values after 2001 (when Greece had already been admitted into the Eurozone) and is not related to Greece's Eurozone entry.
Implications
Several arguments have been expressed about the implications of the audit. Some commentators talked about data falsification. Others 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
Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices, but deviate from the spirit of those rules with questionable accounting ethics—specifically distortin ...
" 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, however larger economies such as 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.
Public finance consequences
As a result of the financial audit, Greece fell in the list of the loan creditability and paid more interest on its loans compared with other EU countries. EU Commission warned Greece about future problems if Greece, now with the new data, does not comply with the Eurozone requirements.
Domestic political consequences
New Democracy's government accused PASOK, and
Costas Simitis
Konstantinos G. Simitis ( el, Κωνσταντίνος Γ. Σημίτης; born 23 June 1936), usually referred to as Costas Simitis or Kostas Simitis (Κώστας Σημίτης), is a Greek politician who served as Prime Minister of Greece a ...
, 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
The euro area, commonly called eurozone (EZ), is a currency union of 19 member states of the European Union (EU) that have adopted the euro (€) as their primary currency and sole legal tender, and have thus fully implemented EMU policies ...
. All the opposition parties accused New Democracy's government of making a false audit.
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 the way PASOK used to do it was known to the Eurostat, which never opposed it.
Costas Simitis wrote in the ''
Financial Times
The ''Financial Times'' (''FT'') is a British daily newspaper printed in broadsheet and published digitally that focuses on business and economic current affairs. Based in London, England, the paper is owned by a Japanese holding company, Nik ...
'' that Greece's deficit revision damaged the EU: "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, the same newspaper published a
Letter to the Editor
A letter to the editor (LTE) is a Letter (message), letter sent to a publication about an issue of concern to the reader. Usually, such letters are intended for publication. In many publications, letters to the editor may be sent either through ...
by the Director General of Eurostat
acknowledged the need for monitoring and review of government accounts independent of political cycles, outlining the changes made but taking issue with the portrayal of the Greek account revisions.
In March 2006, Eurostat made changes to the system of defense expenditure calculation,
which seemed to legitimize some of the practices of the previous
Costas Simitis
Konstantinos G. Simitis ( el, Κωνσταντίνος Γ. Σημίτης; born 23 June 1936), usually referred to as Costas Simitis or Kostas Simitis (Κώστας Σημίτης), is a Greek politician who served as Prime Minister of Greece a ...
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.
See also
*
Greek government debt crisis
Greek may refer to:
Greece
Anything of, from, or related to Greece, a country in Southern Europe:
*Greeks, an ethnic group.
*Greek language, a branch of the Indo-European language family.
**Proto-Greek language, the assumed last common ancestor ...
*
Fakelaki
''Fakelaki'' or ''fakellaki'' is the phonetic transliteration of the Greek word φακελάκι. It means "little envelope" but is also used in Greek popular culture as a jargon term referring to the bribery of public servants and private companie ...
*
Greek financial audits 2009–2010
European debt crisis:
*
European sovereign debt crisis
The European debt crisis, often also referred to as the eurozone crisis or the European sovereign debt crisis, is a multi-year debt crisis that took place in the European Union (EU) from 2009 until the mid to late 2010s. Several eurozone membe ...
References
{{reflist
Politics of Greece
Government audit
Financial Audit
A financial audit is conducted to provide an opinion whether "financial statements" (the information is verified to the extent of reasonable assurance granted) are stated in accordance with specified criteria. Normally, the criteria are internat ...
Economic history of Greece
Eurozone crisis
Corruption in Greece
Finance in Greece