Oil and dollar stoke the fires of inflation Central bank governor worried about impact of falling euro

Less than four months before formally entering the European Economic and Monetary Union, with its promises of monetary and price stability, Greece faces the specter of strong inflationary pressures, from both a rising dollar and high oil prices. It is estimated that the rise of the dollar, and the yen, has already added 1 trillion drachmas ($2.5 billion) to the country's debt and $1 billion to its current account deficit. As for inflation, it rose to three percent in August and may yet go higher.

The drachma's shadowing of the euro has meant that it has shared its depreciation against the dollar, and has increased inflationary pressures even further.

"The euro problem (the currency's weakness) is as grave as the rising oil prices," Bank of Greece governor Lucas Papademos told Kathimerini yesterday. "The combined effect with expensive oil worsens the climate of inflationary pressure in Europe."

European Union countries may be subjected to the same inflationary pressure, but Greece's weak foreign trade position means that it cannot offset the rising price of imports with its own cheaper exports, as many other EU countries can do. Already, gasoline has reached 300 drachmas per liter and, on Monday, one dollar was selling for a record 400 drachmas, before declining slightly yesterday.

National Economy and Finance Minister Yiannos Papantoniou has repeatedly said over the past few days that reducing taxes on oil products is not an option, since Greece's taxes are already Europe's lowest. But even other EU members - which have seen widespread protests in favor of cheaper fuel - do not regard this as an option, as long as they hope to pressure the oil-producing countries to lower their prices.

Papantoniou said that all Greece can do is wait for the end of September for international market trends to reveal whether oil prices will fall toward $30 per barrel or will remain at around $35 per barrel. Bank of Greece officials believe that the only way to offset the negative effects of a rising oil price and a sliding drachma is through swift privatizations, market deregulation, and labor market reform. But unions remain adamantly opposed to such moves and have been conducting a series of strikes against the so-called "de-hellenization" of public utilities.

http://www.k-english.com/content.asp?id=48608

-- Martin Thompson (mthom1927@aol.com), September 15, 2000

Answers

The recent fall of the euro is a much more serious problem than most people realize, I think.

-- Uncle Fred (dogboy45@bigfoot.com), September 15, 2000.