with emu membership greece has lost its independent exchange rate and monetary policies, which could be useful instruments for improving competitiveness and employment. however, it cannot be said that this loss is very great. in small open economies, especially those with strong trade unions, nominal devaluations are quickly offset by wage increases that aim to avoid a cut in real wages. hence, nominal devaluations do not lead to sustained real devaluations. greece clearly comes in this category. a similar line of reasoning applies to a monetary expansion leading to temporarily low interest rates. challenges for the future membership of the euro area brings with it new challenges for economic policy in the years ahead. with independent monetary and exchange rate policies no longer available to target national policy goals, emphasis has shifted towards fiscal policy and to policies to promote labour [ and product ] market flexibility as a means of restoring strong non - inflationary growth in the face of a negative shock. budgetary policy will continue to be geared to maintaining public finances close to balance or in surplus in the medium run, while supporting growth by acting in a counter - cyclical manner ( and allowing automatic stabilizers to work fully ) as envisaged in the stability and growth pact. this is supplemented by the greek authorities ’ goal of reducing the general government debt - to - gdp ratio to 60 per cent by 2010. the latter target is crucial given greece ’ s presently high debt ratio and the need to make further progress on fiscal consolidation prior to the onset of expenditure pressures relating to the ageing population. prudent fiscal policies will also be crucial to offset the progressively larger negative private savings – private investment gap which otherwise could induce unsustainable movements in the total savings – total investment gap and correspondingly in the current account deficit. in 2002, the general government surplus is expected to be 0. 8 per cent of gdp. in 2003 and 2004 the projected budgetary surplus should average 1. 1 per cent of gdp, according to the 2001 update of the greek stability and growth programme. at the same time, the debt ratio is expected to decline from 99. 6 per cent in 2001 to 90 per cent of gdp in 2004. emu membership is acting as a catalyst for further progress on the structural front and for the reinforcement of macroeconomic stabilization as greece deepens its economic and financial integration with the euro area. continued structural reforms will tend to increase total factor productivity, which has been a significant driving force behind growth in recent years. in this

respect, considerable progress has been made with the liberalisation of markets, the safeguarding of competition and institutional changes aimed at ensuring the smooth operation of product and financial markets. among these, the most important measures taken in 2001 were : the ending of the state monopoly in the electricity sector, the opening - up of the fixed telephony market and the awarding of umts licenses and supplementary cgm licenses. the liberalisation of sea transport, an area of major importance, is planned for this year. there has also been an extensive programme of privatisation. some important companies ( like olympic airways, the piraeus port authority and the postal services ) are scheduled to go through privatisation schemes this year. some publicly - owned companies only recently scheduled for privatisation include the postal savings bank and the general bank, the athens water and sewage company ( already partially privatized ) and the public gas company ( depa ). the government agenda for structural reform also includes pension reform at the centre of the current policy debate in greece ( social dialogue on this issue was launched last month and is currently underway ). some steps are also being taken to reform the health care system, where there is vast room to improve service delivery and public expenditure control. the government is also proceeding to an overall tax reform ; the proposals of an experts ’ commission were made public earlier this month ; after public discussion, the government will make its decisions in the summer and new provisions will take effect as of january 2003. the tax reform is expected not only to improve the efficiency of the greek economy, but also to reduce the administrative costs of collecting taxes and the compliance costs for the taxpayers. the challenge now is to broaden and deepen the efforts undertaken to date to strengthen competition and efficiency in factor and product markets, efforts which are essential to ensure real convergence. further progress is required on labour market reform. there remains foremost a need to facilitate labour market entry and to improve training. in product markets, the privatisation progress should be combined with broader measures to ensure competitive market outcomes across the economy. further efforts to reduce bureaucratic inefficiencies are also required to lift impediments to new businesses - including foreign direct investment. in conclusion, despite the slowdown in the world economy, the greek economy continues to perform very well. real convergence is the clear priority for the coming years and the authorities still face some major challenges to facilitate the process. nonetheless, the commitment of the authorities to both fiscal