george provopoulos : international financial turmoil and its impact on the greek economy key remarks by mr george provopoulos, governor of the bank of greece, at the meeting with the presidency and members of the hellenic federation of enterprises, athens, 14 july 2008. * * * the international financial system it will take some time until normality is fully restored... 1. the international financial turmoil, which began almost a year ago, is still ongoing and continues to affect financial markets and macroeconomic aggregates. extreme situations have been avoided, thanks to the action taken by major central banks ( in the form of finetuning operations to restore normal liquidity conditions ) and by governments, in particular those of the united states and the united kingdom, aimed at averting the risk of a broader systemic crisis. 2. however, it remains uncertain how long it will take before credit markets return to normal conditions. τhis continued uncertainty is reflected in, at times, strong tensions in money and credit markets ( which are more sensitive to risk factors – whenever these appear ) and in equity markets ( where there are occasional swings of investors'risk aversion and, thus, liquidity preference, as well as of their uncertainty regarding the macroeconomic outlook of the united states or other countries ). 3. due to globalisation, uncertainty in the global economy also affected the greek economy and the economies of the wider se european region, although these economies have proved quite resilient. impact on the real economy : despite the slowdown, the economic fundamentals of the euro area are sound. greece needs to intensify, rather than simply not relax, efforts to address structural weaknesses and macroeconomic imbalances … 1. the uncertainty surrounding the global economic outlook remains higher than usual. it seems that the adverse effects of the financial turmoil on world economic activity will be stronger and more protracted than initially thought. this is the case in particular with the us economy ( where the housing crisis is serious and is spilling over to other sectors ). any prolongation or deepening of the economic slowdown in the united states could have repercussions on the euro area and thereby on the greek economy. 2. i should clarify that by " uncertainty " i mean the possibility that downside risks to the growth projections made until recently could materialise. according to these projections made by international organisations, the growth rates of the global economy and of the european economy are slowing down, but growth is continuing, despite the

fact that a small number of euro area countries recorded zero or negative gdp growth in the first or the second quarter of 2008. 3. according to available projections, while some downward revision during the next two months cannot be excluded, growth rates should remain positive in 2008, of the order of 1. 5 - 2. 1 % in the euro area and 3. 4 - 3. 5 % in greece. in both cases, exports and domestic demand will remain the main drivers of growth, although their contribution to growth will be smaller than in 2007. however, in spite of the shocks experienced during the last twelve months, the economic fundamentals of the euro area as a whole remain sound. 4. as far as greece is concerned, the adverse international environment makes it imperative to intensify, rather than simply not relax, efforts to address the macroeconomic imbalances and structural weaknesses which are reflected in : - the large current account deficit ; - the still high public debt - to - gdp ratio ; - the persistent inflation differential vis - a - vis the euro area as a whole ; and - the unemployment rate, which despite its decline remains relatively high. the increase in the world prices of oil and food commodities this increase presents a major, but not unprecedented, challenge. this time we have to deal with the challenge in a correct and, above all, timely manner, ensuring that it does not trigger a second round of endogenous, broadly - based inflationary pressures. targeted relief of economically weaker groups must be prioritised. this will require a brave effort from all parties involved, enterprises and households alike, to adapt to the new conditions. we must not repeat the painful mistakes of the past. 1. adding to the credit - related macroeconomic uncertainties are those that arise from the possibility of further increases in the world prices of oil and other raw materials as well as food. 2. all of us, i. e. policy makers and social partners, have a duty to make sure that the fundamentals of the greek economy improve and that heightened macroeconomic risks do not materialise. as our economy now faces the effects of exogenous and to some extent temporary shocks, it is of the utmost importance to ensure that the adverse effects of domestic factors – i. e. the macroeconomic imbalances and structural weaknesses that i mentioned earlier – on our medium - term prospects of output, employment and incomes are contained. should we fail, hard times for all of us will last longer