The Greek Financial Audit was a 2004 investigation into the true extent of Greece's public finances. It examined government revenue, spending and the level of Greek government borrowing.
Background
Within the European Union, entry into the Eurozone depends on the applicant nation meeting certain economic criteria. Measures such as budget deficits and public debt levels are assessed, as well as the inflation situation and the stability of the national currency exchange rate of a European Union member state. Requirements include a budget deficit below 3% of gross domestic product (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 refused to validate data transmitted by the Greek government. In reaction, the NSSG (National Statistical Service of Greece) 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 was inaugurated.
After the March 7 elections, the new government said that it would start an objective financial audit of the government accounts. George Papandreou, of Panhellenic Socialist Movement (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 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 it was calculated with the ESA79 methodology in force at the time of Greece's application. 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 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. A currency swap arranged with Goldman Sachs 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" employed by many states in order to meet the deficit criterion for entry into the Eurozone.