Greek Financial Audit, 2004

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The 2004 Financial Audit of Greece was an investigation into the true extent of Greece's public finances. It examined government revenue, spending, and the level of Greek government borrowing.[1][2]


Within the European Union, entry into the Eurozone depends on the applicant nation meeting certain economic criteria.[3] 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.[3]

Up until 1994, Greece recorded very high deficits, for some years above 10% of GDP.[1][2] 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.[1][2] In 2000, given a deficit below 3% of GDP in 1999, Greece was accepted as the 12th member of the European monetary union.

EU doubts about 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. This was shortly before Greek elections and a new government (New Democracy) was inaugurated.

When the conservative party New Democracy won the March 7 elections in 2004, it said it would start an objective financial audit of the government accounts. George Papandreou, president of Panhellenic Socialist Movement (PASOK) which was the main opposition at that time, and the other two smaller parties, initially agreed with the need for an audit. But the agreement lasted a very short time during which neither outside auditing firms nor the central bank were asked to carry out such an audit.

New government audit

Instead, the government produced new estimates while investigating the years 1997 - 2003, and the resulting data was given to Eurostat, which then went on and published a report.[3] The requirement that the 1999 budget deficit should have been below 3% of GDP was one of the key criteria for Eurozone entry; thus, its revision to 3.1%, The precise figure was actually 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 calculated with the ESA79 methodology in force at the time of Greece's application, and thus, 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 U.S. banks by Greece and other Eurozone countries to artificially reduce their reported budget deficits. A currency swap arranged with Goldman Sachs allowed Greece to 'hide' 2.8 billion Euros of debt, however, this affected deficit values after 2001 (when Greece had already been admitted into the Eurozone) and is not related to Greece's Eurozone entry.


Several arguments have been expressed about the implications of the audit. Some commentators talked about data falsification. Others, though, 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,[citation needed] 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.

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, while big economies like 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,[citation needed] 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, who was 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. All the opposition parties accused New Democracy's government on making an audit that was not a real one.

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 that the way PASOK used to do it was known to the Eurostat and Eurostat was never opposed to it.

Costas Simitis wrote in an in the Financial Times claiming that Greece's deficit revision damaged Europe. There Simitis states among other things that 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.[4] Some days later FT received a Letter to the Editor by the Director General of Eurostat[5] acknowledging 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,[6] which seemed to legitimize some of the practices of the previous Costas Simitis 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

European debt crisis:


  1. 1.0 1.1 1.2 Tim Harford (9 September 2011). "Look out for No. 1". Financial Times.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  2. 2.0 2.1 2.2 Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
  3. 3.0 3.1 3.2 "Report by Eurostat on the Revision of the Greek Government Deficit and Debt Figures" (PDF). 22 November 2004.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  4. Simitis, Costas (22 Dec 2004). "Greece's deficit revision damaged Europe" (online). Financial Times. The Financial Times Ltd. Retrieved 19 February 2015.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  5. Hanreich, Gunther (28 Dec 2004). "December 28, 2004 2:00 am Eurostat takes issue with former Greek PM on reasons for the revision of economic data" (online). Financial Times. The Financial Times Ltd. Retrieved 19 February 2015.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  6. Spinthourakis, M. (10 Mar 2006). "Eurostat takes new decision on military expenditure". Athens News Agency (Item 16). Hellenic Resource Network. Athens News Agency. Retrieved 19 February 2015.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>