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Boost from oil rate, euro decline

By Costas Karkayiannis

The Greek economy can expect two surprise gifts this year: The sharp decline of crude oil rates, ranging at around $ 55 per barrel, and the equally significant drop of the euro against the US dollar and other major currencies.

Both developments have provided an important boost to the countrys competitiveness and are a blessing for Greek exports, while the drop in energy costs could improve the disposable income of citizens and therefore consumption. However, the ultimate benefit for the Greek economy will depend on the impact of other factors, such as whether the eurozone escapes a third period of recession, whether political uncertainty subsides and the course of the main markets for Greeces products.

Imports account for 80 percent of Greeces fuel consumption, so the drop by half of oil rates since June 2014 will have a particularly favorable effect on the Greek economy. In previous years the effect of the reduction in salaries was offset in terms of the competitiveness of the local manufacturing sector by the increase in energy costs.

The decline in oil prices also creates deflationary pressures, just as the eurozone witnessed deflation of 0.3 percent in November against a target for a 2 percent inflation. In Greeces case, though, deflation was among the targets of its bailout program as it strengthens the competitiveness of the economy by reducing the cost of products and services.

Therefore, the drop in crude oil rates can have a multiple beneficial impact on the economy: Through dropping consumer prices and a reduction of the current account deficit, by slashing the cost of energy and even through the increase in consumption if the gains trickle down to consumers and boost their disposable incomes.

The weakening of the euro by about 12 percent against the dollar and other key currencies in recent months will bolster Greek exports, as well as tourism by making the country an even more attractive destination. Already in October exports posted a 7 percent yearly increase, which exporters attributed to the drop of the single currency.

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