Policy Brief: Economic Survey of Greece, 2009

Greece has initially held up better during the global economic crisis than many other OECD countries. It is unlikely, however, to avoid a recession as confidence, tourism and shipping receipts have all fallen substantially. The financial sector may face pressures from a contracting real estate sector and its exposure to the emerging economies of south-eastern Europe. The authorities have responded with fiscal measures and a plan to assist the financial sector. However, their room for policy manoeuvre is tightly restricted by the high public debt, repeated fiscal slippages and the large external and internal imbalances, which have been reflected in high sovereign interest-rate spreads since the end of 2008 as risk aversion rose.

Fiscal consolidation is imperative, but tightening needs to be carefully timed. As activity slows, budgetary deterioration is inevitable. There is virtually no room for budgetary manoeuvre, and the poor state of public finances justifies the immediate structural consolidation already put in place. However, automatic stabilisers should be allowed to work, even though this will probably widen the fiscal deficit to some 6¾ per cent of GDP by 2010. To boost credibility and avoid adverse market reactions, a strong commitment to continue fiscal consolidation is urgently needed. This should include specific, concrete measures to eliminate the structural deficit, a more restrictivebudgetary rule and greater independent oversight. The goal should be to bringpublic debt below 60% of GDP by 2020-25, when the full effect of populationageing kicks in. Developments in the financial sector will continue to demandclose supervision to ensure that the support plan remains an adequate response to evolving risks.

Structural fiscal reforms should be a key priority going forward. Sustainability calls for improvements in a tax system which is beset withwidespread evasion. Apart from simplifying and widening tax bases, the fight against tax and social security contribution evasion should be steppedup, and tax collection improved. This needs to be accompanied with tightercontrol over spending, including a cut in administrative costs, rationalisationand limitation of the wage bill, and reforms in loss-making state enterprises. Longer term viability also calls for further pension reforms, including revision of the parameters for pension calculations and new measures to further reduce incentives to early retirement.

The performance of the healthcare and education systems needs to be improved. This is important for social cohesion, the enhancement of human capital, and productivity. In both areas, in which major reforms have been launched, substantial efficiency gains can be achieved.

OECD: Economic Survey of Greece 2009 http://www.oecd.org/dataoecd/5/61/43284926.pdf

---