Priorities of the next government
Five years after the end of Greece’s bailout adventure and one after the country’s emergence from the special regime of enhanced supervision, the government that will emerge from the elections is called to respond to new challenges: removing the last signs of financial crisis, regaining investment grade for Greek bonds, and promoting a new production model in the country, more competitive and extroverted.
The agenda of the next government will be heavy. The pandemic and the energy crisis that burdened the previous four years did not help to deal with chronic wounds of the economy, on the contrary, they restored – even if temporarily – the deficits in the budget and in the balance of payments.
A handout culture was also cultivated and a number of reforms, such as in Justice, did not go their way. On the other hand, the country recovered satisfactorily after the plunge in GDP in the first year of the pandemic and recorded high investment performance, with the help of both the Recovery Fund and Foreign Direct Investments, although the high growth rates are largely due to non-productive investments such as construction.
Exports increased dramatically and tourism surpassed pre-pandemic levels. Taxes were cut under the ruling party’s program, but inflation eroded disposable income. Tax evasion appears to have been reduced based on the VAT loophole measure, but in practice it still appears to be very widespread. The public debt after the first pandemic jump took a dive, but in absolute terms it increased and in any case it is the highest in the Eurozone.
Financial analysts note a number of priorities for the next day in the financial sector:
1. Investment grade recovery. It is a condition to attract investments and lower the borrowing costs of the Greek State.
2. Return to primary surpluses of 2%-2.5% of GDP. Greece achieved zero primary deficits in 2022, but is now called upon to make one more adjustment, based on the new Stability Pact, which is expected to be agreed this year. 2%-2.5% of GDP translates into savings of €4-5 billion, and this in turn means an end to support measures as we saw them during the energy crisis and frugal benefits from now on. It also means a reduction in tax evasion, which, despite the limitation shown by the VAT loophole, is still widespread. If it does not manage to return, in a stable way, to primary surpluses of this amount, the country will pay dearly with ever higher borrowing costs, since it will jeopardize the sustainability of its debt.
3. Reducing external deficits, the current account balance, through the transition to an outward-oriented production model. The participation of consumption in GDP must decrease, analysts note, while on the contrary, the participation of investments must increase, which is currently 14%, while in the E.U. on average it is at 22%. National saving must turn positive again. Greece cannot continue to grow with consumption and tourism as drivers, which proved vulnerable during the pandemic. Of course, tourism is valuable, but analysts emphasize that the productive base needs to be strengthened, especially in outward-facing sectors. On the contrary, today, as the experience of previous years has shown, growth depends on consumption, which in turn depends on imports. This is an unsustainable long-term model.
4. Promoting reforms. In areas such as Justice, land registry, education and the modernization of public administration, there have been delays that also weigh on economic life, mainly by preventing investment decisions.
5. Full absorption of the Recovery Fund resources, using them for productive purposes. The deadline expires in August 2026 and by then the country is required to invest approximately another 20 billion euros (out of the 31 billion euros corresponding to it).
The goal
The ultimate goal of any economic policy is, of course, to improve the welfare of citizens. Greece is still far from the EU average GDP per capita. and the rapprochement will not come for 7-10 years, economists estimate. During these it will need to have growth rates of at least 3%.
