The priorities the next government must set for the economy
The Greek economy has made significant progress since the previous decade’s major debt crisis, which was the result of reckless fiscal policy and loss of competitiveness. The significant progress and strengthening that we see today in the credibility of economic policy, which is mainly reflected in the low spreads of Greek government bonds but also in many other indicators of the real economy, public finances, exports, and financial sector, are attributable to a number of factors. Above all, however, they resulted from a painful fiscal adjustment, a radical restructuring of public debt, extensive and difficult reforms in the labor market, the goods and services markets, the social security system, the taxation system, as well as from the extensive restructuring and capital strengthening of the banking sector. These important changes have largely remedied past economic policy mistakes and key macroeconomic imbalances. These changes led to a return to a true convergence of Greece’s GDP per capita with the European Union average (now built on a solid basis rather than on huge “twin” deficits), to the considerable deceleration of the public debt-to-GDP ratio, while Greek government bonds are, currently, only a heartbeat away from investment grade, which marks and confirms the return to normality.
A decisive factor, for saving, at first, then recovering, and finally establishing trust in the Greek economy, was and still is the support of Greece’s partners and especially of European institutions. The historically and extensively unprecedented refinancing and restructuring of nearly the entire public debt on very favorable terms, the recapitalization of banks, the availability for the European Central Bank to purchase Greek government securities – despite the lack of investment grade – and Greece’s large participation in the European recovery instrument NextGenerationEU (NGEU) are all major aspects of this support.
Despite the improvement in competitiveness, both in terms of relative unit labor costs and relative final prices, and despite the rise in the structural competitiveness ranking scale, the Greek economy still has persistent structural issues, resulting in a still relatively low ranking in international structural competitiveness indexes. Some of these inherent weaknesses include delays in the administration of justice, ongoing bureaucracy and inefficiency in some areas of public administration, delays in the national land registry completion (issues which, inter alia, discourage investment, particularly from abroad), backlog in some key infrastructure, low participation of women and youth in the labor market, coupled with adverse demographic developments, insufficient measures against tax evasion, shortcomings in the “knowledge triangle” (education – research – innovation), quasi-oligopolistic conditions in specific goods and services markets and distortions in the energy market. The country’s GDP (and GDP per capita) remains significantly below 2008 levels, public debt remains the highest in the European Union and the second highest worldwide, while the current account deficit is now (forecast for 2023) at 7% of GDP.
The very high current account deficit recorded in recent years should be of concern. It is well known that the high deficit recorded in 2022 (9.7% of GDP) is about 40% due to higher fuel prices. Moreover, there is no need for a zero deficit or, even more, a surplus, in an economy that aspires to re-converge its GDP per capita with that of its partners and, even more so, that wants to increase its national investment rate (currently 14% of GDP) up to the European Union’s average (22% of GDP). Which, by the way, spends on its national defense – on armaments – a much higher percentage of GDP (over two times) than the European Union average. However, a current account deficit of more than 4% of GDP, persisting over the medium term, is in conflict with the EU’s macroeconomic imbalances procedure, but above all, indicates that national expenditure is significantly and persistently higher than domestic output or, for that matter, that private and public sector investment is significantly higher than the corresponding savings.
In this context, the following points are of particular importance:
First, the above-mentioned reforms, boosting the growth rate of potential domestic output, thereby increasing the economy’s capacity for higher spending (either investment or consumption) without worsening the external balance.
Second, the increase, to the extent possible, of public sector primary surpluses, by creating a special reserve, not distributed in the current fiscal year, of extraordinary public revenues. The recent example of Ireland, which created a Strategic Investment Fund, from extraordinary tax revenues generated by higher inflation, in order to support the green transition and the social security system, is a model to follow.
Third, the efforts to further increase exports of goods and services and to substitute imports, promote energy saving and the green transition, in order to reduce dependence on imported fuels.
Fourth, the largest possible increase of foreign direct investment (which does not create external debt obligations for either the public or private sector), and in particular productive FDI (greenfield investments), together with the optimal use – and thus the maximum possible inflow – of resources from the EU Structural Funds and the Recovery and Resilience Facility.
As the global financial stability challenges remain high, with successive crises and widespread, increased uncertainty, the greatest risk for Greece’s economic prospects would be losing the so arduously regained credibility of its current economic policy, breaching existing commitments, and returning to past practices. Responsibility and commitment on the part of economic policymakers are required to safeguard the sacrifices of the past decade and to continue the progress that has been made. The primary task of the next government should be to (a) implement a reforms program that will improve structural competitiveness, increase the economy’s overall productivity and expand the country’s productive potential, thereby also reducing the current account deficit, and (b) return to primary, structural, in other words cyclically adjusted, fiscal surpluses of around 2% of GDP, so as to recover, maintain and, in the medium term, exceed its investment grade this year. This will have positive multiplier effects in all sectors of the economy and will benefit all citizens.
Yannis Stournaras is the governor of Bank of Greece.
