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13 May 2011

Commission forecast for Greece


Fiscal tightening will have a strong contraction impact on economic activity, on the back of cuts in public wages, an increasing tax burden and ensuing declining disposable income and public spending.

The contraction of economic activity, reflected in further weakening labour demand, is still weighing heavily on employment, which is set to fall throughout 2011. Reduced employment opportunities in the private sector, along with the recruitment freeze and cuts in short-term contracts in the public sector, will push the unemployment rate up to above 15 per cent through 2012. The situation in the labour market combined with declining wages should weigh on disposable income over the medium-term, dampening real demand. As a result also of continuing tax uncertainty, private consumption is projected to contract further within the forecast horizon.

The adjustment programme for Greece contains a very wide agenda of structural reforms. The aim of these reforms is to improve the supply-side conditions of the economy and increase internal competition and external competitiveness. Their implementation will facilitate the return of the economy to potential growth, while strengthening this potential. In the course of 2010, Greece adopted two batches of labour market reforms. By July, Parliament had already voted on legislative changes related to overtime pay rates, severance costs, and sub-minima wages for groups at risk, such as young and long-term unemployed. The Government and the social partners also agreed that the minimum wage would be frozen until summer 2012, and then expected to increase in line with expected euro-area inflation. The new labour law of December reforms the mediation and arbitration system and goes in the direction of moving the wage bargaining system towards the firm level, where the firms’ growth strategies are decided. The establishment of special firm-level collective agreements could be a promising step towards making the wage-setting system better adapted to reflect the firms' economic conditions.

The 2011 budget law foresees the implementation of fiscal consolidation measures – including those agreed in May – of some 5¾ per cent of GDP. Around half of these measures are intended to enhance revenue, and most of them are permanent. The rest comes from spending cuts and includes retrenchment of unproductive and untargeted spending, a reduction in short-term contracts in the public sector, better targeting of universal household subsidies, and better management and use of state assets, particularly in the collection of arrears.

The implementation of fiscal policy in 2011 remains challenging. While the Government has confirmed its commitment to meet the deficit target, fully recouping the slippage of 2010, it has not yet announced any additional measures. Based on current trends and the budgetary execution so far, additional measures will be needed to ensure that the 2011 deficit ceiling is respected. The upward revision of the 2011 budget deficit forecast stems mainly from the tax revenue performance in the first quarter of 2011, the downward revision for the yield of some fiscal measures in the state budget, and a base effect from the worse-than expected 2010 fiscal outcome.

Full forecast (Greece)



© European Commission


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