29 November 2010

Commission forecast for Greece

A decade of expansionary fiscal policies resulted in the build-up of unsustainably high fiscal (high general government deficit and gross debt stock, rising interest payments) and macro-economic (high current account deficit and external debt, outflow of income) imbalances.

Following the escalation of the debt crisis in spring 2010 and the setting-up of the three-year Economic Adjustment Programme, Greece adopted comprehensive  fiscal consolidation measures. They are expected to have a dampening impact on domestic demand in 2010 and the first half of 2011. However, successful and credible  fiscal adjustment efforts should boost confidence and improve sentiment. Credibility gains are expected to compensate for the economic cost of  adjustment and lead to the beginning of a recovery in the second half of 2011. Sustained fiscal consolidation would support the much needed rebalancing of the economy towards a higher positive contribution to growth of the external sector.

The risks to this baseline scenario are broadly balanced. On the positive side, the resurgence of both consumer and business confidence and the gradual improvement of liquidity and capitalisation of Greek banks may help to sustain credit expansion at modest levels, which could underpin private consumption and foster investment. In addition, the contribution of net exports to GDP growth may turn out to be stronger than projected, should the impact of on-going and planned structural reforms materialise more swiftly. On the negative side, the contraction in imports may prove to be more transitory and less pronounced than expected (especially towards the end of the forecast horizon). If tighter credit conditions persist, external financing to the private sector could prove less buoyant and so the servicing of Greece's high external debt might crowd out domestic spending.

The 2011 budget foresees additional measures amounting to 2½ per cent of GDP, which should be sufficient to reach the 2011 deficit target of 7½ per cent of GDP. This would bring total fiscal consolidation measures in 2011 – including those agreed in May – to 5¾ per cent of GDP. About two-thirds of the agreed new measures are on the expenditure side, and most of them are structural in nature. They include cuts in 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. Taking into account the consolidation measures for 2012 agreed under the Economic Adjustment Programme in May (but no additional ones) and on the back of the discontinuation of one-off measures to be implemented in 2011, the headline deficit should exceed 7½ per cent of GDP in 2012. Debt would increase from 126¾ per cent of GDP in 2009 to 156 per cent of GDP in 2012.

Full forecast (Greece)

© European Commission