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09 December 2010

The Economic Adjustment Programme for Greece – Second review


A joint Commission/ECB/IMF mission met with the Greek authorities in Athens on 15-22 November 2010. The mission assessed compliance by Greece with the terms and conditions of the second review under the economic adjustment programme and updated conditionality for the next reviews.

Policy implementation has become more difficult. After a strong start with major inroads in fiscal consolidation and structural reforms, including far-reaching pension and labour market reforms, programme implementation has become more difficult. The 2010 ESA fiscal deficit target will be missed, despite very sizeable fiscal consolidation efforts, and there have been delays in the preparation of important structural reforms. Slower progress reflects a combination of factors, including the electoral cycle, the resistance of vested interests, and – in a few cases – difficulties to design and activate a number of complex reforms within a short time-span. With the Government’s reform mandate strengthened in the wake of the local elections, the mission argued that the time is right to redouble fiscal consolidation and reform efforts, and to demonstrate enhanced resolve to implement programme policies.

Fiscal pressure points are more arduous than expected. The quantitative performance criteria (QPC) for end-September have been met. However, revenue has continued to underperform – reflecting problems with tax compliance – and, despite sizeable spending under-execution, the full-year target for the general government cash primary balance is at risk. The ESA government deficit is expected to reach 9.6 per cent of GDP, 1½ per cent of GDP above the programme target.

The Government committed to respect the 2011 ESA deficit target of €17 billion. With higher than expected starting deficit and debt levels and somewhat lower growth prospects, larger  consolidation efforts are needed to reach initial deficit targets and to put the debt ratio on a downward path from 2013 onwards. It is, therefore, welcome that the Government confirmed that the fiscal strategy remains firmly anchored on the consolidation path agreed in May 2010. To recoup the ground lost in 2010 fully, the Government has committed to implement 2½ per cent of GDP in new measures, over and above those already agreed. The new measures directly address some of Greece’s endemic budgetary weaknesses. They include reforms to restructure state-owned enterprises, to reduce waste and corruption in healthcare, and to better focus social protection. The 2011 budget also includes some one-off measure

The authorities are taking steps to increase cash buffers in the Treasury. They have been able to rollover short-term paper successfully. While yields remained high, auctions have attracted strong demand, including from international investors. The privatisation programme will be significantly strengthened, with a total amount of €7 billion targeted over 2011-13, more than twice the amount foreseen in the original programme. These actions should allow for an increase in cash buffers in the Treasury to deal with contingencies and to contribute to the reduction in the government debt ratio.

A second wave of structural reforms needs to be launched. Key reforms on the pension system, the liberalisation of the transport sector and the increase of labour market flexibility were implemented in the early months of the programme. Some of these reforms had been on the national reform agenda for quite some time, and could, therefore, be rapidly enacted. Progress since the summer has been slower with for  instance, reforms of the remuneration system in the public sector and of the wage bargaining system facing significant delays. Slower progress reflects the need to overcome vested interests and, in a few cases, objective technical and legal challenges. Given the many areas of the real economy requiring a deep reform, the mission called for a new decisive impulse to implement reforms that boost the economy’s growth potential. New deadlines for key labour and product market reforms were agreed with the authorities. Priority should be given to those reforms that speed-up adjustment and produce an early supply response.

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