03 May 2013

Greece – 2013 Article IV consultation concluding statement of the IMF mission

1. Greece is making progress in overcoming deep-seated problems in the midst of a very serious and socially painful recession. The adjustment challenges facing Greece in 2010 were daunting, with fiscal and current account deficits both well into the double digits, reflecting runaway increases in public expenditures and the emergence of a large competitiveness gap in the years following the adoption of the euro. For any country belonging to a currency union, addressing dual imbalances of this magnitude would carry very high risks to growth, as recognised at the outset. In the event, the recession in Greece has been much deeper than expected. But Greece’s achievements must also be recognised:

• Progress on fiscal adjustment has been exceptional by any international comparison, with the primary balance set to have cumulatively improved by 10 percent of GDP by end-2013, amid a contraction in GDP of more than 20 per cent. 
• Greece has also made a significant dent in its competitiveness gap. Far-reaching labour market reforms have helped to realign nominal wages and productivity at the enterprise level. We estimate that the competitiveness gap as measured by Unit Labour Costs (ULC) has been reduced by close to two-thirds since 2010, while the current account deficit has come down cumulatively by about 10 percent of GDP.
• Financial sector stability has been preserved, despite large losses associated with the debt restructuring and a sharp rise in NPLs associated with the deep recession.

2. These achievements have been facilitated by unprecedented support from the international community, including €173 billion to date from Greece’s European partners. This has significantly cushioned the adjustment need, preventing what would otherwise have been much more serious social hardship, while containing negative spillover to the rest of the euro area. The achievements to date are evidence of a very strong and persistent determination on the part of Greece and its European partners to do whatever it takes to restore Greece to a sustainable situation inside the euro area.

3. However, insufficient structural reforms have meant that the adjustment has been achieved primarily through recessionary channels, with unequal distribution of the burden of adjustment. Three problems stand out:

• Very little progress has been made in tackling Greece’s notorious tax evasion. The rich and self-employed are simply not paying their fair share, which has forced an excessive reliance on across-the-board expenditure cuts and higher taxes on those earning a salary or a pension.
• While labour market reforms are causing a notable decline in nominal wages, this has only to a very limited degree been reflected in lower prices, because of failure to liberalise closed professions and more generally open up to competition. This is another reason for why too much of the burden has so far fallen on those earning wages and pensions.
• While the rebalancing of the economy has been associated with a surge in unemployment in the private sector, not least among the young, the over-staffed public sector has been spared, because of a taboo against dismissals.

Decisive corrective actions are needed in each of these areas to promote an early supply response and achieve a more balanced distribution of the burden of adjustment. The mission welcomes that the government is refocusing its programme in recognition of these problems.

4. Major fiscal challenges remain.

5. Effective financial intermediation is crucial to contribute to a strong recovery. 

6. A strong recovery will need to be built primarily on deepening structural reforms. 

7. Attempts to engineer growth artificially should be resisted. 

8. Restoring growth remains the overarching precondition for whether Greece succeeds. Looking over the period 2010–2012, the much deeper than expected recession was overwhelmingly due to a progressive loss of confidence, culminating in acute concerns about euro exit, as political uncertainty continued to grow, making it increasingly evident that there was no strong political resolve to stand up to vested interests fiercely opposed to reforms. This led to a dramatic contraction in investments not only through poor sentiment, but directly through deleveraging and an attendant sharp credit contraction. Looking forward, two crucial considerations stand out:

• With fiscal adjustment set to remain a drag on GDP growth for several years to come, the key challenge is to generate the improvement in confidence needed for a recovery in investment to begin to more than offset this drag. This cannot happen unless Greece can secure broad domestic support for the programme and the political stability that would come with this. The lessons of the recent past are that only with full and timely policy implementation and commitment to the programme can the fundamentals for a recovery be put fully in place and the fear of adverse outcomes permanently put to rest.
• Greece’s public debt remains much too high, despite the restructuring of privately held bonds and recent support by official creditors. It is, therefore, very welcome that Greece’s European partners have now accepted that Greece could need significant exceptional support on below-market terms in order to restore debt sustainability and that they have committed to provide additional relief, if needed, to keep debt on the programmed path, i.e. to bring it substantially below 110 per cent of GDP by 2022. With Greece’s debt now overwhelmingly held by the official sector, such a commitment is essential to assure creditors that a credible framework for dealing with Greece’s debt overhang is now in place.

Full statement

© International Monetary Fund