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The economy contracted further in 2012 owing to strong, but absolutely necessary, fiscal consolidation, declining wages and confidence, and weak external demand. Unemployment has risen to historical highs. A return to positive growth is projected only towards the end of 2014 as world trade strengthens, confidence returns and competitiveness improves.
The agreed consolidation measures should be put in place. But if growth proves lower than assumed in the government’s fiscal plans, then the automatic stabilisers should be allowed to operate, even if this means missing the set targets. The most vulnerable in Greek society need to be better protected from cuts in social spending. Recapitalisation of the banking system should be a priority to restore credit channels to support growth. It is vital to vigorously implement structural reforms, including combating tax evasion, enhancing efficiency in public administration and removing barriers to competition. Such reforms are the only path to the renewal of sustained growth in Greek living standards.