The following OECD assessment and recommendations summarise Chapter 1 of the Economic Survey of Greece 2005 published on 7 July 2005.
What are the key policy challenges facing Greece?
Greek GDP is estimated to have grown by well above 4% in both 2003 and 2004, thus outperforming not only the European Union, but also the OECD average by a substantial margin for the fourth year running. A sharp decline in nominal and real interest rates that preceded entry into the euro area in January 2001was amplified by financial market reform, and the subsequent investment boom resulted in a large rise in productivity. Private consumption has been supported by strongly-rising credit, from initially low levels. However, employment growth has been only moderate, and structural unemployment remains high. Most of the recent strength of activity has been concentrated in domestic demand, especially construction, and services, in part arising from Olympic Games preparations, and financed by deficit spending. The fiscal audit performed during 2004 revealed that the deficit-to-GDP ratio had been understated by about 2 percentage points since 1997, and the debt ratio by 6 to 8 percentage points. The revised deficit for 2004 was 6% of GDP. With the world economy expected to continue its recovery over the coming years, growth is likely to continue exceeding the EU average despite substantial fiscal consolidation. But with the Greek economy still operating above potential, the inflation gap vis-à-vis the euro area may not narrow enough to prevent a further erosion of competitiveness that could at some point lead to a significant weakening of growth.
The main immediate challenge for Greek economic policy is to pursue substantial budget consolidation for some years not only to meet the fiscal objectives of EMU, but more fundamentally to prepare for budget pressures that will start after 2015 as population ageing impacts on an actuarially unsound and largely unreformed public pension system and raises the cost of maintaining the public health system. Over the medium-term, the main policy challenge is to close the sizeable gap with average EU-15 living standards. Convergence will require high per-capita economic growth over a prolonged period, which will entail both ensuring sound macroeconomic policies and raising potential output growth. Short-run prospects for solid growth remain good, but they may weaken in future years. Hence sustaining robust growth over the longer term will necessitate structural reforms to product markets and their effective implementation as well as the mobilisation of the large unused potential of labour inputs, especially among women and the young, and substantial improvements in human capital.
Decomposing the income gap
Percentage point differences in GDP per person relative to the United States, PPP-adjusted, 2003
1. The gap in GDP per capita is equal to the sum of the two components shown. The effect of labour utilisation is based on total hours worked per capita. Productivity is measured on a per-hour basis.
Source: OECD, Productivity database (February 2005).
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