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Please note that new projections for the Greek economy have become available.
The following OECD assessment and recommendations summarise Chapter 1 of the Economic survey of Greece published on 30 May 2007.
What are the main risks and policy challenges?
Over the past decade, Greece has progressed rapidly in closing the income gap with the best performing economies, particularly once the recent 26% upward revision to the level of GDP is taken into account. This data revision is largely the result of improved measurement of the fast-growing services sector, while, contrary to many press headlines, the contribution from the inclusion of illegal activities was less than 1% of GDP. A full assessment of growth performance is difficult because data revisions prior to 2000 have yet to be published, but it is likely that growth in GDP per capita over the past decade has exceeded 4½ per cent per annum, which would rank Greece second highest (after Ireland) in the OECD. Explanations for the rapid catch-up in living standards include: financial market liberalisation coupled with membership in monetary union, which led to a substantial reduction in borrowing costs; buoyant activity in export markets in south-eastern Europe; and the fiscal stimulus and focal point given by the Olympic games in 2004. The fact that strong growth has continued since 2004 in the context of substantial fiscal consolidation is consistent with enhanced robustness stemming from structural reforms. The strong performance over the last decade has occurred despite product and labour market regulations which are still strict in international comparison. However, product market regulations have been eased and there has been a large boost to productivity growth given an initially weak starting position. In addition, a large informal sector exists and tight regulation may be less of an impediment to growth if it is not strictly enforced. An example is the employment of illegal immigrants which has satisfied a latent demand for less-skilled workers that labour market rigidities helped to create. However, competition-impeding regulations that are weakly enforced and a large informal sector are clearly second best to a well-performing regulatory framework with people working in regular jobs, particularly because the former combination gives rise to tax evasion on a large scale.
Gaps in GDP per capita levels and growth rates(1)
Relative to the United States
1. GDP in volume converted to US dollars using constant purchasing power parities.
2. Assumes that half of the GDP revision was generated over the period 1995-2000.
Source: OECD (2006), Productivity Database, September, www.oecd.org/statistics/productivity.
Contrary to expectations of a post-Olympics slump, the economy has continued to grow briskly in 2005 and 2006 during a period of substantial fiscal consolidation. The government deficit has been substantially cut from a peak of 7¾ per cent of GDP in 2004 to an estimated 2½ per cent in 2006 (based on the unrevised GDP data, which are the basis for judging compliance with the Excessive Deficit Procedure, pending confirmation of the revised GDP data by Eurostat). This is the first time the deficit has been brought below 3% since the adoption of the euro. While strong growth of around 4% is expected to continue for some years, headwinds are likely to become stronger over time. The clearest sign of macroeconomic tension is an increase in the current account deficit to about 9½ per cent of revised GDP in 2006. In the absence of currency risk, this mainly serves to highlight concerns about a continuing loss in competitiveness, with consumer price inflation running at about 3¼ per cent at the end of 2006, having remained persistently above the euro area average for many years. Relatively high inflation implies low real interest rates, which fuel domestic demand. However, losses in competitiveness may ultimately undermine growth performance. They may continue for some time in a favourable external environment, but the longer they last, the larger and more protracted the adjustment in relative prices and wages that may be needed to restore competitiveness.
While short-run prospects remain good, sustaining robust growth over the longer term will necessitate further product market reforms – and their effective implementation – as well as the mobilisation of the large unused potential of labour inputs, especially among the old, young, and women and improvements in human capital. While there is considerable scope for action over a wide range of policies, the particular focus of the current Survey is on the five structural priorities identified in the OECD’s recent Going for Growth publication:
Removing the financial disincentives to work at older ages which are inherent in the pension system while constraining the possibilities for early retirement.
Reducing the minimum cost of labour by introducing a sub-minimum wage for young people and lowering social security contributions for the low-paid.
Reforming employment protection legislation. In particular, rebalancing employment protection across different occupations.
Reducing barriers to entry and promoting competition in network industries.
Making tertiary education more efficient and raising its standards to international levels.
Having front-loaded the reduction in the fiscal deficit, the government’s main macroeconomic objective is to more gradually reduce the deficit, by about ½ per cent of GDP per annum until the budget is in balance or surplus by 2012 at the latest. As the government debt-to-GDP ratio is high and prospective pressures of population ageing on public health and pension spending are estimated to be among the largest in the OECD, fiscal consolidation should continue, possibly at a more rapid pace than planned taking advantage of strong economic growth. Currently Greece is the only euro area country which does not include quantitative long-term fiscal projections in the annual stability programme. To raise awareness of the impending problems a long-term fiscal scenario to mid-century should be published to show how fiscal policy will cope with the expected spending pressures from ageing. In this context, delaying fiscal consolidation might have longer-term costs in terms of additional debt service costs, including an increase in the risk premium paid on government debt, and higher taxes, which would also be more heavily skewed towards future generations. However, aggressive fiscal consolidation is at best a stop-gap. A preferable approach is for a far-reaching pension reform to be put in place soon. Achievement of the government’s medium-term objective might be an adequate platform for ensuring future fiscal sustainability, if also accompanied by reforms which would help to contain future spending pressures on health, and especially, pensions.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of Greece 2007 is available from:
For further information please contact the Greece Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Dave Turner, Vassiliki Koutsogeorgopoulou and Pamfili Antipa under the supervision of Peter Hoeller.