Economic survey of Greece 2007

 

Contents  | Executive summary How to obtain this publication | Additional info

Published on 30 May 2007. The next Economic Survey of Greece will be prepared for 2009.
Bookmark this page: www.oecd.org/eco/surveys/greece.

Please note that new projections for the Greek economy have become available.

An Economic Survey is published every 1½-2 years for each OECD country. Read more about how Surveys are prepared. The OECD assessment and recommendations on the main economic challenges faced by Greece are available by clicking on each chapter heading below.

Contents                                                                                                                           

Chapter 1. Recent performance and key challenges

There has recently been a major revision to the national accounts, increasing the level of real GDP by over one quarter since 2000. Understanding the nature of this revision is important for assessing growth performance, but there are limitations due to the absence of a consistent historical series.

Growth in GDP per capita over the last decade has been among the most rapid in the OECD. Most of the explanations for this strong growth performance – notably the effect of a large reduction in competition-curbing product market regulation and financial market deregulation – are of a transitory nature. This raises two questions with important policy implications. Firstly, what is the risk that the current period of strong growth will end with a hard landing? Secondly, what should the policy priorities be to sustain strong growth over the longer term?

Signs of macroeconomic tensions are manifest in a continuing loss in competitiveness, rapid growth in consumer credit and a ballooning current account deficit. The risks of this resulting in a hard landing are, however, reduced by a number of factors: the absence of currency risk; the fact that that household credit is still relatively low in relation to income; and the increasing diversity in export markets. Past experience from other euro area countries which have been in a similar position suggests that it will be important to ensure that there is scope to allow the automatic fiscal stabilisers to operate. In this context the recent reduction in the government deficit to below 3% of GDP is an important development. A further rapid decline in the deficit is needed, while growth prospects remain strong because of the high level of government debt and prospective fiscal costs of ageing.

There is considerable scope for policies to improve the performance and flexibility of both labour and product markets. The focus of the present Survey is on the five structural priorities identified in the recent OECD publication Going for Growth which recommends policy action in the areas of pensions, minimum labour costs, employment protection, network industries and tertiary education.

Chapter 2. The gains from prompt fiscal consolidation

A major achievement has been the reduction in the fiscal deficit since 2004 by over 5% of GDP to below the 3% limit in 2006. The government plans a more gradual reduction over coming years so that overall balance or surplus is reached no later than 2012. However, fiscal consolidation should continue, possibly at a more rapid pace than planned given the high level of government debt, favourable outlook for output growth, and long-term fiscal costs of ageing which are estimated to be among the largest in the OECD. There are as yet no specific proposals to reform pensions, which account for most of the prospective ageing-related increase in public expenditure, although the government is expected to announce reforms later this year. Delaying fiscal consolidation, particularly the urgently needed pension reform, would have substantial longer-term costs in terms of higher taxes and additional debt service costs, including an increase in the risk premium paid on government debt. In addition, this would heavily skew the tax burden towards future generations. Consolidation should focus on reducing primary spending and on enhancing tax revenues. This can be achieved particularly through increased efficiency of public administration and by tackling tax evasion and other measures to further broaden the tax base. Ensuring long-run fiscal sustainability will further require the implementation of wide-ranging reforms in the key area of health care, as well as an early decision to introduce a comprehensive reform of the pension system.

Chapter 3. Pensions: a comprehensive reform is urgently needed

A major pension reform is urgently required to ensure fiscal sustainability, eliminate distortions against working at older ages and deal effectively with poverty issues.
First, pension expenditure is projected to increase to mid-century by more than for any other OECD country. Reform is required not only to ensure fiscal sustainability, but also because pension expenditure will otherwise account for more than one-fifth of (unrevised) GDP and inevitably crowd out other social outlays which are needed to support social cohesion and structural objectives. Judged against projections for other EU countries a fall in pension benefits relative to average wages is likely to bear the brunt of any adjustment, although the extent of this adjustment can be limited by reforms which reduce disincentives to continue work in old age and curtail the many alternative early retirement pathways.

Second, incentives to retire early are among the highest in the OECD, and have led to a low employment rate among older workers. There are tenuous links between contributions and benefits and a range of special provisions that allow early retirement before the “normal” retirement age of 65. To remove disincentives, pensions should be linked to lifetime contributions and greater actuarial fairness ensured, while the wide range of early retirement schemes should be phased out.

Third, despite high aggregate pension outlays, the diversity in replacement rates across different funds means that pension expenditure is not always targeted to those most in need. Reducing overall pension expenditure while improving the safety net against poverty in old age is likely to require that any safety net pension – whether means-tested, based on some criteria such as residency or based on the current minimum pension – is strictly available only at the official age of retirement, in contrast to the current situation where minimum pensions are available at much earlier ages and so severely distort incentives to retire early.

Chapter 4. Easing entry into the labour market

Unemployment remains high, particularly among first-time labour market entrants (mainly the young) and re-entrants (mainly women), while the long-term unemployed account for a high share of the total. There is scope for policy to facilitate entry to the labour market particularly by reducing minimum labour costs and easing the relatively strict employment protection legislation. Neither is currently on the government’s policy agenda.

The level of minimum wages is not exceptional in international comparison. However the absence of a specific sub-minimum means that they do rank more highly for youth. Adverse effects on employment are exacerbated by high employers’ social security contributions. An unusual feature is that legally binding minimum wages are set by the social partners and apply to the whole economy; also, the government can under certain conditions extend collective agreements at the industry or occupational level to cover the entire industry or occupation rather than just the parties to the agreement. In setting minimum wages, the social partners should take into account high unemployment rates of youth. Social security contributions for the low-paid were reduced in 2000 but they should be reduced further, financed by spending restraint. A well-targeted tax and benefit system rather than differentiated minimum wages should be the instrument to address the needs of low income earners with families.

Employment protection legislation (EPL) across all occupations is roughly in line with the EU19 average, although it is much stricter for white than blue collar workers, due to higher severance payments. These differences may reduce labour market turnover and harm the employment prospects of groups which are most subject to entry or re-entry problems, such as the young, women and the long-term unemployed. Severance payments for white collar workers should be reduced and brought into line with those for blue collar workers.

Other policy changes which would improve the labour market situation, but which should await an improvement in the fiscal situation, include greater support for active labour market measures and childcare.

Chapter 5. Improving tertiary education

A well-performing higher education system is crucial for human capital formation, innovation and the take-up of new technologies. However, tertiary education outcomes in Greece are poor in international comparison as evidenced by low graduation rates; the high number of students that study abroad, despite the costs borne by students studying in Greece being low; and a poor performance in terms of academic publications. Tertiary education is entirely provided and largely financed publicly, which raises questions about the effectiveness of this public spending. New OECD indicators suggest that the current institutional framework for tertiary education falls short of best practice by a wide margin. In particular, it is one of the most centralised and least flexible systems in the OECD. This chapter highlights the shortcomings of the current set up and assesses the recent reform of the university system. These plans provide a necessary step in the right direction, with a focus on improving governance and setting up a system of evaluation. However, further steps will be required, to remedy all shortcomings, most notably to allow private universities and to link funding to performance. At a later stage deeper reforms to student finances should also be considered.

Chapter 6. Fostering competition in network industries

Effective competition in the network industries remains weak. While commendable progress was made in partly or fully privatising state-owned enterprises, the stake of the government in key public utilities remains high, and price regulation is still pervasive, especially in the transport sector. Substantial challenges exist in the energy sector, where vertical integration hampers the emergence of genuine competition, despite the legal opening of the market. In telecommunications, the unbundling of the local loop needs to be speeded up to facilitate access to broadband services and the rapid diffusion of information technologies. The postal services market is being liberalised gradually, in line with the relevant EU Directive. Important concerns arise, however, about the financing of a universal service. In the transport sector, the liberalisation of ferry economy class fares is expected to trigger competition, but the privatisation of the national airline is still pending. Regulation of the road freight sector has remained among the most restrictive in the OECD. In the railway industry, reforms need to continue to promote competition. Effective regulators are essential for ensuring non-discriminatory access to the network and fostering competition in all the newly liberalised sectors.

Summing up

This Survey presents a long list of recommendations that appear crucial for sustaining strong growth. Many, though not all of them, are on the government’s reform agenda. Commendable progress has been made on fiscal consolidation and the government has also moved ahead in implementing structural reforms. Yet, much remains to be done. In the network industries or health care reforms, the crux lies in the effective implementation of the reform agenda. Similarly, Greece is slow in implementing European internal market directives into national law and faces a high number of infringement cases relating to poor quality transposition and/or incorrect application of internal market rules. At the same time, the government has to convince the public, which is often reluctant to embrace reforms, of the need to modernise and to move to international best practice. The current reform of the university system, for instance, was highly controversial even though it is essential. Moreover, the public still needs to be convinced of the required deep reform of the pension system that constitutes a sine qua non for achieving sustainable fiscal policy. Pushing ahead with reforms and their effective implementation will require a deep restructuring of the public sector.

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:

Additional information                                                                                                  

 

For further information please contact the Greece Desk at the OECD Economics Department at eco.survey@oecd.org.  The OECD Secretariat's report was prepared by Dave Turner, Vassiliki Koutsogeorgopoulou and Pamfili Antipa under the supervision of Peter Hoeller.

 

 

 

 

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