The COVID-19 shock abruptly interrupts Greece’s recovery

Greece has responded swiftly to the pandemic and has effectively limited infections, but the economy has been hit hard.

As in other countries, containment measures, travel restrictions, social distancing and high uncertainty have led to a temporary but extraordinary drop in production and large loss of tourism demand and employment

“The government has responded with substantial packages to strengthen the health system, buttress incomes and liquidity, and support and restart sectors most affected by the shock, such as tourism”

To reinvigorate the recovery, the government has set out an ambitious reform programme focused on boosting growth and investment. Before the pandemic hit, the Greek economy had been expanding for over three years at just below 2% average annual growth. Structural reforms, high primary budget surpluses and debt measures by European partners had sustained Greece’s recovery and rebuilt confidence. Rising goods and tourism exports had supported growth and jobs, reducing unemployment and buttressing private consumption.

Fiscal targets

In recent years, Greece has exceeded its fiscal targets and the current account deficit has narrowed. Increased revenues and better control of expenditure contributed, before the pandemic outbreak, to sustained and substantial primary budget surpluses, rebuilding fiscal credibility. Greece has successfully returned to the international bond market and rating agencies have raised its sovereign rating. The economy has become more open, although the COVID-19 shock is projected to hinder export growth.

The public debt ratio is projected to rise from already high levels due to the extraordinary fall in nominal GDP and, to a lesser extent, fiscal support following the COVID-19 shock. As the economy resumes its recovery, and the budget shifts gradually back to a primary surplus, the public debt ratio is projected to start declining again, helped by low interest rates. The European Central Bank’s decision to include Greek government securities in its asset purchase programmes have contained bond yields below the levels of mid-2019.

Past labour and product market reforms have improved Greece’s price competitiveness and will stand Greece in good stead when domestic and foreign demand recover. In early 2019, Greece increased the minimum wage for the first time in many years and ended the subminimum wage. This boosted incomes without any obvious negative employment effects prior to the COVID-19 shock. Following the COVID-19 shock, the 2020 review of minimum wages has been deferred to early 2021. Mechanisms to extend sectoral collective agreements to non-signatory workplaces have been reintroduced, while conditional opt-out arrangements were introduced in late 2019.

The COVID-19 shock adds to Greece’s challenges

The COVID-19 shock risks exacerbating Greece’s long-standing labour market challenges. The employment rate has increased over the past six years but is still one of the lowest. Women and the young continue suffering from low employment rates. The dearth of child and elderly care centres restrict women’s job opportunities as caregiving responsibilities often fall on them. The lack of prospects has pushed many talented young people to emigrate, lowering the country’s entrepreneurial and innovation potential. Difficulties of integrating migrants into the labour market and education system together with limited support from other EU countries to deal with the large influx of asylum seekers compound these challenges. The COVID-19 crisis risks aggravating these problems as job growth has collapsed and a large number of discouraged job-seekers have left the labour force. Poverty and material deprivation, while improving, are high, especially among the young and families.

Following past reforms, Greece’s social protection system was much better prepared to deal with a large shock than at the onset of the global financial crisis. The government’s temporary income support measures have buffered household incomes from the COVID19 shock. However, despite improvements in recent years, poverty rates among the young and families with children remain high while retirees fare significantly better. This and the large impact of the COVID-19 shock on the working age population and the young further underline the need to address the intergenerational imbalances of the social protection system. Pension payments as a share of GDP remain among the highest. The COVID-19 shock makes the need to continue modernising Greece’s social protection system manifest so as to better target anti-poverty programmes to people in need and significantly strengthen retraining schemes.

Economic activity

Economic activity, though shifting gradually to tradable sectors, is still concentrated in traditional and low-innovation sectors, contributing to low productivity growth. Small and low productivity firms continue to play an outsized role in the economy. Despite recent progress, such as the digitalisation of the public administration, high tax burdens, red tape, low-quality regulations and a slow justice system mar the business environment, discouraging domestic and foreign investment and preventing businesses from thriving. Banks’ non-performing loans (NPLs) were falling before the COVID-19 shock but they are still high, curtailing banks’ capacity to finance investment. The severe liquidity constraints many firms are facing following the COVID-19 shock risks increasing NPLs further. The government has introduced temporary credit lines and guarantees to address this challenge. Nonetheless, it remains urgent to durably lower NPLs on banks’ balance sheets.

Repair of the banking system needs to accelerate.

“The government is implementing a new asset protection scheme (Hercules) to help banks to dispose of the large stock of nonperforming loans”

The plan is expected to lower banks’ non-performing loans significantly over the next two years. However, the COVID-19 shock has slowed progress, and further action is needed to address the large stock of non-performing loans that will remain and improve the quality of banks’ capital.

Increasing productivity growth

Increasing productivity growth is key to raising living standards and offsetting the large negative effect of demographics. Raising productivity growth will require additional efforts to reduce barriers to competition, especially in professional services, including notaries, lawyers and retail sales of medicines, and increasing the efficiency and effectiveness of the public administration (including the justice system). This would contribute to enhance the rule of law, thus reducing the costs and uncertainties of doing business in Greece, attracting more foreign direct investment, and helping to rebuild trust in public institutions. The government’s efforts to reduce red tape, raise accountability and efficiency in the public sector, including through the use of digital technologies, are welcome and demonstrated their effectiveness during the COVID-19 shutdown period. Efforts to prevent and prosecute corruption need to be pursued following international best practices. The recent establishment of the independent National Transparency Authority goes in the right direction.

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