Class Assignment

Module: Global & Microeconomic

Environment
Batch: NMIMS EMBA 2018-20

Greece @ Economic
Cross Road

Authors
Dhruva Bhatia – 80118180002
Vinit Amin – 80118180037
Pratik Acharya – 80118180031
Atul Khatrotiya- 80118180005
Ranjan Choudhary- 80118180003
Abhijit – 80118180025
Abhinav Saket – 80118180013
Kalpesh Pandey - 80118180033
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CONTENTS

A Brief History of Greece ............................................................................................ 2

Political & Demographic Status ................................................................................... 3

Economic Indicators.................................................................................................... 4

History of Greece’s Economic Crisis ............................................................................ 6

Greece’s Debt & Bailout Agreements .......................................................................... 9

Current Economic Scenario ....................................................................................... 11

Economic Outlook .................................................................................................... 13

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A brief history of Greece

Greece, like most European countries, had its golden age during the 1960s, when its annual growth
rate averaged nearly 8 per cent, outperforming all the major European economies.

2001-2007: Greece in the Euro is growing again

Greece joined the euro group in 2001. The year coincided with a new period of strong economic
growth and rapid convergence. With renewed credibility the government was able to borrow money
at low interest costs, but instead of reducing its public debt there was another wave of fiscal
expansion. In this period growth was largely consumption-driven. The annual average growth rate of
government consumption expenditures was 4.7 per cent compared to 1.9 per cent in the Eurozone.
Exports growth rates were similar to the other countries, while imports grew much faster. The result
was that, just before the crisis, Greece was running both a fiscal and current account deficit. In the
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words of the Lisbon council “Greece in the 2000-2007 period offers a dramatic example of
unsustainable, boom-based growth acceleration pursued under weakening systemic growth forces”.

2007- present: the crisis

Greece has lost 26 per cent of its GDP since 2007, the largest fall in modern history not linked to a
war or social revolution. Its debt pile ballooned to 177 per cent of GDP, although this was largely as a
result of the fall of GDP. A Greek adjustment program was agreed in 2010 aimed at improving
competitiveness and the fiscal situation, and a new bailout program, including pension reform,
privatizations, and the reform of labour and product markets – was approved in July 2015 in order to
avoid the country to be forced to exit the Eurozone. There are contrasting opinions about whether
this will lead to sustainable growth or the whether the fall in demand will spiral into further economic
contraction.

Political and Demographics Status

POLITICAL STATUS
The politics of Greece takes place in a parliamentary representative democratic republic. The President,
elected by Parliament every five years, is Head of State. The Prime Minister is Head of Government.
The Ministerial Council, consisting of the Prime Minister, Ministers, Deputy Ministers and Ministers
without portfolio, is the collective decision-making body that constitutes the Government of Greece.
Legislative power is exercised by Parliament and the President of the Republic. Executive power is
exercised by the President of the Republic and the Government. Judicial power is vested in the courts
of law, whose decisions are executed in the name of the people.
Legislative Process:
The legislation initiative lies in the government, which introduces Bills, and the Parliament which
introduces Law Proposals. It is mandatory that an explanatory report is attached to Bills and Law
Proposals, as such report indicates the exact wording of current legislation to be amended or repealed.
If a Bill or a Law Proposal incurs additional expenses for the State Budget, it then has to be
accompanied by a General Accounting Office’s report specifying the amount of the expenditure
involved. If a Bill results in expenditure or reduction of revenues, a special report regarding the
coverage of the expense is attached and it is signed by both the Minister of Finance and the competent
Minister. Bills must also be accompanied by an Impact Assessment Report and public consultation
report that took place prior to the submission of the Bill. Bills and Law Proposals may be transmitted
to the Scientific Agency of the Hellenic Parliament, which submits a review on the proposed provisions.
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Amendments and additions to Bills and Law Proposals that are up for voting must be introduced at the
latest three days prior to the debate and on Fridays it must take place until 13:00 the latest and may
be introduced by Ministers and MPs alike. Amendments submitted by Ministers are also accompanied
by a brief Impact Assessment Report. The elaboration and examination of a Bill or a Law proposal
includes two stages that are at least seven (7) days apart. At the first stage a debate in principle and on
the articles is conducted and at the second stage a second reading takes place followed by debate and
vote by article. During the legislative elaboration of every Bill or Law proposal from the competent
standing committee, every special permanent committee can express its opinion on any specific issue
that falls within its competence.
Foreign Relationship:
Greece have a good foreign relationship with Europe, Asia, the Middle East, Africa, France, Italy,
Bulgaria, United States, the other NATO countries like Albania, and the European Union. Greece also
maintains strong diplomatic relations with Cyprus, Albania, Russia, Serbia, Armenia and Israel, while at
the same time focuses at improving further the good relations with Egypt and the Arab World,
Caucasus, and China.
DEMOGRAPHIC STAUS:
The last official census in Greece took place in 2012 which found a population of 10.8 million which
comprised of Greek citizens (91%), Albanian citizens (4.5%), Bulgarian citizens (0.7%), Romanian
citizens (0.4%), Pakistani citizens (0.3%) and Georgian citizens (0.25%). About 2/3 of Greek people live
in urban regions. Due to Eurozone's financial problems, Officials say that families in Greece simply can't
afford to have children. The data also shows that Greece is currently experiencing a declining birthrate,
with hospitals reporting 10% fewer births in the past 4 years. The number of live births in the country
has fallen nearly 15%, highlighting the true impact of cost-cutting measures in the country. Greece is
now in its 8th straight year of recession, which is the longest on record for an advanced western
economy. The country also has the highest unemployment rate in the Eurozone at almost 28%. As a
result of Eurozone crisis, fewer foreign nationals are coming Greece to set up home here.

Economic Indicators
After joining European Union now the national currency of Greece is Euro (EUR). Greece is having a
High-income economy. Apart from European Union it’s also a member of OECD a trading block. Tourism
is the dominant sector in the economy contributing substantial part in GDP. A significant part of the
economy runs on cash and unaccounted. It has very high deficit and debt ratio since the economic
crisis. The GDP is (billions USD) 221.57 (Source: IMF – World Economic Outlook Database, 2018).
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After taking austerity measures the GDP of the country has improved gradually as shown in the
following Table:

Main Indicators 2015 2016 2017 2018 (e) 2019 (e)

GDP(bl USD) 194.96 194.64 204.30e 221.57 229.86

Unemployment - - 22.3 20.7 19.5

Rate (%)

However a higher labour cost, deficit etc. made it uncompetitive in last few years which is reflected
in its foreign trade as shown in the Table below:

Because of unfavorable foreign trade Greece is consistently struggling to maintain its current account
deficit

Foreign Trade Indicators 2012 2013 2014 2015 2016

Imports of Goods and Services (in % of GDP) 33.1 33.2 34.8 31.7 31.2

Exports of Goods and Services (in % of GDP) 28.7 30.4 32.4 31.7 30.5
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Greece's annual inflation rate eased to 0.9 percent in July 2018 from a seven-month high of 1 percent
in the previous month. Main upward pressure came from: food and non-alcoholic beverages (1.5
percent vs 1.3 percent in June); transport (3.4 percent vs 4.3 percent); communication (3.3 percent,
the same as in June); and hotels, cafes and restaurants (1.3 percent vs 1.2 percent).

The Greek economy is recovering. Improving debt sustainability, tackling poverty and boosting
investment are vital to sustaining the positive momentum. Despite these positive developments,
unemployment, poverty and inequality remain high, wages are low, investment remains depressed and
productivity keeps falling. Addressing these and other challenges will crucially depend on the
continuation of the reform effort and strengthening reform ownership.

History of Greece’s Economic Crisis

The sovereign debt crisis of Greece which is also known as “The Greek Depression” was started
immediate after the global financial crisis of 2007-08. The recession the Greek economy is facing now
is one of the longest which surpassed even the infamous great depression of US. The effect of global
financial crisis were deeper and more destroying for few countries and Greece was one amongst them.
The Greece economic structure was consisting of High Debt level, High Budget Deficit, Low Competitive
Power and Unstable Political structure. The untruthful leaders tried to hide the gaps with dishonest
statements, incorrect economic and political decisions which finally pushed the country to the great
crisis and eventually turned out a Euro Zone crisis.
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The revelation of the underreporting of the structural deficiency in the economy such as incorrect
assessment of GDP, Deficit and government debt led to a crisis of confidence of the investors. The
economic turmoil forced Govt. increase the taxes in 12 rounds, followed by austerity measures, cut in
spending and initiate reforms. The country faced huge exodus of high skilled well educated citizens and
nation wise protest and political unrest. The reduction in income, tax receipts reduced the GDP and
also affected Debt to GDP ratio. The unemployment reached 25% from below 10% in 2003.
The Report “Stability and Growth Program 2010” published by Greek Ministry of Finance listed five
main causes for country’s financial turmoil:
GDP Growth: After 2008 the GDP growth was lower than anticipated. The global financial crisis affected
two of its major source of earning Tourism and Shipping and lowered the revenue earning by almost
15%. The Greek Ministry of Finance suggested reduction of salaries and bureaucracy to make it
competitive and also redirect non-growth sector spending like military to growth stimulating sectors.
Government Deficit: There was huge mismatch in government’s revenue verses earnings between
2004 till 2009 where the government’s expenditures surpassed its tax revenues by 56%. Govt.
expressed that its intension is to keep the deficit well below the expected inflation level by reducing
the expenditure.
Government Debt: The Government’s Debt increased substantially after 2009 because of higher deficit
and higher Debt servicing cost. The reports express that only structural economic reform would be
insufficient and strong austerity measures also have to implement. According to EU Commission Report
of October 2011, the Debt level was expected to reach 198% of the GDP which is way beyond the
maximum level of 120% set by IMF.
Budget Compliance: The year 2009 being election year the economic control was worse and systems
were lax which made the check and balance measures ineffective. The report suggested to tighten the
compliance disciplines to control the deficit.
Data Credibility: Eurostat consistently contested the confronted the fiscal data provided by the
government which forced them to revise down the figures. The revised statistics reveled that Greece
had consistently exceeded the “Euro Stability Criteria” by exceeding the maximum deficit limit of the
GDP of 3% and debt to GDP maximum limit of 60%. Whereas the actual deficit was 13.6% and Debt was
150% of the GDP.
Government Spending: The Greece was one the fasted economy in Eurozone growing at 4.2% before
2009 with huge inflow of foreign capital. However the growth followed with higher budget deficit also.
It was spending money on non-growth sector like in Defense where Greece was the second highest
within NATO after US. Pre Euro currency devaluation helped Greece to get borrowings and also because
of higher interest rates comparing with Eurozone. All together increased its Debt burden.
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Current Account Balance: Greece’s huge budget deficit was funded by mostly foreign borrowings which
stopped during the global crisis of 2009. Countries usually devalue their currency to maintain the
inflow, however this was not possible for Greece being a Eurozone member. Hence it was left with no
other option, other than to reduce its spending and income reduction.
Tax Evasion: In 2012 in Transparency International’s Corruption Perception Index, Greece scored
36/100 which was lowest and ranked it as most corrupt country within EU. As per an estimate of 2012
the black economy which does not contribute to the taxation system was about 24.3% of the economy.
A January 2017 report by the DiaNEOsis indicated the unpaid taxes in Greece was almost 95 billion
Euros and much of it was uncollectable. The loss to the government due to tax evasion was 6% to 9%
of the GDP. The Collection of VAT was collected less by 28% from what is due to the government. In
2015, estimates indicated the amount of evaded taxes stored in Swiss banks was around 80 billion
euros.
A chronological sequence of the Greece’s debt crisis:
2010: In April, after the GDP data was published which showed the starting of the recession, the credit
rating agencies downgraded Greek Bonds to Junk status. This froze the private capital market and put
Greece in danger zone of sovereign default. On 2nd May European Commission, European Central Bank
and IMF launched €100 billion to rescue Greece from sovereign default. After the new government
took over, it revised the 2009 deficit from 6% to 8% of GDP to 15.7% of GDP. The government total
Debt was revised from €269.3 billion (113% of GDP) to €299.7 billion (13% of GDP).
2011: Government failed to control the bailout conditions as the recession worsened and forced it to
for a second bailout package wherein the private creditors agreed for 50% reduction in Greek Debt and
the Euro Zone officials launched €130 billion.
2012: The Second bailout program was ratified in February 2012. However the recession worsened and
the government also hesitated to implement the bailout program. Meanwhile IMF extended additional
fund of €8.2 billion.
2014: The review of the bailout program revealed unexpected financial gaps. The country again saw
recession in Q4 2014. The government changed because of snap parliamentary elections. The new
government rejected the bailout terms. In retaliatory move Eurozone suspended the balance aid
agreed under bailout program. The rift caused liquidity crisis in the country and this lead to stock
market crash also blocking of private financing.
2015: Facing sovereign default, the new government prepared new proposals which were rejected,
because of which the chances of Greece’s exit from the Eurozone started looming. Government
decided to go for referendum which rejected the financial bailout terms. On 13th July the Eurozone
leaders decided on a provisional third bailout program.
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2017: Following the strong austerity measures, the economy started showing positive signs as the IMF
forecast Greece economy to grow by 2.8%. However in June 2017 news report indicated that the risk
of crushing the Debt burden is still hanging and may default in some payment. Eurozone meanwhile
gave credit lines and loans for a possible debt relief. The Greek government in response sent a 21 point
commitments which it will meet by June 2018.
In its analysis published in on 23rd August 2018, Moody has said that eight years of heavy austerity and
restructuring of labour market created a havoc on the Greek economy. Where the GDP fell by a quarter
on 2008 level, the unemployment rate has jumped up to 25% and also income fell by almost a third.
High skilled Greeks left the country leading to 4% decline in the population from 2010. On the positive
side the real GDP has increased for five consecutive quarters which is best since 2005-06. The growth
has been consistent and exports growth is positive but consumption and investment have not grown
equally.

Greece Debt & Bailout Agreements

On October 4, 2009, Pasok (Socialist) leader George Papandreou wins national elections, becoming
prime minister. Within weeks, Papandreou reveals that Greece’s budget deficit will exceed 12 percent
of GDP, nearly double the original estimates. The figure is later revised upward to 15.4 percent.
Greece’s borrowing costs spike as credit-rating agencies downgrade the country’s sovereign debt to
junk status in early 2010.
Greece asked for a financial rescue by the European Union and International Monetary Fund. To avoid
default, the International Monetary Fund and EU agreed to provide Greece with 110 billion euros ($146
billion) in loans over three years. Germany provided the largest sum, about 22 billion euros, of the EU’s
80-billion-euro portion. In exchange, Prime Minister Papandreou commits to austerity measures,
including 30 billion euros in spending cuts and tax increases.
 Papandreou Proposes Referendum on Bailout
In 2011 amid public anger over austerity, Prime Minister Papandreou calls for a national
referendum on a second bailout agreement under negotiation. However, Papandreou calls off the
referendum after the center-right opposition agrees to back the revamped EU-IMF deal.
Papandreou was forced to step down, and economist Lucas Papademos was appointed to head
a unity government tasked with implementing further austerity and structural reforms
 EU Agrees to New Greek Bailout
On February 2012 Finance ministers approved a second EU-IMF bailout for Greece, worth 130 billion
euros ($172 billion). The deal included a 53.5 percent debt write-down—or “haircut"—for private
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Greek bondholders. In exchange, Greece can reduce its debt-to-GDP ratio from 160 percent to 120.5
percent by 2020. Greece and its private creditors completed the debt restructuring on March 9,
the largest such restructuring in history.
Eurozone finance ministers and the IMF agreed to a revised aid deal for Greece, including lower
interest rates on Greek bailout loans and a debt-buyback program. The new plan allowed Greece to
cut its debt-to-GDP ratio to 124 percent by 2020, rather than 120 percent, while committing it to
bringing its debt levels “substantially below" 110 percent by 2022.
 Greek Parliament Approves Austerity Measures
July 2013, Greece’s Parliament approved unpopular new austerity measures, agreed to as a
condition of the ongoing EU-IMF bailout. The legislation included layoffs of some twenty-five
thousand public servants, as well as wage cuts, tax reforms, and other budget cuts. The approval
opened the way for a new tranche of bailout funds worth nearly 7 billion euros ($9 billion), while
labour unions called a general strike in protest.
 Greece Returns to International Bond Market
April 2014, Greece returned to international financial markets with its first issue of Eurobonds in
four years. The government raises 3 billion euros in five-year bonds, with an initial yield of under 5
percent—a low rate seen as a mark of a return to economic normalcy. In another sign of renewed
investor confidence, the offer raised 1 billion euros more than expected.
Later in same year, the left-wing, anti-austerity Syriza party won a resounding victory in snap
elections in 2015, breaking more than forty years of two-party rule. Incoming Prime Minister Alexis
Tsipras says he will push for a renegotiation of bailout terms, debt cancellation, and renewed public
sector spending—setting up a showdown with international creditors that threatens Greek default
and potential exit from the monetary union.
 Greek Bailout Expires
The Greek government missed its 1.6 billion-euro ($1.7 billion) payment to the IMF when its bailout
expired on June 30 2015, making it the first developed country to effectively default to the Fund.
Negotiations between the Syriza leadership and its official creditors fell apart days before, when
Prime Minister Tsipras proposed a referendum on the EU proposals. To stem capital flight, Tsipras
had previously announced emergency capital controls, limiting bank withdrawals to 60 euros ($67)
per day and calling a bank holiday after the ECB capped its support.
Prime Minister Tsipras bent to European creditors and pressed parliament to approve new austerity
measures, despite a July 5 referendum in which Greeks overwhelmingly rejected these terms. The
agreement came after a weekend of talks in which a Greek eurozone exit was only narrowly averted
and opened the way to a possible third bailout program worth up to 86 billion euros ($94 billion).
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The ECB resumed some support for Greek banks, but the compromise splits the ruling Syriza party
and set the stage for new elections in the coming months.
 Third Bailout Approved
2015, The Greek parliament adopted a suite of economic reforms as part of a new rescue
package from the EU, the country’s third since 2010. In exchange for the 86-billion-euro bailout,
which is to be distributed through 2018, EU creditors require Greece to implement tax reforms, cut
public spending, privatize state assets, and reform labour laws, among other measures. While the
IMF participated in the previous bailouts, the organization refused to contribute additional funds
until the creditors provide Greece “significant debt relief.”
Tensions over Greece’s third bailout grown as the IMF warned that the country’s debt
is unsustainable and that budget cuts EU creditors demand of Athens will hamper Greece’s ability
to grow. To forestall a crisis that could put the 86-billion-euro program in jeopardy, EU
representatives agree to more lenient budget targets, but they declined to consider any debt relief.
Meanwhile, Prime Minister Tsipras agreed to implement deeper tax and pension reforms even as
he faces domestic pressure over a weakening economy and rising poverty.
 Greece Exits Final Bailout Program in 2018
Greece received its final loan from European creditors, completing a bailout program begun in 2015,
the country’s third since 2010. In total, Greece now owes the EU and IMF roughly 290 billion euros
($330 billion), part of a public debt that has climbed to 180 percent of GDP. To finance this debt,
Athens is committed to run a budget surplus through 2060, accepting continued EU financial
supervision, and imposing additional austerity measures. EU officials hail the bailout as a success,
pointing to Greece’s return to growth. Unemployment, too, has fallen, though, at 20 percent, it
remains the EU’s highest. The IMF, however, maintains that the Greek economy, which has shrunk
by 25 percent since the beginning of the crisis, will likely require further debt relief.

Current Economic Scenario

On 24 July 2018, Economic data points to sustained momentum in Q2 2018, albeit likely slower than
Q1 2018’s solid pace. The manufacturing PMI remained firmly entrenched in positive territory in June,
with continued expansions in new orders and output boding well for business conditions. Economic
sentiment slipped slightly in June, however, and the unemployment rate rose marginally in April. In
recent bailout news, Germany delayed signing off on the final EUR 15.0 billion aid payment in
disapproval of Prime Minister Alexis Tsipras’ postponement of a VAT hike. The disbursement speed
bump demonstrates how tightly watched Greece will be under the new surveillance regime upon
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completion of the bailout program in August and the challenges it may face to uphold its commitment
to certain economic reforms. Dedication to unpopular austerity measures may be particularly difficult
ahead of the next legislative election, to be held by the end of October 2019, when politicians will be
seeking to shore up voter support.
Greece’s economic freedom score is 57.3, making its economy the 115th freest in the 2018 Index. Its
overall score has increased by 2.3 points, with dramatic increases in the scores for government
spending and fiscal health easily offsetting declines in investment freedom and government integrity.
Greece is ranked 43rd among 44 countries in the Europe region, and its overall score remains below
the regional and world averages.
Under the supervision and guardianship of its international creditors, Greece has made progress in
restoring macroeconomic stability and implementing much-needed initial fiscal adjustments. The
public sector still consumes more than 50 percent of GDP, however, and Greece continues to confront
a daunting debt burden and severe erosion of competitiveness. The rigid labour market impedes
productivity and job growth, and corruption remains a problem. The economy is hostage to powerful
public unions, and the government’s statist model undermines entrepreneurs.

 Government size
The top personal income tax rate is 42 percent. The top corporate tax rate has been increased to 29
percent. The overall tax burden equals 36.8 percent of total domestic income. Over the past three
years, government spending has amounted to 51.3 percent of total output (GDP), and budget
deficits have averaged 2.4 percent of GDP. Public debt is equivalent to 181.3 percent of GDP.
 Regulatory efficiency
With government focused on avoiding political or economic collapse, little attention has been paid
to improving a business regulatory environment that ranks near the middle for European countries.
Labour regulations are restrictive, and labour mobility is lacking. The government continues to
maintain some direct price controls on goods and services, and some well-connected special
interests receive poorly targeted subsidies.
 Open Markets
Trade is significant for Greece’s economy; the combined value of exports and imports equals 61
percent of GDP. The average applied tariff rate is 1.6 percent. Nontariff barriers impede trade.
Government openness to foreign investment is below average, but inflows of foreign direct
investment have resumed. The financial system’s overall stability has been severely undermined by
the crisis, and banks remain under significant strain.
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 Greece Current economy statistics

2013 2014 2015 2016 2017

Population (million) 11 10.9 10.9 10.8 10.8
GDP per capita (EUR) 16,417 16,350 16,238 16,154 16,506
GDP (EUR bn) 181 179 176 174 178
Economic Growth (GDP, annual variation in %) -3.2 0.7 -0.3 -0.2 1.4
Domestic Demand (annual variation in %) -4.1 -0.4 -0.1 -0.2 0.9
Consumption (annual variation in %) -2.6 0.6 -0.5 0 0.1
Investment (annual variation in %) -8.4 -4.7 -0.3 1.6 9.6
Exports (G&S, annual variation in %) 1.5 7.7 3.1 -1.8 6.8
Imports (G&S, annual variation in %) -2.4 7.7 0.4 0.3 7.2
Industrial Production (annual variation in %) -3.2 -1.9 1 2.5 4.5
Retail Sales (annual variation in %) -8.1 -0.4 -1.5 -0.6 1.3
Unemployment Rate 27.5 26.6 25 23.6 21.5
Fiscal Balance (% of GDP) -13.2 -3.6 -5.7 0.6 0.8
Public Debt (% of GDP) 177 179 177 181 179
Inflation Rate (HICP, annual variation in %, eop) -1.8 -2.5 0.4 0.3 1
Inflation Rate (HICP, annual variation in %) -0.9 -1.4 -1.1 0 1.1
Inflation (PPI, annual variation in %) -0.9 -1.2 -7.2 -5.7 5.3
Policy Interest Rate (%) 0.25 0.05 0.05 0 0
Stock Market (annual variation in %) 28.1 -28.9 -23.6 2 24.7
Exchange Rate (vs USD) 1.38 1.21 1.09 1.05 1.2
Exchange Rate (vs USD, aop) 1.33 1.33 1.11 1.11 1.13
Current Account (% of GDP) -2 -1.6 -0.2 -1.1 -0.8
Current Account Balance (EUR bn) -3.7 -2.9 -0.4 -1.9 -1.4
Trade Balance (EUR billion) -15.2 -17 -14.3 -16.2 -18.2

Economic Outlook
The rapid recovery of the Greek economy following the Greek Civil unrest was facilitated by a number
of measures, especially, as in other European countries, by the grants and loans of the Marshall Plan.
Greek Austerity Packages

When the first three austerity packages had been negotiated and agreed upon from February to May
2010, they featured a total fiscal tightening of €41 billion of which €28bn was related to 2010–11 and
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the remaining €13bn scheduled for 2012–14. Because of a worse than expected recession, this was
however followed by a need for the government also to pass a fourth austerity package in June 2011
and a Fifth austerity package in 2012. The two extra packages increased the total amount of fiscal
tightening for 2010–2014 to €65 billion (equal to 31.9% of the 2012 Greek GDP), with the first €36bn
in 2010–11 followed by €13bn in 2012 and €16bn in 2013–14.[32]
The Fifth austerity package only introduced a new tightening of €13.5bn for 2013–14, but this was in
addition to the fiscal tightening of €2.5bn being implemented during the years as leftover from the
earlier packages, resulting in €16bn of tightening for 2013–14. Creditors attributed the increased need
for fiscal tightening to the Greek government's inability/unwillingness to implement the needed
economic structural reforms, while the government viewed the recession as the result of the austerity
measures.

OUTLOOK
Despite austerity measures, many aspects of Greece’s economy are still problematic. Government
spending makes up 40 percent of GDP while EU bailouts contribute 3.3 percent. Greece relies on
tourism for 18 percent of GDP. Bureaucracy often delays commercial investments for decades. The
government has shrunk, but it is still inefficient. There is too much political patronage. Government
decision-making is centralized, further slowing response time.
This bureaucracy, combined with unclear property rights and judicial obstacles, has kept Greece from
selling 50 billion euros worth of state-owned assets. Only 6 billion euros worth of property has been
sold since 2011.
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Tax evasion has gone underground as more people operate in the black economy. It now comprises
20.8 percent of GDP. As a result, fewer people are paying higher taxes to receive less from the
government than they did before the crisis.
Many of the jobs available are part-time and pay less than before the crisis. As a result, hundreds of
thousands of the best and brightest have left the country. Banks haven’t completely recuperated, and
are hesitant to make new loans to businesses. It will be a slow road to recovery.
RISK AND CHALLENGES
The above is based on the assumption that the reform and privatization program will be implemented
smoothly and by the agreed time schedule. The recovery of the economy remains fragile, and subject
to risks and vulnerabilities, both internal and external. Delays or backtracking on reforms would
weaken the positive outlook and impact negatively on investors’ confidence.
Stock disequilibria – such as the high public debt, the high burden of NPLs and high unemployment –
persist or have even increased during the years of the crisis, acting as a drag on long-term growth.
To address the above challenges the focus of economic policy should be on the following:
1. Addressing the public debt overhang. The BoG has put forward a mild debt reprofiling proposal,
which entails only a negligible cost for our partners and provides for extending the weighted average
maturity of interest payments on EFSF loans by at least 8.5 years.
2. Implementing the remaining reforms and improving the quality of institutions. Particular emphasis
should now be placed on improving public administration, implementing the land registry,
strengthening institutions and the autonomy of independent authorities, cutting red tape, lowering
the regulatory burden and ensuring the predictability and stability of legislation, reducing entry
barriers into network industries, retail trade and professional services as well as on enhancing
judicial efficiency.
3. Adopting a growth-friendly fiscal policy mix. The over performance relative to the fiscal policy targets
over the past three years strengthened fiscal policy credibility, but it came at a cost, i.e. lower
economic growth. This is due to the high reliance of the fiscal policy mix on tax policy measures and
tax rate hikes. The mix is not sustainable and must change. More emphasis has to be placed on
cutting non-productive expenditures, increasing the public sector efficiency, including the
management of state property and improving tax administration.
4. Tackling the problem of NPEs and strategic defaulters. The NPE reduction targets for the next two
years are ambitious compared to 2017, implying that banks will need to step up their efforts and
make full use of the available toolkit for private debt resolution.
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5. Improving further the business environment and the insolvency framework to enable faster
reallocation of productive factors to more productive opportunities.
6. Promoting innovation, education and knowledge-based capital. Policy must focus on improving the
quality of labour (i.e. skills), attracting investment in new technologies and improving the quality of
capital through the creation of an institutional framework that supports innovation.
7. Speeding up privatizations to attract foreign direct investment. Conditions should be established to
attract FDI by quickly completing privatization projects which are at a mature stage, as well as
stepping up the pace of the overall asset utilization program.
8. Supporting the unemployed and enhancing employment and training programs.
The actions described above will improve Greece’s creditworthiness, boost the investment and
business climate, facilitate the return to financial normality, and contribute to the sustainable recovery
of the economy after many years of recession and stagnation.

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