Executive summary
Greece’s strong recovery from the COVID crisis, supported by continued reforms, is being slowed by surging energy prices and renewed global uncertainty, despite evolving fiscal support. Fully implementing the ambitious Recovery and Resilience Plan, managing supply and cost pressures while supporting fiscal health, and completing the restoration of banks’ health are key to a sustained recovery.
Greece recovered strongly from the COVID crisis. Government support measures, reviving tourism and other exports, and improving consumer and investor confidence supported a rebound in demand, returning GDP to its pre-COVID crisis level. Continued reforms are improving the business environment, helping to attract rising foreign direct investment. These factors and the end of short-time work schemes contributed to strong jobs growth and reduced the unemployment rate to a 12-year low.
Surging energy prices, supply disruptions and renewed uncertainty, especially since Russia’s war of aggression against Ukraine, is sharply slowing the recovery (Table 1). The war is directly affecting Greece’s energy supply and costs. Its indirect effects are compressing spending and delaying investment and hiring. The government’s accelerating disbursement of its ambitious Recovery and Resilience Plan and expanding fiscal support to energy consumers are buffering these shocks, and will help the recovery resume once the security situation and energy prices stabilise.
The government has extended fiscal support, slowing the budget’s return to surplus. It has expanded electricity and fuel price subsidies for households and businesses, and raised social transfers for low-income households. Recovering activity and surging prices have buoyed revenues. Public debt has fallen to its pre-COVID crisis ratio to GDP, and judicious debt management is containing financing costs. Still, the government’s energy support measures have delayed the return of the primary budget surplus to its medium-term target of 1.5% to 2% of GDP, weighing on Greece quickly achieving an investment-grade rating.
After a decade when inflation has been among the slowest in the OECD, prices have accelerated as supply pressures broaden. Large increases in energy and food prices lifted inflation to the highest rates in over a quarter-century (Figure 1). Capacity use, input costs, wages and inflation expectations have all risen. In key markets, limited competition, or many small, low-margin-low-productivity firms add to price pressures.
Source: OECD Price Statistics database.
Wages are rising after 12 years of little growth. The government increased the minimum wage by nearly 10% in the first half of 2022. Some groups of workers with in-demand skills, such as in ICT and construction workers, are experiencing stronger wage growth. Minimum wage increases provide a safety net for workers with weak bargaining power, but have become the primary source of wage adjustments for many workers paid above the minimum rate. Sectoral collective bargaining on wages and working conditions would better support incomes and productivity.
Bank lending to businesses has started to increase, a step towards financing the renewal of the private capital stock. Banks’ health is improving. The Hercules securitisation scheme is enabling banks to shift much of their non-performing loans off their balance sheets faster than new bad loans are emerging. Banks’ statutory capital, while meeting regulatory requirements, is being depleted through this process, and 58% consists of deferred tax credits. To expand access to finance, the government is on-lending its NextGenerationEU loans to selected domestic banks and European financial institutions to fund new private investments, although this brings implementation risks. Resolving the existing non-performing loans will release their debtors and assets securing the loans. Resolution often entails restructuring or insolvency processes, which the economy’s recovery, the implementation of the new insolvency framework, and efforts to improve judicial processing times are supporting.
Public debt has declined relative to GDP but remains high. Its long maturity structure and interest rates fixed at low rates limit the immediate exposure to rising market rates. Future fiscal pressures include substantial investment needs and any realised contingent liabilities.
Greece’s ambitious Recovery and Resilience Plan includes many reforms and investments to improve the public sector’s performance and to sustain growth. Implementation has started in earnest, and dedicated bodies are steering progress. In recent years, low disbursement rates have held back public investment. Recent public investment management reforms can help to address challenges such as shortages of well-trained staff and fragmented responsibilities across many different bodies, such as for public procurement. New dedicated public project implementation and auditing bodies may further build spending quality and integrity, furthering recent improvements in perceptions of corruption.
Recent tax cuts have reduced the large labour income tax wedge. Compliance is generally improving, although significant shortfalls remain. For consumption and recurrent property taxes, coverage has broadened, while some rates have been cut. Income tax and social contribution rates are being cut. A significant number of targeted reliefs across different taxes have been introduced to support specific policy goals. Some of Greece’s tax rates and receipts, such as those on distributed corporate profits, are now relatively low.
The share of adults in work lags other OECD countries, especially among women and youth, despite the post-COVID recovery in employment (Figure 2). Yet skill shortages are emerging and ageing is reducing the working age population. A legacy of low private investment weakens productivity and firms’ ability to seize emerging opportunities in digitalisation and the green economy transition.
Source: OECD (2022), Short-term Labour Market Statistics database.
Recent strong employment growth must continue for Greece to achieve the employment rates of other OECD countries. The public employment service can help improve the match between jobseekers and employers. It is gaining capacity to tailor individual employment support programmes, which can particularly help younger jobseekers, but it is burdened by large numbers of registered jobseekers loosely connected to the workforce. The relatively low share of women in paid employment is gradually rising as work arrangements become less inflexible and workers have greater capacity to influence their work arrangements. The new paternal leave scheme can help improve the sharing of household tasks, if it is widely taken up. Foreign-born workers make a large contribution to Greece’s labour force, but their skills are often unrecognised and underused.
Private investment has been low for many years (Figure 3). Scarce finance, the high share of very small firms, and limited dynamism are contributing factors. Streamlining complex administrative processes as part of the public sector’s digitalisation efforts is helping to improve the business environment. Digitalisation and the green economy transition are creating new investment opportunities. Rising foreign direct investment creates opportunities for domestic firms to raise their productivity and expand their markets. Expanding the role of medium-sized and larger firms, and deepening management capacity, will help Greece to seize these opportunities.
Source: Calculations based on data from OECD Economic Outlook.
Greece’s economy remains intensive in greenhouse gas emissions (GHG) mostly due to its fossil fuel use. Replacing fossil fuels with renewable energies would help achieve emission reduction goals (Figure 4). This will require energy consumers to invest and adapt.
Transforming the energy system cost-effectively will be crucial given large investment needs and scarce fiscal space and finance. Making buildings more energy efficient promises large energy savings but requires sizeable upfront investments. Shifting transport off the road and onto Greece’s underused railway system would reduce emissions at modest costs compared to replacing fossil-fuelled cars with low-emission alternatives. Strengthening carbon pricing, while protecting vulnerable groups, and gradually tightening regulations on the use of fossil fuels and energy efficiency can provide policy certainty. This will be crucial to guide investments and productive capacities through this extended transition.
Greece is particularly exposed to a warming climate with more extreme weather events, coastline erosion and less rain. Adapting to climate change will require adjusting public infrastructure and encouraging people to take protective measures. Publicising information about risks and protective measures, and boosting low property insurance coverage to clarify the sharing of risks between the public and private sectors, can reduce vulnerabilities and limit fiscal costs.
Climate policies can stoke opposition and risk being reversed. Responsibility for implementing climate policies is spread across many bodies, weakening implementation. Many workers and firms will need to adjust their skills and activities. Climate-related active labour market measures focus on workers in the most directly-exposed sectors.