# C_2007070EN.01000901.xml

| 27.3.2007 | EN | Official Journal of the European Union | C 70/9 |
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27.3.2007

EN

Official Journal of the European Union

C 70/9

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COUNCIL OPINION

COUNCIL OPINION

of 27 February 2007

on the updated stability programme of Greece, 2006-2009

(2007/C 70/03)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(3) thereof,

1

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 27 February 2007 the Council examined the updated stability programme of Greece, which covers the period 2006 to 2009 (2)
   (3). |
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(1)

On 27 February 2007 the Council examined the updated stability programme of Greece, which covers the period 2006 to 2009 (2)
   (3).

2

3

| (2) | The macroeconomic scenario underlying the programme envisages that real GDP growth will be broadly stable at around 4 % per year. Assessed against currently available information, this scenario appears to be based on plausible growth assumption for 2006 and 2007 but on favourable ones thereafter when the projected evolution of growth appears to be on the high side. The programme's projections for inflation appear to be on the low side in the outer years of the programme period. |
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(2)

The macroeconomic scenario underlying the programme envisages that real GDP growth will be broadly stable at around 4 % per year. Assessed against currently available information, this scenario appears to be based on plausible growth assumption for 2006 and 2007 but on favourable ones thereafter when the projected evolution of growth appears to be on the high side. The programme's projections for inflation appear to be on the low side in the outer years of the programme period.

| (3) | For 2006, the general government deficit is estimated at 2,6 % of GDP in the Commission services' autumn 2006 forecast and in the new update, fully in line with the target set in the previous update of the stability programme. Total expenditures achieved the target set in the 2006 budget. While the main categories of expenditure broadly achieved the targets, a reduction in social transfers other than in kind fully compensated a

  % of GDP overrun in public investment. Total revenues were marginally higher than expected. One-off measures were partly substituted by permanent measures implemented in the middle of the year, namely increases of the excise tax on fuel and cigarettes, and a tax increase on mobile connection bills. Revenues from these permanent measures compensated for the reduction in one-off revenues from 0,6 % of GDP set in the 2006 budget to 0,4 % of GDP. |
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(3)

Formula

| (4) | The budgetary strategy in the programme aims at correcting the excessive deficit in 2006. Thereafter, the government deficit is planned to continue narrowing steadily over the programme period, to 1,2 % of GDP in 2009. The deficit reduction by 1

  percentage point of GDP between 2006 and 2009 is spread almost equally between revenue increase and expenditure reduction. On the revenue side, total revenue is expected to increase by

  p.p. of GDP, mainly driven by indirect taxes and social contributions. On the expenditure side, total expenditure is projected to fall by around

  p.p. of GDP over the same period, of which

  p.p., corresponds to lower interest payments. As a result, reductions in primary expenditure are projected to be limited to just

  p.p.. Social transfers are projected to increase by

  p.p., which would be more than compensated by reductions amounting

  p.p. in other expenditure categories, mainly collective consumption. The primary surplus would improve by around 1 percentage point over the programme period, to close to 3 % of GDP by 2009. Although, compared with the previous programme, the targets for 2006-2008 are broadly unchanged with the same macroeconomic scenario, the current adjustment in 2006 is more significant since the deficit outcome for 2005 (5,2 % of GDP) is higher than projected in the update of December 2005 (4,3 % of GDP). |
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(4)

Formula

Formula

Formula

Formula

Formula

Formula

Formula

| (5) | The structural balance (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) calculated according to the commonly agreed methodology is planned to improve from a deficit of around 3

  % of GDP in 2006 to 1

  % at the end of the programme period (2009). As in the previous update of the stability programme, the medium-term objective (MTO) for the budgetary position presented in the programme is balanced or in surplus in structural terms, which the programme does not aim to achieve within the programme period. As the MTO is more demanding than the minimum benchmark (estimated at a structural deficit of around 1

  % of GDP), achieving it should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. The MTO lies within the range indicated for euro-area and ERM II Member States in the Stability and Growth Pact and the code of conduct and adequately reflects the debt ratio and average potential output growth in the long term. |
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(5)

Formula

Formula

Formula

| (6) | The risks to the budgetary projections in the programme appear broadly balanced until 2007 but the budgetary outcomes could be worse than projected in the programme thereafter. In particular, for 2008 and 2009, the programme does not provide sufficient information on measures envisaged and is based on a favourable macroeconomic scenario. Based on past experience, and although no slippages have been recorded for the last two years, risks of expenditure overruns over the programme period can not be excluded, while revenue shortfalls may materialise if the announced measures to fight tax evasion would turn out ineffective. |
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(6)

The risks to the budgetary projections in the programme appear broadly balanced until 2007 but the budgetary outcomes could be worse than projected in the programme thereafter. In particular, for 2008 and 2009, the programme does not provide sufficient information on measures envisaged and is based on a favourable macroeconomic scenario. Based on past experience, and although no slippages have been recorded for the last two years, risks of expenditure overruns over the programme period can not be excluded, while revenue shortfalls may materialise if the announced measures to fight tax evasion would turn out ineffective.

| (7) | In view of this risk assessment, the budgetary stance in the programme is consistent with a correction of the excessive deficit by 2006 as recommended by the Council. However, the budgetary stance does not seem to provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations within the programme's horizon. In the years following the correction of the excessive deficit, Greece is expected to continue to experience good times. In view of this assessment, the pace of the adjustment towards the MTO implied by the programme should be strengthened, especially after 2007, to be in line with the Stability and Growth Pact, which specifies that, for euro-area and ERM II Member States, the annual improvement in the structural balance should be 0,5 % of GDP as a benchmark and that the adjustment should be higher in good economic times and could be lower in bad economic times. |
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(7)

In view of this risk assessment, the budgetary stance in the programme is consistent with a correction of the excessive deficit by 2006 as recommended by the Council. However, the budgetary stance does not seem to provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations within the programme's horizon. In the years following the correction of the excessive deficit, Greece is expected to continue to experience good times. In view of this assessment, the pace of the adjustment towards the MTO implied by the programme should be strengthened, especially after 2007, to be in line with the Stability and Growth Pact, which specifies that, for euro-area and ERM II Member States, the annual improvement in the structural balance should be 0,5 % of GDP as a benchmark and that the adjustment should be higher in good economic times and could be lower in bad economic times.

| (8) | Government gross debt is estimated to have reached 104 % of GDP in 2006, far above the 60 % of GDP Treaty reference value. The programme projects the debt ratio to gradually decline by almost 13 percentage points of GDP over the programme period, while stock-flow adjustments are diminishing rapidly starting from 2007. The evolution of the debt ratio after 2007 might be less favourable than projected in the programme given the favourable growth projections and the risks to the deficit targets mentioned above. Nevertheless, in view of this risk assessment, the debt ratio seems to be sufficiently diminishing towards the reference value over the programme period. |
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(8)

Government gross debt is estimated to have reached 104 % of GDP in 2006, far above the 60 % of GDP Treaty reference value. The programme projects the debt ratio to gradually decline by almost 13 percentage points of GDP over the programme period, while stock-flow adjustments are diminishing rapidly starting from 2007. The evolution of the debt ratio after 2007 might be less favourable than projected in the programme given the favourable growth projections and the risks to the deficit targets mentioned above. Nevertheless, in view of this risk assessment, the debt ratio seems to be sufficiently diminishing towards the reference value over the programme period.

| (9) | The long-term budgetary impact of ageing in Greece is uncertain as long-term projections of pension expenditure are not available; however, it is very likely to be well above the EU average; according to the latest available information from the 2002 updated Greek stability programme, a significant increase in pension expenditure as a share of GDP is projected over the long term. The initial budgetary position, albeit improved compared with 2005, constitutes a significant risk to sustainable public finances even before considering the long-term budgetary impact of an ageing population. Moreover, the current level of gross debt is well above the Treaty reference value and reducing it requires achieving high primary surpluses for a long period of time. Consolidating the public finances as planned, together with urgent reform measures aimed at containing the likely significant increase in age-related expenditures, would contribute to reducing risks to the long-term sustainability of public finances. Overall, Greece appears to be at high risk with regard to the sustainability of public finances. The availability of long-term projections of pension expenditure would improve the assessment of long term budgetary sustainability. |
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(9)

The long-term budgetary impact of ageing in Greece is uncertain as long-term projections of pension expenditure are not available; however, it is very likely to be well above the EU average; according to the latest available information from the 2002 updated Greek stability programme, a significant increase in pension expenditure as a share of GDP is projected over the long term. The initial budgetary position, albeit improved compared with 2005, constitutes a significant risk to sustainable public finances even before considering the long-term budgetary impact of an ageing population. Moreover, the current level of gross debt is well above the Treaty reference value and reducing it requires achieving high primary surpluses for a long period of time. Consolidating the public finances as planned, together with urgent reform measures aimed at containing the likely significant increase in age-related expenditures, would contribute to reducing risks to the long-term sustainability of public finances. Overall, Greece appears to be at high risk with regard to the sustainability of public finances. The availability of long-term projections of pension expenditure would improve the assessment of long term budgetary sustainability.

| (10) | The stability programme does not contain a qualitative assessment of the overall impact of the October 2006 implementation report of the national reform programme within the medium-term fiscal strategy. In addition, it provides no systematic information on the direct budgetary costs or savings of the main reforms envisaged in the national reform programme and, excluding 2007, its budgetary projections do not explicitly take into account the public finance implications of the actions outlined in the national reform programme. Nevertheless, the measures in the area of public finances envisaged in the stability programme seem consistent with those foreseen in the national reform programme. In particular, the majority of the measures and actions planned for 2007 in the implementation report of the national reform programme seem to have been included in the 2007 Budget Law, even if the lack of detailed description of the measures and their implementation raises some doubts over the budgetary implications. |
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(10)

The stability programme does not contain a qualitative assessment of the overall impact of the October 2006 implementation report of the national reform programme within the medium-term fiscal strategy. In addition, it provides no systematic information on the direct budgetary costs or savings of the main reforms envisaged in the national reform programme and, excluding 2007, its budgetary projections do not explicitly take into account the public finance implications of the actions outlined in the national reform programme. Nevertheless, the measures in the area of public finances envisaged in the stability programme seem consistent with those foreseen in the national reform programme. In particular, the majority of the measures and actions planned for 2007 in the implementation report of the national reform programme seem to have been included in the 2007 Budget Law, even if the lack of detailed description of the measures and their implementation raises some doubts over the budgetary implications.

| (11) | The budgetary strategy in the programme is broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. |
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(11)

The budgetary strategy in the programme is broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008.

| (12) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides all required and most of the optional data (4). |
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(12)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides all required and most of the optional data (4).

4

The Council considers that, following a significant fiscal consolidation and in a context of strong growth prospects, the programme is consistent with the correction of the excessive deficit by 2006 and it envisages progress towards the MTO. However, the MTO would not be attained within the programme period. The consolidation, which also relies on a significant decline in the interest burden, is subject to some risks as specific measures are only partially spelled out after 2007.

In view of the above assessment, Greece is invited to:

| (i) | taking into account the good times, following the correction of the excessive deficit, strengthen the adjustment towards the MTO and ensure that the debt-to-GDP ratio is reduced accordingly; |
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(i)

taking into account the good times, following the correction of the excessive deficit, strengthen the adjustment towards the MTO and ensure that the debt-to-GDP ratio is reduced accordingly;

| (ii) | continue improving the budgetary process by further increasing its transparency, spelling out the budgetary strategy within a longer time perspective and effectively implementing mechanisms to monitor and control primary expenditure; |
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(ii)

continue improving the budgetary process by further increasing its transparency, spelling out the budgetary strategy within a longer time perspective and effectively implementing mechanisms to monitor and control primary expenditure;

| (iii) | in view of the very high level of debt and the projected increase in age-related expenditure, improve the long-term sustainability of public finances by achieving the MTO, controlling public pension and healthcare expenditures and resolutely implementing ambitious reforms; and produce as soon as possible long-term projections for age-related expenditure. |
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(iii)

in view of the very high level of debt and the projected increase in age-related expenditure, improve the long-term sustainability of public finances by achieving the MTO, controlling public pension and healthcare expenditures and resolutely implementing ambitious reforms; and produce as soon as possible long-term projections for age-related expenditure.

Comparison of key macroeconomic and budgetary projections

| | 2005 | 2006 | 2007 | 2008 | 2009 |
| --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | SP Dec 2006 | 3,7 | 4,0 | 3,9 | 4,0 | 4,1 |
| COM Nov 2006 | 3,7 | 3,8 | 3,7 | 3,7 | n.a. |
| SP Dec 2005 | 3,6 | 3,8 | 3,8 | 4,0 | n.a. |
| HICP inflation
  (%) | SP Dec 2006 | 3,5 | 3,3 | 3,0 | 2,8 | 2,6 |
| COM Nov 2006 | 3,5 | 3,3 | 3,3 | 3,3 | n.a. |
| SP Dec 2005 | 3,5 | 3,2 | 3,0 | 2,7 | n.a. |
| Output gap
  (% of potential GDP) | SP Dec 2006 (5) | 0,9 | 1,0 | 0,9 | 1,1 | 1,5 |
| COM Nov 2006 (9) | 1,5 | 1,5 | 1,5 | 1,8 | n.a. |
| SP Dec 2005 (5) | 1,1 | 1,1 | 1,1 | 1,5 | n.a. |
| General government balance
  (% of GDP) | SP Dec 2006 | – 5,2 | – 2,6 | – 2,4 | – 1,8 | – 1,2 |
| COM Nov 2006 | – 5,2 | – 2,6 | – 2,6 | – 2,4 | n.a. |
| SP Dec 2005 | – 4,3 | – 2,6 | – 2,3 | – 1,7 | n.a. |
| Primary balance
  (% of GDP) | SP Dec 2006 | – 0,4 | 2,0 | 2,0 | 2,4 | 2,9 |
| COM Nov 2006 | – 0,4 | 2,0 | 1,8 | 1,7 | n.a. |
| SP Dec 2005 | 0,9 | 2,3 | 2,4 | 2,8 | n.a. |
| Cyclically-adjusted balance
  (% of GDP) | SP Dec 2006 (5) | – 5,6 | – 3,0 | – 2,8 | – 2,3 | – 1,8 |
| COM Nov 2006 | – 5,9 | – 3,3 | – 3,3 | – 3,1 | n.a. |
| SP Dec 2005 (5) | – 4,8 | – 3,1 | – 2,8 | – 2,4 | n.a. |
| Structural balance (6)

  (% of GDP) | SP Dec 2006 (7) | – 5,6 | – 3,4 | – 2,8 | – 2,3 | – 1,8 |
| COM Nov 2006 (8) | – 5,9 | – 3,7 | – 3,3 | – 3,1 | n.a. |
| SP Dec 2005 | – 4,8 | – 3,7 | – 2,8 | – 2,4 | n.a. |
| Government gross debt
  (% of GDP) | SP Dec 2006 | 107,5 | 104,1 | 100,1 | 95,9 | 91,3 |
| COM Nov 2006 | 107,5 | 104,8 | 101,0 | 96,4 | n.a. |
| SP Dec 2005 | 107,9 | 104,8 | 101,1 | 96,8 | n.a. |
| Source:

  Stability programme (SP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations |

2005

2006

2007

2008

2009

Real GDP

(% change)

SP Dec 2006

SP Dec 2006

3,7

3,7

4,0

4,0

3,9

3,9

4,0

4,0

4,1

4,1

COM Nov 2006

3,7

3,8

3,7

3,7

n.a.

SP Dec 2005

SP Dec 2005

3,6

3,6

3,8

3,8

3,8

3,8

4,0

4,0

n.a.

n.a.

HICP inflation

(%)

SP Dec 2006

SP Dec 2006

3,5

3,5

3,3

3,3

3,0

3,0

2,8

2,8

2,6

2,6

COM Nov 2006

3,5

3,3

3,3

3,3

n.a.

SP Dec 2005

SP Dec 2005

3,5

3,5

3,2

3,2

3,0

3,0

2,7

2,7

n.a.

n.a.

Output gap

(% of potential GDP)

SP Dec 2006 (5)

SP Dec 2006 (5

0,9

0,9

1,0

1,0

0,9

0,9

1,1

1,1

1,5

1,5

COM Nov 2006 (9)

9

1,5

1,5

1,5

1,8

n.a.

SP Dec 2005 (5)

SP Dec 2005 (5

1,1

1,1

1,1

1,1

1,1

1,1

1,5

1,5

n.a.

n.a.

General government balance

(% of GDP)

SP Dec 2006

SP Dec 2006

– 5,2

– 5,2

– 2,6

– 2,6

– 2,4

– 2,4

– 1,8

– 1,8

– 1,2

– 1,2

COM Nov 2006

– 5,2

– 2,6

– 2,6

– 2,4

n.a.

SP Dec 2005

SP Dec 2005

– 4,3

– 4,3

– 2,6

– 2,6

– 2,3

– 2,3

– 1,7

– 1,7

n.a.

n.a.

Primary balance

(% of GDP)

SP Dec 2006

SP Dec 2006

– 0,4

– 0,4

2,0

2,0

2,0

2,0

2,4

2,4

2,9

2,9

COM Nov 2006

– 0,4

2,0

1,8

1,7

n.a.

SP Dec 2005

SP Dec 2005

0,9

0,9

2,3

2,3

2,4

2,4

2,8

2,8

n.a.

n.a.

Cyclically-adjusted balance

(% of GDP)

SP Dec 2006 (5)

SP Dec 2006 (5

– 5,6

– 5,6

– 3,0

– 3,0

– 2,8

– 2,8

– 2,3

– 2,3

– 1,8

– 1,8

COM Nov 2006

– 5,9

– 3,3

– 3,3

– 3,1

n.a.

SP Dec 2005 (5)

SP Dec 2005 (5

– 4,8

– 4,8

– 3,1

– 3,1

– 2,8

– 2,8

– 2,4

– 2,4

n.a.

n.a.

Structural balance (6)

6

(% of GDP)

SP Dec 2006 (7)

SP Dec 2006 (7

– 5,6

– 5,6

– 3,4

– 3,4

– 2,8

– 2,8

– 2,3

– 2,3

– 1,8

– 1,8

COM Nov 2006 (8)

8

– 5,9

– 3,7

– 3,3

– 3,1

n.a.

SP Dec 2005

SP Dec 2005

– 4,8

– 4,8

– 3,7

– 3,7

– 2,8

– 2,8

– 2,4

– 2,4

n.a.

n.a.

Government gross debt

(% of GDP)

SP Dec 2006

SP Dec 2006

107,5

107,5

104,1

104,1

100,1

100,1

95,9

95,9

91,3

91,3

COM Nov 2006

107,5

104,8

101,0

96,4

n.a.

SP Dec 2005

SP Dec 2005

107,9

107,9

104,8

104,8

101,1

101,1

96,8

96,8

n.a.

n.a.

Source:

Stability programme (SP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations

Stability programme (SP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations

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(1)  OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:

1

http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm

(2)  The update was submitted 2 weeks beyond the 1 December deadline set in the code of conduct.

2

(3)  The Greek authorities have transmitted to Eurostat new GDP data for the period 1995-2005, showing a sharp upward revision of GDP levels. This revision was carried out within the regular assessment of compliance with Eurostat's statistical practices. Eurostat is currently reviewing these data. The updated Greek stability programme and its assessment are based on unrevised GDP data. Eurostat has lifted its reservations on historical Greek budgetary data.

3

(4)  In particular, data on general government expenditure by function, long-term sustainability and contributions to potential GDP growth are missing.

4

(5)  Commission services calculations on the basis of the information in the programme.

5

(6)  Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.

6

(7)  One-off and other temporary measures taken from the programme (0,4 % of GDP in 2006).

7

(8)  One-off and other temporary measures taken from the Commission services' autumn 2006 forecast (0,4 % of GDP in 2006).

8

(9)  Based on estimated potential growth of 3,7 %, 3,8 %, 3,6 % and 3,5 % respectively in the period 2005-2008.

9

Source:

Stability programme (SP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations

Stability programme (SP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations

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