Yannis Stournaras: The Greek economy - prospects and main
challenges
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 2nd EU-Arab World
Summit on "The Greek economy: Prospects and main challenges", Athens, 10 November 2017.
* * *
Ladies and Gentlemen,
It is a great pleasure for me to be with you today. The EU-Arab Summit is a forum that improves
communication and fosters cooperation between Europe and the Arab World. Regular dialogue
between the two parties improves understanding, builds trust, addresses concerns and
challenges, and removes barriers. These positive effects are reflected in improved cooperation
at both regional and global level, in the context of multilateral institutions and international fora.
This promotes cross-border trade and investment flows, which, in turn, raise economic growth
and prosperity in both areas. In the last two days in Frankfurt I had the benefit of participation in
the High-Level Policy Dialogue between the Eurosystem and Gulf Countries' central banks and
monetary agencies.
In my intervention today I will focus on the Greek economy: First, I will present the progress that
has been made in Greece since the start of the crisis. Second, I will discuss the outlook for the
economy and the main risks and remaining challenges that must be addressed. Third, I will
underline the preconditions for a sustainable recovery of the Greek economy. Finally, I will point
out the advantages of investing in Greece.
1. Progress since the start of the crisis
Despite past mistakes, occasional delays and even serious backtracking, economic adjustment
in Greece has been one of the largest ever undertaken by any country. Since the beginning of the
sovereign debt crisis in 2010, Greece has implemented a bold programme of economic
adjustment that has fully eliminated fiscal and external deficits and improved competitiveness.
The turned into a surplus of 0.5 percent of GDP in 2016
general government balance
from a deficit of 15.1 percent of GDP in 2009. The primary surplus (that is, the general
government balance net of interest payments) was 3.7 percent of GDP in 2016, from a 10.1
percent of GDP deficit in 2009. This represents one of the largest, if not the largest, fiscal
adjustments ever undertaken in economic history. Based on this progress, on 25 September
2017, the European Council repealed its 2009 decision on the existence of an excessive
deficit.
The current account deficit has fallen by 15 percentage points of GDP since the
beginning of the crisis, with the current account effectively being in balance over the last two
years.
Labour cost competitiveness has been fully restored and price competitiveness is almost
back at its level of the year 2000. It is worth noting that this has been achieved mainly
through the painful process of internal devaluation, that is, through reductions in nominal
wages and salaries.
A bold programme of and privatizations has been implemented.
structural reforms
Reforms cover the pension system, the health system, labour markets, product markets,
the business environment, public administration, the tax system, and the budgetary
framework. According to a recent Lisbon Council report (EuroPlus Monitor, September 2017
Update), Greece is ranked first among the 28 countries of the European Union on the
basis of the Adjustment Progress Indicator.
As a result of these efforts, openness has improved substantially and the economy has
started to rebalance towards tradable, export-oriented sectors. For example, the share
of total exports in GDP increased from 19.0% in 2009 to 30.2% in 2016. Exports of goods
and services, excluding the shipping sector, have increased by 41% in real terms since their
trough in 2009.
Finally, the banking system has been restructured and consolidated. Significant
recapitalization, following stringent stress tests along with in-depth asset quality reviews,
now ensures that Greek banks are among the best capitalized in Europe. This fact, along
with an NPE coverage ratio of 47 percent and good collateral, play a catalytic role in allowing
banks to address the pressing issue of reducing significantly the stock of non-performing
loans. In addition, significant institutional reforms have been initiated aiming at providing
banks with a variety of means of reducing non-performing loans. According to incoming
data, there has been progress since the beginning of the year in the area of banks'
At end-June 2017, the stock of NPEs (including off
Non Performing Exposures (NPE).
balance sheet items) was 3.2% lower than at end-December 2016.
2. The short and medium-term outlook of the Greek economy
The economic recovery continues and growth is gathering pace following the completion of the
second review and the positive impact it had on confidence and liquidity. The consolidation of
growth dynamics is reflected not only in GDP figures, but also in the performance of several
short-term indicators of economic activity, such as: industrial production, retail sales, dependent
employment flows in the private sector, and real exports of goods, tourist arrivals and receipts.
The improved outlook for the economy boosted economic sentiment, increased bank deposits,
improved Greece's credit rating and led to successive declines in the banks' dependence on
central bank financing: for example, Emergency Liquidity Assistance (ELA) for Greek banks now
stands at €26.9 billion, down from its peak of €90 billion in July 2015. In addition, yields of Greek
government bonds declined to late-2009 levels, which allowed the Greek government to return to
international markets, after a period of three years, on July 25. Moreover, the slope of the yield
curve steepened, implying improved investor perceptions for the outlook of the Greek economy.
Corporate bond yields have also fallen to historically low levels. Meanwhile, Greek banks have
made their way back to international financial markets by selling covered bonds.
Looking forward recent soft data, such as the manufacturing PMI and the economic sentiment
indicator, point to a sustained recovery in the coming months. Overall, in 2017 the Bank of
Greece estimates that GDP will increase by approximately 1.7%. For 2018 and 2019,
growth is projected to accelerate to 2.4% and 2.7% respectively. These projections are
mainly based on the assumption that the reform programme will be implemented smoothly and
according to the existing timetable.
3. Risks and major challenges ahead
Despite the positive signs that are being recorded today and the progress achieved, there are still
downside risks to the outlook of the Greek economy.
In the short-term, the main risk is a delay in the completion of the third review of the
which will fuel a new cycle of uncertainty. In such a case economic recovery and
programme,
the return to international financial markets will prove to be short-lived.
In addition, there are external risks associated with developments in global financial markets
and geopolitical factors.
There are also some medium-term challenges that need to be addressed in order to strengthen
the positive outlook. In particular:
The currently high and persistent long-term unemployment raises inequality, posing a risk
for social cohesion and increases the risk that human capital is destroyed, affecting
longterm potential growth.
Banks continue to be burdened with the large stock of non-performing loans and are,
thus, unable to provide sufficient credit to the private sector.
Investment remains at a very low level, due also to the fact that, despite considerable
progress, the business environment is not yet considered as friendly as it should be towards
private investment. For example, according to the Global Competitiveness Index of the
World Economic Forum, competitiveness slightly deteriorated in 2017-2018. According
to this Index, the most problematic factors for doing business in Greece are considered to
be high tax rates, inefficient government bureaucracy, tax regulations, policy and
government instability, access to finance and corruption.
The general government debt-to-GDP ratio has risen to unsustainable levels.
4. Preconditions for a sustainable recovery
To address the existing risks and challenges and to remain on a sustainable recovery path,
economic policy must focus on the following eight issues:
i. Attract FDI and increase openness
As already mentioned, the economic adjustment and the structural improvements in Greece
during the past seven years have been one of the largest ever undertaken by any country. Among
other benefits, this has minimized the various risks, has rendered Greece more business friendly
and created significant investment opportunities. However, domestic savings are insufficient to
meet investment needs which, after a long period of very low investment rates, are significant
even though capacity utilization remains low in some sectors. Thus, besides
restoring access
of companies to capital markets and to bank funding, conditions should be encouraged
that will attract foreign capital, notably Foreign Direct Investment (FDI).
FDI, besides closing the investment gap, promotes greater trade ties with countries and
companies with cutting edge-technologies. This facilitates the participation in global value
chains (GVCs). FDI and participation in GVC improve both physical and human capital, spur
innovation and contribute to the development of new products and services in high value added
sectors, thus boosting productivity.
Domestic and foreign investment and the integration in GVC will increase openness and improve
both the quantity and quality of Greek exports. This, in turn, will accelerate the reallocation of
productive resources towards exports and will raise the long-term potential output. At the same
time, the production of high technology goods and the provision of high technology
knowledgeintensive services will improve the capacity of the country to retain and attract talents.
ii. Pursue privatizations, reforms and improve institutions
Despite the progress achieved so far, there is still a lot to be done in the areas of
privatizations,
structural reforms and the quality of institutions. Privatizations, which are at a mature stage,
need to be completed quickly. In order to attract both domestic and foreign investment, further
emphasis should be put on reforms that foster competition in product and services markets,
which in turn raises productivity and employment.
At this point I want to emphasize that well-functioning institutions matter for economic growth and
enable countries to address significant challenges, because they affect incentives for people and
businesses to invest in physical and human capital, technology and the organization of
production. As pointed out in the seminal work of Acemoglu and Robinson (2012), institutions
can increase both aggregate economic growth and improveincome distribution, because they
guarantee property rights and enforce contract law, providing incentives for people and
businesses to invest and innovate, while at the same time the State provides adequate education
and a sufficient level and quality of public infrastructure, allowing people and businesses to thrive.
Hence, good institutions enable growth and poverty reduction. At the same time economic and
social progress also facilitates better institutions. Well-functioning institutions improve non-price
competitiveness, enhance business confidence and reduce the country risk, leading to more
domestic and foreign investment. Therefore, besides macroeconomic and fiscal adjustment,
more economic flexibility via the adoption of structural reforms and sound institutions
lead to more resilience, faster recovery after an adverse shock and higher long-term
growth.
Institutions have improved in a number of cases over the course of the years. For example, the
independence of the Hellenic Statistical Authority (EL.STAT) and the new Tax Revenue Authority
has been established by law. In addition, over the course of the crisis, new institutions and
regulatory authorities have been established. For example, the creation of the Parliamentary
Budget Office and the Fiscal Council improves oversight on public finances. However, much
more needs to be done in a number of areas.
According to the Global Competitiveness Index 2017-2018 of the World Economic Forum,
Greece ranks in the 87th position out of 137 countries in terms of institutions. Greece ranks quite
low in terms of the efficiency of government spending, the burden of government regulation, and
the efficiency of the legal framework in settling disputes and in challenging regulations. Moreover,
according to the World Bank's "Ease of Doing Business" ranking on the conditions for setting up
a business, Greece's position has improved significantly in 2011-2017 (from 148 in 2011 to 37 in
2017), but remains low relative to its European peers.
Therefore, particular emphasis should now be placed on upgrading the education system,
improving public administration, 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 in enhancing judicial efficiency. With regard to independent
authorities, it is important to strengthen the role and administrative and financial autonomy, as
well as accountability towards the Parliament, of the authorities responsible for regulating,
supervising and maintaining a level playing field in the markets.
It should be taken into account that most of the reforms to be implemented entail fewer
shortterm costs relative to those implemented earlier on in the programme (i.e. labour and pension
reforms). However, taking into account the synergies with the already implemented reforms,
upcoming reforms are expected to yield immediate net gains in terms of faster economic
recovery.
Moreover, flexible economic structures and better institutions not only lead to higher long-term
growth but also reduce the probability of severe recessions.
iii. Tackle the NPL problem
In the banking sector, the large volume of non-performing loans and the problem of the
strategic defaulters prevent the banking system from financing economic growth. All the
necessary measures have now been legislated and the regulatory framework has been
reformulated in order to be able to address the NPL problem in an efficient and expeditious
manner.
As I mentioned earlier, incoming data point to a reduction in NPEs and this is mainly driven by
loan write-offs. However, banks should utilize all the available toolbox to reduce troubled assets,
and in particular speed up the sale of NPLs. To accelerate the reduction of the NPL stock, the
new electronic auctions platform should become fully operational as soon as possible. Particular
emphasis should also be placed on the restructuring of viable companies and the liquidation of
non-viable ones. This will release resources to support new and existing sound investment and
business initiatives, thereby supporting the economic recovery. The recent modernisation of the
institutional framework allows the co-operation of banks with loan servicers and various non-bank
entities and private investors, such as private equity funds, in order to restructure the underlying
business.
iv. Adopt a growth friendly fiscal policy mix
The Bank of Greece has proposed the adoption of a more growth friendly fiscal policy mix.
More emphasis has to be placed on cutting non-productive expenditures and increasing the
public sector efficiency, including the management of state property. This is important since,
according to OECD estimates, state property in Greece is among the highest as a percent of
GDP in OECD member-states. The scaling down of an oversized and inefficient public sector
and the improvement in tax administration will lead to a fairer distribution of the fiscal burden and
will facilitate the reduction of the excessively high tax rates. According to the Global
Competitiveness Index 2017-2018, Greece ranks last and second to last as regards the
adequacy of the tax system to provide incentives to invest (137th out 137 countries) and to work
(136th out of 137 countries).
v. Support Small and Medium Enterprises (SMEs)
1
SMEs are the backbone of the Greek economy in terms of employment and gross value
added (GVA). In 2015, they accounted for 75.1% of total GVA and for 87.3% of employment in
non-financial corporations. Very small or micro SMEs (employing less than 10 people) accounted
for 59.1% of total employment and for 35.9% of GVA in the non-financial corporate sector. The
larger share of SMEs in total employment relative to their share in GVA suggests that there is a
problem of low productivity, which is more pronounced for very small SMEs. Given the
prevalence of SMEs in the Greek economy, policy efforts should also be targeted towards
providing incentives for cluster development, alongside with measures to provide affordable
funding via the banking sector, the capital markets and the official sector through various EU
initiatives. These concerted efforts will allow SMEs to adopt new technologies and benefit from
economies of scale as they will gain access to international distribution channels and to foreign
markets.
vi. Remove various barriers to investment
Besides improving the business environment and lowering taxation, it is necessary to remove
decisively and definitively the obstacles arising from various small or large organized
interests and groups, which exacerbate the business climate and hamper the materialization
of new investment and the implementation of privatizations, even those already
approved.
The removal of capital controls as a result of the gradual improvement of the economy and the
return of full confidence will improve the investment climate and help attract foreign direct
investment.
vii. Promote innovation and a more effective use of human capital
Innovation-driven growth, supported by knowledge-based capital (or intangible assets), is critical
to improving living standards.
The efforts of previous years, mainly through the use of resources from the European Structural
Funds, have led to a partial improvement in the country's performance in many areas, with the
expenditure in research and development (R&D) being on an upward trend over the period 2011-
2016. R&D expenditure reached €1,733 billion or 0.99% of GDP in 2016 from €1,391 billion or
0.67% of GDP in 2011. Despite the continuing rise, Greece records one of the lowest R&D
intensities compared to its euro area peers (2.0% of GDP).
However, innovation-based growth is based on a much wider range of elements than just R&D
spending, such as employee skills and training, investment in information and communication
technologies (ICT), organizational know-how, databases, design, brands and various forms of
intellectual property.
A more effective use of domestic high-skilled human capital requires the adoption of policies
and reforms that encourage research, facilitate the diffusion of technology and boost
entrepreneurship. Companies should be incentivized to increase investment in R&D in order to
improve their capacity to innovate. Universities and research institutes should be encouraged to
cooperate with the private sector to commercially exploit research results and ideas. These
initiatives will promote innovation, increase productivity and facilitate the transition to a
knowledge-based economy.
The improvement in institutions and the implementation of the reform and privatization program
will provide incentives for the initiation of new investment projects. New investment goes
hand-inhand with job creation and is, thus, expected to facilitate the reduction of the unacceptably high
unemployment rate. However, certain aspects of structural reforms and the stabilisation of the
economy might have negative distributional effects. Hence, it is essential to provide immediate
support to the unemployed and those marginally attached to the labour market by
employing active labour market policies and targeted social transfers to counter the temporary
income loss and to shorten job-transitions. In the medium-term, emphasis should be placed on
skill upgrading and retraining policies to get people back to work as well as improvements
in education, given that investment in human capital is a prerequisite to an inclusive and
sustainable growth model.
viii. Address the public debt overhang
Decisive and concrete actions are needed to ensure the sustainability of Greek public debt.
The Eurogroup reaffirmed last June its commitment to the principles contained in the May 2016
statement, and specific mention was made of measures that could be taken, if necessary,
regarding public debt reprofiling.
The Bank of Greece has put forward a specific proposal for extending the weighted average
maturity of interest payments on EFSF loans of at least 8.5 years. If adopted, such a proposal
would support both the recovery of the economy and the country's creditworthiness. This is more
so if it is combined with a lower fiscal target, that is a primary surplus of 2.0 percent of GDP
instead of 3.5 percent, and more privatisations.
This mild debt reprofiling proposal is vital for debt sustainability in Greece, while it involves only a
negligible cost for its partners. It would also pave the way for the inclusion of Greek government
bonds in the ECB's quantitative easing programme, which in turn will facilitate sustainable
market access, the return of more deposits to the Greek banks and, ultimately, the full abolition
of capital controls.
5. Greece has the potential to become an attractive investment destination
I will now briefly refer to some factors and structural features that make Greece an attractive
place to invest. First, the policy changes that have taken place over the past seven years,
coupled with the decisive implementation of the remaining reforms, improve confidence,
enhance business climate and generate positive growth prospects providing incentives for the
initiation of new domestic and foreign direct investment.
Second, The most crucial factor that ensures the
economic policy is and will remain prudent.
implementation of the reforms required for the Greek economy to prosper in the context of the
Economic and Monetary Union is the emergence of a strong political consensus in Parliament
and society in favour of keeping Greece in the euro area. In addition, adherence to the EU
macroeconomic and fiscal rules and the strict monitoring by the EU as part of
postprogramme surveillance which is already envisaged for programme member-states with
relatively high public debt, precludes the emergence of new imbalances.
Third, Greece benefits from a large amount of EU funds which aim at boosting growth and
jobs. In particular, the EU funds programmed to be disbursed to Greece for the period 2014 to
2020 amount to €35.9 billion, or 20% of Greece's 2016 GDP.
Fourth, Greece is both a Hence, enterprises
European Union and a euro area member state.
located in Greece enjoy the benefits of currency and price stability and have access to the EU
They face a stable institutional environment, enjoy investor protection, and have
Single Market.
access to a sound banking system which is under the oversight of the European Central
Bank.
Fifth, there are several features that make Greece an attractive
non-price competitiveness
place to invest. Greece has a highly skilled human capital by international standards.
According to the 2017-2018 Global Competitiveness Report of the World Economic Forum,
Greece ranks relatively high in higher education and training (44th out of 137 countries) and,
in particular, in the tertiary and the secondary education enrollment rates. Moreover, Greece also
receives a relatively good ranking in (50nd) and in some
technological readiness innovation
and business sophistication factors like the application for patents (PCT patents: 37th), and
particularly in the availability of scientists and engineers (10th). In addition, Greece receives a
relatively good ranking in terms of the strength of investor protection (41th) and in terms of its
infrastructure (38th) as well as the number of procedures to start a business (36th) and the
degree of customer orientation (48th).
Sixth, one of Greece's most important advantages is its in Southeastern
geographical location
Europe. Being at the crossroads of three continents and in close proximity with the
MiddleEast and the Arab world, Greece provides significant investment opportunities as a
transport
and energy hub. Given that Greece is a major tourist destination country, there are significant
investment opportunities in tourism conditional on expanding the capacity and quality of tourism
infrastructure. Investment opportunities also exist in sectors such as logistics, networks,
shipping, trade, pharmaceutical, manufacturing, and mining and quarrying. Since many
Arab countries seek to diversify their investment base, these sectors in Greece provide a
mutually beneficial opportunity for doing so.
Seventh, it has already been mentioned that Greece has a sizeable state real estate property
that is available for utilization by private investors under the privatization programme. Both the
and the private investment needs generate profitable
current privatization programme
investment opportunities for foreign investors. Despite some missteps, there is already
encouraging evidence. FDI inflows reached almost €2.8 billion in 2016 (1.6% of GDP). It is the
biggest FDI inflow recorded since 2010 and was mainly directed to services sectors (i.e. hotels
and restaurants, transportation, financial intermediation and real estate activities). In the first
the total inflow has already reached €2.7 billion.
eight months of 2017 The increased FDI flow
and the continuation of the privatization programme (e.g. the recent sale of the train
operator Trainose S.A. to Trenitalia, the extension of the Athens International Airport Development
Agreement for 20 additional years) indicate that major foreign investors see positive
prospects on the future of the Greek economy.
Last but not least, Greece, being a member of the EU, NATO and other international
multilateral organizations, enjoys peace, security and enhanced cooperation with its partners.
6. Conclusions
The ongoing reform and fiscal adjustment effort is bearing fruits. The fiscal and current account
imbalances have now been corrected, important and long-needed reforms have been
implemented, competitiveness has improved and the banking sector is adequately capitalized.
The economy is now recovering and growth is gathering pace.
However, more needs to be done. Greece is now facing three stock imbalances, namely a high
rate of unemployment, a high public debt and a high stock of NPLs in bank portfolios. These
three crisis legacies, coupled with the significant investment requirements in order to improve the
economy and modernize its public and private infrastructure, will remain the major challenges for
Greece over the coming years.
In addition, we still have some way to go in order for Greece to tap the financial market on
sustainable terms after the end of the current programme in August 2018. To this end, the Greek
authorities must pursue the remaining reforms forcefully and close the 3rd review before the end
of the year, in order to improve the credit rating of the country. At the same time our European
partners should specify in more detail the medium-term debt reprofiling measures according to
the Eurogroup agreement and, in close cooperation with the Greek authorities, provide more
clarity on the post-programme support for the Greek economy.
These actions will improve the investment climate and attract foreign direct investment. This, in
turn, will facilitate the return to financial normality after seven years of significant sacrifices by the
Greek people. More flexible economic structures coupled with sound institutions and
macroeconomic fundamentals will accelerate the reallocation of productive resources towards
tradable and exportable goods and services, making the economy more resilient to future shocks
and raising long-term potential growth.
Sources:
Acemoglu D. and J. Robinson, 2012 Why Nations Fail: The Origins of Power, Prosperity, and
Poverty, Publisher: Crown Business.
Bank of Greece, 2017. Monetary Policy Report 2016-2017, July.
Draghi, M., 2017. Structural reforms in the euro area. Introductory remarks, 18 October.
www.ecb.europa.eu/press/key/date/2017/html/ecb.sp171018.en.html
Draghi, M. 2017, Introductory Statement 26
October.www.ecb.europa.eu/press/pressconf/2017/html/ecb.is171026.en.html
European Commission, 2017. A new start for job and growth in Greece - almost two years on,
situation as of 10 June 2017.Brussels.
European Commission, 2017. Investment in the EU Member States: An analysis of drivers and
barriers, Institutional paper 062, October.
National Documentation Centre, 2017. R&D expenditure in Greece in 2016.
www.ekt.gr/el/news/21148.
OECD, 2016, Greece, OECD Economic Surveys, Paris.
OECD, 2016, Statistical Insights: Government assets matter too not just debt.
IMF, 2017, Global prospects and policies, World Economic Outlook, October.
Lisbon Council 2017, EuroPlus Monitor, September Update
Sondermann, D., 2016. Towards more resilient economies: the role of well-functioning economic
structures, ECB Working Paper No 1984.
Stournaras, Y. , 2016 "Partners for Growth and Development" "Prospects of the Greek economy
after six years of adjustment" Speech at the EU-Arab World Summit in Athens, 3 November.
www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx?
Item_ID=384&List_ID=b2e9402e-db05-4166-9f09-e1b26a1c6f1b
Stournaras, Y., 2017. "Greece: A comeback to the financial markets? Are we near the finishing
line? " Speech at an event organized by the Economist in Frankfurt, 31 May.
www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx?
Item_ID=441&List_ID=b2e9402e-db05-4166-9f09-e1b26a1c6f1b
Stournaras, Y., 2017. "The Greek economy: challenges and prospects" Speech at an event
organized by the British Hellenic Chamber of Commerce in Athens, 28 September.
www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx?
Item_ID=472&List_ID=b2e9402e-db05-4166-9f09-e1b26a1c6f1b
Stournaras, Y., 2017. "Greece and the global economy: Prospects and main challenges
ahead" Speech at an event organized by Credit Suisse in Athens, 11 October.
www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx?
Item_ID=476&List_ID=b2e9402e-db05-4166-9f09-e1b26a1c6f1b
Stournaras, Y., 2017. "Seeking reform in modern and contemporary Greece" Speech at an event
organized by the Hellenic American Union in Athens, 20 October.
www.bankofgreece.gr/Pages/el/Bank/News/Speeches/DispItem.aspx?
Item_ID=479&List_ID=b2e9402e-db05-4166-9f09-e1b26a1c6f1b
World Economic Forum, 2017. The Global Competitiveness Index 2017-2018 edition.
1Employing less than 250 people.