Yannis Stournaras: The Greek economy - investment gap and the
financing of investment needs
Opening remarks by Mr Yannis Stournaras, Governor of the Bank of Greece, at the
presentation of the EIB Investment Survey Results 2023 for Greece titled: "The Greek
economy: investment gap and the financing of investment needs", Athens, 30 May
2024.
* * *
Ladies and gentlemen,
I would like to welcome you to the ank of Greece and to the presentation of the results
of the 2023 EIB investment survey for the Greek economy. In my opening remarks, I
will briefly refer to the growth prospects of the Greek economy and to the particularly
important role of investment.
1. The Greek economy: current state and prospects
The Greek economy grew by 1.2% in the fourth quarter of 2023, after 2.1% in the
previous quarter. This slowdown is attributed to declines in the growth rate of
investment and of exports of goods. For 2023 as a whole, the economy continued to
grow at a satisfactory rate (2%), but weaker relative to the exceptional growth in 2022
(5.6%). Yet, despite successive international crises and high uncertainty due to
geopolitical tensions, the Greek economy has grown faster than the euro area average
since 2021. Private consumption, exports of goods and services and gross fixed capital
formation remained the main drivers of growth in 2023, although the slowdown in the
economies of key trading partners and high inflation exerted a dampening effect on
these GDP components.
Overall, in the coming years, the Greek economy is projected to outperform the euro
area. This development is particularly important, as it reinforces the process of
convergence of Greece's real GDP per capita with the average levels of the EU, which
was interrupted during the sovereign debt crisis. The main driving forces of economic
activity will continue to be investment spending, thanks to the contribution of the
European funds, in particular of the RRF, as well as private consumption, due to a rise
in real disposable income on account of higher employment and lower inflation.
2. The role of investment spending
Given the problems of population ageing, low birth rates and low labour force
participation, the role of investment in physical and human capital becomes decisive for
the future course of the economy in both the short and the long run. In the short run,
investment spending boosts demand and growth. In the long run, it increases the
capital stock of the economy and raises the growth rate of potential output.
Investment spending can contribute to economic growth, whether it involves
improvements in infrastructure, education and health, or investments in productive
equipment, machinery as well as intangible assets and cutting-edge technologies. As a
result of the increase in the stock of physical and human capital, labour productivity
improves, and a sustainable rise in workers' real wages and living standards becomes
possible.
However, the persistently low level of productive capital accumulation has been a
significant obstacle to productivity growth and convergence with the EU average. In
particular, Greece has witnessed a sizeable investment gap vis-à-vis the EU since the
1
sovereign debt crisis. Specifically, according to the European Commission, investment
in real terms was almost 50% lower in 2022 relative to 2008. The investment-to-GDP
ratio, which hovered around 24% before 2008 (i.e. at a level comparable to the EU
average), collapsed during the crisis and averaged 11.9% in 2010-2020. A recent IMF
study estimates that the investment gap, according to certain measures, in Greece
reached up to 8% in terms of GDP in 2019. According to the study, structural
impediments have constrained corporate investment, while business cycle and balance
sheet developments have held back household investment.
The investment-to-GDP ratio has increased in recent years, as a result of strong
investment growth in 2021-2022. Corporate investment has recently fully recovered to
pre-2010 levels, while residential investment is low but growing at a rapid pace due to
strong domestic and foreign demand from European and third-country investors in the
context of the Golden Visa programme. However, the investment-to-GDP ratio still
remains lower than the EU average (14.3% vs. 22.0% in the EU in 2023).
However, it should be noted that it is not only the Greek economy that faces an
investment gap. Rather, this holds also for the EU as a whole compared to the US.
2
According to a recent EIB study, the investment gap between the EU and the US is
attributed, among other things, to output dynamics, high cost of capital, financial
constraints, corporate leverage and uncertainty. The drivers behind the gap include
investment differences in machinery, equipment and innovation. In particular, there is a
big gap in investment in ICT equipment (especially in the services sector) and in
intellectual property products. In the case of Greece, the gap in productive investment
compared to the US is the largest in the EU.
3. What to do next?
The timely absorption and disbursement of RRF resources in the private sector is
crucial for the achievement of the projected growth rates of gross fixed capital formation
in 2024-2026. So far, the absorption rate of RRF funds is satisfactory (41% out of the
total envelop of €36 billion), and Greece is fourth in the relevant ranking of countries
according to a recent European Commission report. However, disbursements to
businesses are progressing at a slower pace (14% of the total), which delays actual
investment spending.
A wide range of ambitious reforms must be implemented to close the investment gap
and accelerate the growth rate of the Greek economy. These reforms should aim to
address structural weaknesses such as delays in the administration of justice, red tape
in public administration and the digital skills deficit. At the same time, however, it is
necessary to eliminate market-restrictive practices by removing barriers to entry and
opening goods and services markets to competition.
Structural reforms will help attract foreign direct investment and facilitate greater
participation of Greek businesses in global value chains. This will contribute to the
adoption of innovative production methods and new technologies, enabling Greek
businesses to produce high value-added and knowledge-intensive products. This, in
turn, will lead to an increase in the labour and total factor productivity of the Greek
economy.
A key driver towards increasing investment and achieving stronger growth is a
robust
banking sector that can provide financing to businesses and households. Over the
past decade, significant progress has been made in strengthening the banking sector.
In particular, banks' profitability, liquidity, capital adequacy and asset quality have all
improved, while the divestment of the Hellenic Financial Stability Fund (HFSF) from the
systemic banks' equity has also progressed. That said, the shock absorption capacity of
the banking sector should be further enhanced. This includes a quantitative and
qualitative improvement of the capital base of Greek banks and convergence of their
NPL ratio to the European average. Moreover, intensifying competition in the domestic
banking sector through the creation of the so-called fifth pillar could improve financing
conditions.
The availability of bank credit to meet business investment needs could be enhanced by
utilising all national and European financial instruments, such as those available
from the European Investment Bank (EIB), the European Bank for Reconstruction and
Development (EBRD), the Hellenic Development Bank (HDB) and the RRF.
In addition to bank financing, the use of all available forms of private investment
financing, including access to capital markets, should be considered. Venture capital,
private equity, crowdfunding, business angels, startup accelerators and microfinance
can be used to finance the investment needs of SMEs that do not have sufficient
tangible assets to offer as collateral for obtaining bank credit.
4. Concluding remarks
In closing, I would like to point out that the progress made in recent years and the
positive prospects of the economy are reflected in the upgrading of the credit rating of
Greek government bonds to investment grade status. However, continuous efforts are
needed to accelerate the growth rate in the coming years. This requires the
implementation of structural reforms and the utilisation of all available European funds,
which are decisive for the financing of investment.
I look forward to hearing the EIB's views and the findings of its investment survey, as
well as the insights of all our distinguished speakers into the investment outlook and the
financing of the investment needs of the Greek economy.
1European Commission (2024), "In-Depth Review 2024 - Greece", Institutional Paper
281, April.
2
European Investment Bank (2024), "Dynamics of productive investment and gaps
between the United States and EU countries", Economics - Working Papers 2024/01.
Recent research finds that product and labour market reforms lead to a cumulative
rise of about 2% in FDI and of 1% in GDP by the end of a five-year horizon. See
Mavrogiannis, C. and A. Tagkalakis (2024), "From policy to capital: assessing the
impact of structural reforms on gross capital inflows", Bank of Greece, Working Paper
No. 328, April.