Yannis Stournaras: Greece and the global economy - prospects
and main challenges ahead
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at an event organized by
Credit Suisse, Athens, 11 October 2017.
* * *
Ladies and Gentlemen,
It is a great pleasure for me to be here with you tonight and have the opportunity to share my
thoughts on the prospects for the Greek economy against the backdrop of brighter prospects for
the global and euro area economy. I will focus on the following issues: First, I will say a few
words about the international environment. Second, I will present the progress that has been
made in Greece since the start of the crisis. Third, I will discuss the outlook for the economy and
outline the main risks and remaining challenges that must be addressed. Fourth, I will discuss
the preconditions for a sustainable recovery of the Greek economy. Finally, I will make some
remarks about the need to improve the EMU architecture.
1. The international environment
The global economy is maintaining a solid pace of expansion. Business and consumer
confidence indicators suggest that sentiment remains upbeat, while financial conditions in
advanced economies remain supportive, underpinned by accommodative monetary policies.
Financial markets in emerging market economies remain resilient and capital flows towards
these economies are robust. Looking ahead, global economic activity is expected to accelerate
moderately. Improving activity in advanced economies is underpinned by monetary and fiscal
policies. In emerging market economies, growth is expected to remain resilient in commodity
importers, while activity in commodity exporters will bottom out after deep recessions in these
economies. World trade is projected to expand in line with global activity over the medium term.
Nevertheless, there are several medium to long-term challenges affecting the prospects of
the global economy. First, productivity growth has slowed across advanced, emerging market,
and low-income countries at a time of significant innovation and technological change. Second,
income inequality has increased in advanced economies, leading to growing dissatisfaction
among electorates and a sharp swing in sentiment against globalization. Third, the generally low
level of global inflation and wage growth, especially in advanced economies, is linked, inter alia,
to globalization, labour market slack and labour's weakened bargaining position, the growing
importance of services, increases in labour supply and more work of a temporary and part-time
nature. These, difficult to predict, changes have affected the position and the slope of the Phillips
curve in these economies, that is the relationship between labour market slack and inflation, and
pose a number of dilemmas for monetary policy. These dilemmas would have been lighter if
other policies, such as fiscal policy and structural reforms, had been more responsive to the
needs of the real economy.
Closer to home, the economic expansion in the euro area is continuing and becoming
increasingly resilient. The euro area economy has enjoyed 17 consecutive quarters of
growth, and the latest data indicate continued momentum in the period ahead. The
accommodative monetary policy stance is supporting domestic demand. Employment growth
and the slight increase in employee compensation are supporting households' disposable
income. These, coupled with increasing household wealth, are benefiting private consumption.
The recovery in investment is supported by improvements in corporate profitability and the very
favorable financing conditions. Buoyant foreign demand supports euro area exports, though the
recent appreciation of the euro represents a source of uncertainty for the overall contribution of
net trade to economic growth.
Headline inflation is expected to decline in the short term, driven mainly by base effects in the
energy component. Looking further ahead, headline inflation is expected to remain clearly below
a level that is consistent with the ECB inflation aim over the next two years, averaging 1.5% in
2019. Furthermore, the recent volatility in the exchange rate represents a source of uncertainty
which requires monitoring with regard to its possible implications for the medium-term outlook for
price stability. Developments in core inflation still do not show convincing signs of a sustained
upward trend. For this reason, the Governing Council of the ECB has recently confirmed the
need for monetary accommodation to secure a sustained return of inflation rates towards levels
that are below, but close to, 2%.
2. Progress since the start of the crisis
Let me now turn to Greece. Since the beginning of the sovereign debt crisis, Greece has
implemented a bold programme of economic adjustment that has eliminated fiscal and external
deficits and improved competitiveness.
The general government balance turned into a surplus of 0.7 percent of GDP in 2016 from a
deficit of 15.1 percent of GDP in 2009. Between 2009 and 2016, the primary balance
(according to the programme definition) improved by about 14 percentage points. In 2016 the
primary surplus was close to 4.0 percent of GDP outperforming significantly the target of 0.5
percent. This represents one of the largest fiscal adjustments ever undertaken by any
country.
Based on this progress, on 25 September 2017, the European Council
repealed its 2009 decision on the existence of an excessive deficit. For 2017 it is
projected that the primary balance target of 1.75 percent of GDP will be reached with a safe
margin.
The current account deficit as a percentage of GDP has fallen by 15 percentage points
since the beginning of the crisis, with the current account effectively being in balance over
the last two years.
has been fully restored and price competitiveness is almost
Labour cost competitiveness
back at its level of 2000 and can be expected to continue to improve with the implementation
of further product market reforms that raise competition in various sectors of the economy. It
is worth noting that this has been achieved through the painful process of internal
devaluation, that is, through outright reductions in nominal wages and salaries.
At the same time, a bold programme of structural reforms has been implemented
covering the pension system, the health system, labour markets, product markets, the
business environment, public administration, the tax system and the budgetary framework.
Its implementation, alongside the privatization and real estate development programme, is
on-going.
Finally, the banking system has been restructured and consolidated. Significant
following stringent stress tests along with in-depth asset quality reviews,
recapitalization,
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 will play a considerable role in
allowing banks to address the pressing issue of 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.
As a result of these efforts, the economy has already started to rebalance towards tradable,
A few numbers are indicative of this trend:
export-oriented sectors.
First, the share of exports of goods and services in GDP increased from 19% in 2009
to 30.2% in 2016 with most of this increase stemming from exports of goods. In fact,
according to Eurostat data, Greece's exports of goods have increased by 43% since 2009 in
real terms, compared to 42% for the euro area and 47% for Germany, Europe's export
engine.
Second, between 2010 and 2015,
the relative price of tradables versus non-tradables
rose by about 10%. As a result, the relative size of the tradables sector, measured by
Gross Value Added, grew by approximately 12% in volume terms and by about 24% in
nominal terms. Finally, in terms of employment, the size of the tradables sector increased
relative to the non-tradables sector by around 8%. Whereas both sectors have been hit hard
by the recession, tradables have performed better than non-tradables as outward-looking
companies increased their exports, taking advantage of the improvement in
competitiveness.
Overall, this increased openness implies that Greece is better placed to take advantage of
improved global growth prospects.
3. 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 improvement in various
short-term indicators:
Following the rebound of economic activity in the first quarter of 2017, real GDP increased
at a faster rate in the second quarter. Positive drivers of growth were exports of goods and
services, government consumption and private consumption, while gross fixed capital
formation declined, mainly due to the significant fall in disbursements from the Public
Investment Programme.
Industrial production performed exceptionally well in the first eight months of 2017.
in the first seven months of 2017 increased.
Retail sales volume
Employment has been growing at healthy rates since mid-2014 despite the stagnation of
economic activity. The rebound is largely driven by greater job-market flexibility due to past
structural reforms. As a result, the unemployment rate has now fallen to just above 21
percent, down from its peak of over 27 percent.
The improved outlook for the economy and the completion of the second review contributed to
the decline in Greek government bond yields to late-2009 levels and facilitated the return to
international markets 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. Finally, Fitch recently upgraded Greece's
credit rating on account of the sustained recovery and the decline in political risk.
On top of the above, the following developments are worth highlighting:
The successive
reductions in the ELA ceiling, the increase in deposits, FDI inflows and the rise of soft
data indicators like the PMI and economic sentiment.
At the same time,
there has been progress since the beginning of the year in the area of
banks' Non Performing Exposures (NPE). At end-June 2017, the stock of Non-Performing
Exposures (including off balance sheet items) was 3.2% lower than at end-December 2016.
Following the pattern of previous quarters, the outflow of NPEs coming from collections,
liquidations and sales of loans was rather limited. Instead, the key driver for the reduction in the
stock of NPEs over the past quarter has been loan write-offs, especially in the business and
consumer portfolios which reached €3.3 billion for the first half of 2017.
Finally, there is progress in reforms despite the recurrent delays in programme implementation.
According to a recent Lisbon Council report (EuroPlus Monitor, September 2017 Update),
Greece is still ranked first among the 28 countries of the European Union on the basis of
This implies that Greece has put the worst of the first half
the Adjustment Progress Indicator.
of 2015 slippage behind it and has started to improve again.
3.1 Growth forecasts for 2017-2019
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.
Consumption is expected to rebound modestly, driven by robust employment which is recovering
faster than output on account of the previously implemented labour market reforms and the
active labour market programmes in place. Investment is projected to increase as confidence is
restored and financial conditions improve. Exports are projected to continue their positive trend,
benefiting not only from the benign global economic outlook but also past improvements in cost
competitiveness.
These projections are based on the assumption that the reform and privatization programme will
be
implemented smoothly and according to the set timetable.
4. 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.
The most significant and immediate risk is a delay in the completion of the third review of
This should be avoided as it would fuel a new cycle of uncertainty that would
the programme.
lead to the suspension of investment plans, it would delay the repayment of government arrears
and would not facilitate a normalization of financial conditions. In such a case economic recovery
and the return to international financial markets will prove to be short-lived.
In addition, there are significant external risks associated with the strengthening of the euro
and the likelihood of economic growth slowing in the euro area. There are also significant
geopolitical risks that could increase the risk aversion of international investors as well as
exacerbate the refugee crisis.
Besides the downside risks, there are also upside opportunities related to the inclusion of Greek
sovereign debt in the ECB's quantitative easing programme (QE), which will improve liquidity and
confidence and will result in a more benign than currently projected economic outlook.
4.1 Medium and long-term challenges
In addition to these risks to the recovery, there are also some medium to long-term challenges
that need to be addressed in order to strengthen the positive outlook. In particular,
The currently high long-term unemployment increases the risk that human capital is
destroyed, affecting long-term potential growth. Potential growth is also negatively affected
by the emigration of young and highly-qualified professionals. Moreover, persistent
unemployment has negative effects on life satisfaction and health, undermining trust in
public institutions and posing a risk for social cohesion.
Despite the progress made so far, 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
in order to support economic activity.
Investment remains at a very low level, and this is not only due to delays in the
disbursement of the Public Investment Programme and the lack of bank lending, but also to
the fact that the business environment is not yet considered as friendly as it should be
towards private investment.
The general government debt-to-GDP ratio has risen to unsustainable levels. This
implies that for many years to come a significant amount of public resources will have to be
directed to the servicing of debt-related obligations. This can be done either by compressing
spending and scaling down the public sector or by increasing revenue. However, raising
revenue by maintaining the currently exceptionally high tax rates constitutes a drag on
longterm growth. High tax rates are a disincentive for launching new investment plans
because companies know that on a permanent basis a substantial part of their future profits
will be transferred to the state. In addition, high tax rates are a disincentive to work and
create incentives for tax evasion for both businesses and households, increasing the size of
the underground economy. At the limit, high taxes and social contributions force businesses
to move their businesses to countries with more favorable tax regimes.
Despite substantial progress in various areas, qualitative indices reflecting the business
environment suggest that Greece is still ranked low relative to other European countries.
For example, according to the Global Competitiveness Index of the World Economic Forum,
competitiveness slightly deteriorated in 2017-2018. The most problematic factors for doing
business in Greece are considered by the above Forum to be the following: high tax rates,
inefficient government bureaucracy, tax regulations, policy and government instability,
access to finance and corruption. The authorities need to continue to put emphasis on
improving non-price competitiveness and public sector efficiency.
These challenges must be tackled urgently in order to avoid hampering the strengthening
recovery and the long-term prospects of the Greek economy.
5. Preconditions for a sustainable recovery
In the medium to long-term the growth prospects of the Greek economy are positive because the
structural reforms implemented raise total factor productivity and consequently potential growth.
According to estimates by the OECD, the full implementation of all reforms, both those
undertaken and those scheduled as part of the ESM programme, is expected, ceteris paribus, to
boost real GDP over a 10-year-horizon by about 13%. And this figure excludes further positive
effects from structural reforms which cannot be easily quantified such as the modernisation of
the public administration and the judiciary system, the strengthening of insolvency regulations
and the resolution of non-performing loans. In-house work by the Bank of Greece points to similar
estimates of the effects of structural reforms. However, in order to reap these potential gains, a
number of conditions should be satisfied.
a. Create the conditions to encourage investment
The economic adjustment and the structural improvements during the past seven years have
rendered Greece more business friendly and have created significant investment opportunities.
However, domestic savings are insufficient to meet the investment needs of the Greek economy
which, after a long period of very low investment rates, are significant. Thus, besides restoring
access of companies to capital markets, conditions should be encouraged that will attract foreign
capital, notably Foreign Direct Investment.
This presupposes the smooth and timely implementation of the agreed reforms and privatization
programme in order to further In
improve the business environment and cut red-tape.
addition, the Bank of Greece favours a more growth friendly fiscal policy mix. More emphasis
has to be placed on cutting non-productive expenditures and managing state property effectively.
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 will facilitate the reduction of the excessively high tax rates benefiting the
private economy and facilitating the return to growth.
Besides improving the business environment and lowering taxation, it is necessary to remove
arising from various small or large vested interests
decisively and definitively the obstacles
and groups, which exacerbate the business climate and hamper the materialization of new
investment and the implementation of reforms and privatizations, even those already
approved.
Last but not least, the removal of capital controls would be a manifestation of the improving
confidence both in the stability of the banking system and the sustainable recovery of the Greek
economy. This will, in turn, facilitate the improvement of the investment climate and help attract
foreign direct investment.
b. Speed up the implementation of the privatization and reform programme
Despite the progress achieved so far, there is still a lot to be done in the areas of privatization
and structural reforms. Privatisations which are at a mature stage need to be completed
quickly. Other reforms have to be completed before the end of the programme, including, for
example, the liberalization of the energy market and the opening of the remaining professions. In
addition, universities and research institutes should be encouraged to cooperate with the private
sector, in order to promote innovation and the transition to a knowledge-based economy. These
initiatives will increase productivity and reduce costs for consumers.
c. Tackle the NPL problem
In the banking sector,
the large volume of non-performing loans and the problem of
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. Banks need to follow faithfully the targets agreed with supervisors. Particular emphasis
should be placed on the restructuring of companies and the closure of non-viable businesses.
This will release resources to support new and existing sound investment and business
initiatives, thereby supporting the economic recovery.
d. Address debt sustainability concerns
Decisive and concrete actions are needed to
ensure the sustainability of Greek public debt,
while, according to the Bank of Greece, there is also a strong case for a more realistic
The Eurogroup reaffirmed in June its commitment
adjustment of medium-term fiscal targets.
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 by at least 8.5 years. The calculations show that this could
make a significant contribution to debt sustainability, even if primary surpluses were to fall to 2
percent of GDP from 2021 onwards rather than from 2023 as envisaged in the Eurogroup
agreement. If adopted, such a proposal would certainly support both the recovery of the economy
and the country's creditworthiness, especially, if the fiscal space created by the reduction of
fiscal targets is used to reduce taxes on labour and capital.
This mild debt reprofiling proposal is vital for debt sustainability in Greece, while it involves only a
negligible cost for its partners. It would 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. This will set in motion a greater investor confidence in Greece's
virtuous circle:
economic prospects will encourage the return of more deposits to banks, allow for a smooth exit
from the current programme, and, ultimately, the full abolition of capital controls.
6. Some remarks about the future of the Economic and Monetary Union (EMU)
Last but not least, given that the recovery is accelerating in the euro area, now is the right time to
consider the future of Europe and in particular possible ways to strengthen the
Economic and Monetary Union.
A lot has been done in recent years to enhance the functioning of the EMU. Policy actions
have focused on addressing institutional weaknesses, structural fragilities and excessive risk
taking that led to the sovereign debt crisis and the negative feedback loop between sovereigns
and banks, which in turn undermined euro area stability. Some key initiatives were the provision
of intergovernmental loans to Greece, the establishment of the EFSF, and its successor the
ESM, the creation of a banking union and the application of stricter rules on banking regulation
and supervision, the establishment of the European Systemic Risk Board and the creation of
appropriate macro-prudential instruments which allowed greater emphasis on identifying and
addressing system-wide risks. Moreover, various monetary policy interventions by the ECB
played a pivotal role in supporting the euro area economy and safeguarding price and financial
stability.
Despite these changes, the new institutional setting of the EMU is far from being appropriate to
address a future crisis. The changes made so far mainly aim at closing loopholes rather than
strengthening EMU. Euro area policy makers cannot rely solely on the ECB and expect that it will
keep monetary policy loose indefinitely. Efforts should focus on improving the resilience and
potential growth of our economies and on reinvigorating real convergence as the way of
improving the well-being for all euro area citizens. The time for action is now, because the euro
area economy is on a stable footing.
First, the economic rebalancing mechanisms (i.e. the Macroeconomic Imbalance Procedure)
should be reinforced and operate symmetrically, i.e. both for countries with external deficits and
for countries with external surpluses. Second, the institutional reforms proposed by the Five
Presidents' Report and the European Commission are in the right direction because they will
improve economic policy coordination, facilitate convergence and allow for risk reduction and
greater private and public risk sharing. The key institutional reforms for the new EMU architecture
are the following:
the creation of a framework for incentivizing structural reforms and aligning national
and EMU priorities by placing more emphasis on the links between financing via European
Union (or euro area) instruments and initiatives, on the one hand, and reform
implementation, on the other;
the completion of the Banking and Capital Markets Union;
the creation of a central fiscal-macroeconomic stabilization function;
the adoption of a
European Safe Asset;
the transformation of the ESM into a European Monetary Fund;
the creation of a euro area Treasury; and
an increase in the accountability of European Institutions to the European Parliament.
Moving forward in this direction would safeguard the monetary union's resilience, its viability and
the long-term prosperity of its citizens.
7. Conclusions
Over the past seven years, Greece has gone a long way in adjusting its major macroeconomic
imbalances, reforming its economy and restoring competitiveness. The economy is now
recovering and growth is gathering pace. An important factor behind this improvement was
the
emergence of a strong political consensus in favour of keeping Greece in the euro area. In
their majority, Greek political parties are not only in favour of the euro, but also have supported
measures in Parliament, sometimes with heavy political and social cost, to ensure that Greece
remains in the euro area. This new political reality resolves, once and for all, any future
uncertainty regarding the course of the country and ensures the implementation of the
reforms required for the Greek economy to prosper in the context of a deepened and
Building on this political consensus, the Greek
completed Economic and Monetary Union.
authorities must pursue the remaining reforms forcefully in order to improve the investment
climate, take full advantage of the brighter global prospects and put the economy on a
sustainable growth path.
Such policies will address the three stock imbalances that remain (high unemployment, high
public debt and a large volume of non-performing loans), attract foreign direct investment and
facilitate the reallocation of productive resources towards tradable and exportable goods and
services. This, in turn, will boost financial markets' confidence about the prospects for the Greek
economy and will signal the exit from the crisis. Nevertheless, despite the progress achieved so
far, we still have some way to go in order for Greece to tap the financial markets on sustainable
terms after August 2018. This will happen if the country can achieve a credit rating enabling it to
refinance its debt at interest rates compatible with debt sustainability and if banks have
appropriate and adequate collateral to have full access to the ECB's refinancing operations (and
not only to ELA). To this end, the reform effort has to be stepped up to close the third review.
Adequate and timely specification of the medium-term debt relief measures in the context of the
decisions taken in the Eurogroup is also necessary, as is constructive dialogue between the
Greek government and the institutions on the type of support for the Greek economy after the end
of the programme in August 2018. In this way, we can ensure a return to financial normality after
seven years of significant sacrifices by the Greek people.
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