Background

Economic developments and policies in Greece are monitored under the European Semester for economic policy co-ordination and under the enhanced surveillance framework according to Regulation (EU) No 472/2013 ( ). The implementation of enhanced surveillance for Greece ( ) acknowledges the fact that Greece needs to continue implementing measures to address the sources or potential sources of economic and financial difficulties, while implementing structural reforms to support a robust and sustainable economic growth.

Enhanced surveillance provides a comprehensive framework for monitoring economic developments and the pursuit of policies needed to ensure a sustainable economic recovery. It allows for a regular assessment of recent economic and financial developments in Greece, as well as for monitoring sovereign financing conditions and updates of the debt sustainability analysis. Enhanced surveillance also provides the framework for assessing the general commitment given by Greece to the Eurogroup of 22 June 2018, to continue and complete reforms adopted under the European Stability Mechanism programme and to ensure that the objectives of the important reforms adopted under the financial assistance programmes are safeguarded. In that context, enhanced surveillance monitors the implementation of specific commitments to complete key structural reforms started under the programme, in six key areas by agreed deadlines up to mid-2022, namely: (i) fiscal and fiscal-structural policies, (ii) social welfare, (iii) financial stability, (iv) labour and product markets, (v) Hellenic Corporation of Assets and Participations and privatisation, and (vi) the modernisation of public administration ( ).

This is the ninth enhanced surveillance report for Greece. The report is based on the findings of a mission held remotely on 26-27 January 2021 and regular dialogue with the authorities. The mission was conducted by the European Commission in liaison with the European Central Bank ( ); the International Monetary Fund participated in the context of its Post-Programme Monitoring framework, while the European Stability Mechanism participated in the context of its Early Warning System and in line with the Memorandum of Understanding of 27 April 2018, on working relations between the European Commission and European Stability Mechanism. The current report assesses the implementation of Greece’s commitments to the Eurogroup regarding reform completion up to end-2020. This report is not linked to a release of policy-contingent debt measures, which – in line with the agreed biannual schedule – could take place on the basis of the tenth report. The tenth report is expected to be published in May.

OVERALL ASSESSMENT

The report was prepared against the backdrop of the second wave of the pandemic, which has led to a general tightening of containment measures before the end of 2020 and, more recently, to a closure of schools and retail businesses and personal mobility restrictions in certain regions including Athens. The Greek economy is expected to have contracted by 10% in 2020 compared to 2019 with only a partial recovery forecast for this year. The fallout of the tourist season in 2020 on the back of the pandemic negatively affected Greece given the weight of the tourism sector in the economy. The government continued adapting the existing fiscal measures supporting the unemployed and wage earners, whose contracts have been suspended, prolonged the support measures for companies and adopted new targeted measures to protect households and corporates. So far, the employment protection measures, supported by the EU notably through the new financing instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE) and the European Social Fund, appear to have been effective, and the unemployment rate has remained broadly stable in spite of the sizeable economic contraction. The number of persons out of jobs is nevertheless growing as hiring of new workers remains subdued. Firms and workers have benefited from public support measures; however, the full size of the challenge faced by the corporate – and the financial – sector is expected to become apparent only at a later stage with the phasing out of support measures, as in other Member States. This will need to be carefully managed to avoid cliff effects.

Despite the challenging circumstances, the authorities managed to progress well in a number of areas, including education, management of state assets, privatisation projects and energy policy. Notably:

·Two ambitious reforms in the area of education were adopted in the past three months. A vocational education and training reform was adopted in December 2020 aiming at improving the attractiveness of that path and better linking vocational education and lifelong learning with labour market needs. The Higher Education Law from February 2021 aims, in turn, at modernising the operation of the universities and enhancing the quality of education offered. Moreover, internal and external evaluations of schools have been launched.

·The Hellenic Corporation of Assets and Participations completed the review of the boards of all state-owned enterprises, which was a specific commitment. The strategic plan of the Corporation continued to be implemented as planned, and the authorities completed the preparation of the updated Ministerial Guidance for the Corporation.

·Privatisation tenders have progressed with the successful closing of the transaction of Marina of Alimos on 31 December 2020, good prospects for concluding the Hellinikon project in the coming months, and some long-awaited progress on pending actions necessary for the Egnatia concession – all of which are specific commitments.

·In the area of energy policy, the authorities have launched the market test with a view to closing the long-standing anti-trust case against the Public Power Corporation in the coming months, which is a specific commitment.

Reforms continued also in other important areas. Public financial management reforms, including of the public investment budget, have re-gained the much needed momentum through progress made on the administrative, economic and functional budget classifications. Close monitoring will be needed, as this is key to enhancing the efficiency of payment procedures. The legislation for the human resources reform of the tax administration was adopted and the reform remains on track for its full implementation by the next review. Public administration reforms have also been progressing as planned, including the adoption of a new legislation for faster and more efficient recruitment of civil servants.

Nevertheless, the overall pace of implementation seems to have slowed down in a number of areas, due notably to the pandemic context, and the implementation of measures to address several commitments has been delayed. In addition to the continued difficulties posed by the pandemic, the authorities also pointed to a reshuffle of several key posts in the administration at the beginning of this year and the increased workload due to the preparations of the Recovery and Resilience Plan as a cause of some delays, and this is duly acknowledged. A number of detailed specific roadmaps have been agreed to prepare the ground for decisive progress by the tenth report in May. These include a continued delivery of the financial sector reforms, full implementation of the human resources reform of the Independent Authority for Public Revenues, operationalisation of the Project Preparation Facility and the Strategic Projects Pipeline for major investments, prevention of the creation of new arrears and reduction of the existing stock following the delays observed including through the reinforcement of the Steering Committee for the clearance of arrears and simplification of the legislative framework for the conduct of fiscal procedures, completion of the reform of the further simplification of investment licensing in agreed areas, and the adoption of the modernised Labour Code. In addition, the authorities committed to a number of specific steps in the areas of health care, fighting corruption, public administration reform and the implementation of the chart of accounts. Given its importance in the context of the overall recovery strategy, the justice reform needs to be relaunched, as reforms linked to the effectiveness of the justice system contribute to ensuring a swift implementation of investments, including from the private sector.

The implementation of some key financial sector reforms has also been delayed but an ambitious timeline for the next review was agreed. The entry into force of the insolvency code was partially postponed at the end of last year, with some elements envisaged to enter into force on 1 March, and others postponed to 1 June 2021. This code represents a major reform of the insolvency framework but requires substantial implementation work related to its detailed specification as well as to the setting up of an IT platform interconnected with those of the banks. Implementation of other agreed reforms continues but at a slower pace than previously agreed and will require close monitoring, particularly with respect to the clearance of the backlog of household insolvency cases (the end-2021 target appears at risk) and with respect to the clearance of called state guarantees, which has been further delayed in the last quarter of 2020 also on account of difficulties with hiring of new staff amidst the tightening of containment measures. The authorities are preparing additional measures to support the financial sector, in particular an extension of the asset protection scheme Hercules, which is welcome. In the context of the tightening of containment measures towards the end of 2020, the authorities have suspended all enforcement measures across all categories of debtors, including the conduct of e-auctions and its preparatory steps, which can take several months. Such a generalised freezing of all enforcement steps, if protracted, may impinge on a swift and efficient handling of non-performing loans by Greek banks and servicers going forward. The authorities are thus invited to adopt temporary and more targeted solutions in a timely manner, while protecting vulnerable households.

The authorities are engaging closely with the European Commission in the context of the preparation of the Recovery and Resilience Plan. This is welcome as the significant funds that Greece is entitled to receive via the Recovery and Resilience Facility, if used efficiently and appropriately, would support growth, job creation and the twin transitions in the coming years. The EU Recovery and Resilience Facility will make available €30.5 billion to Greece during the period 2021-2026, out of which €17.8 billion through grants. Reforms and investments that will be part of the Plan are expected to build on and complement past and ongoing reforms in the context of the enhanced surveillance process. Coupled with the additional envelope of €1.7 billion under the React-EU instrument and the €2.7 billion already disbursed by the European instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE) as well as any possible additional amount ( ), these substantial financing resources will help cushion the economic and social impact of the pandemic and provide the necessary support for a sustainable and inclusive recovery.

Overall, this report concludes that Greece has progressed well with the implementation of a number of reform commitments yet notes that reform momentum has slowed down, acknowledging the challenging circumstances caused by the pandemic. The European institutions welcome the continued close and constructive engagement of the authorities and the agreement on a number of revised timelines for critical reforms. The authorities are encouraged to continue to mobilise resources with a view to taking all necessary steps to achieve their due specific commitments in time for the tenth enhanced surveillance report, to be issued in May and for which a disbursement of the next set of policy-contingent debt measures is foreseen.

MACROECONOMIC DEVELOPMENTS

The coronavirus pandemic continues to have a strong negative impact on the Greek economy. The economy expanded by 2.3% on a quarter-on-quarter basis in the third quarter of 2020 after a decline of -14.1% in the previous period. The recovery in the third quarter was substantially less dynamic than the sizable rebound in the euro area, largely on account of the sharp fall of value added in the tourism sector. Growth was driven by private consumption, with the exports of goods showing some resilience. Unemployment continued to decline, reaching 16.2% in the third quarter of 2020, which indicates that the support measures in place are successful in protecting jobs. At the same time, employment decreased compared to a year ago, primarily due to the lower number of hires in the tourism sector. Youth unemployment also decreased but remains very high at 34.2% in the third quarter.

Following the tightening of containment measures towards the end of 2020, the economic recovery is expected to remain anaemic in the first half of this year. The containment measures announced in November 2020 remain in place, implying severe restrictions for the services sector, while industrial production continues with limited disruptions albeit facing disrupted supply chains and curtailed demand. These necessary measures to save lives are expected to further delay the economic recovery. The Commission 2021 winter forecast, prepared before the recent regional tightening of containment measures, expects real GDP growth to reach 3.5% in 2021 and 5% in 2022, driven mainly by domestic demand. The projection assumes that vaccination will gradually succeed to protect the most vulnerable by mid-2021, allowing for a lasting, if only step-wise relaxation of the containment measures in the second quarter. The external sector is also projected to provide a positive contribution to growth, albeit less strong than previously expected as tourism may take longer to recover fully. The projection assumes that fiscal policy in 2021 will continue to support the economy with targeted interventions towards businesses and households. The slack in the economy is expected to weigh on price growth, which is expected to remain mildly negative also in 2021, with a subsequent recovery in 2022.