EUROPEAN COMMISSION Brussels, 20.5.2020 COM(2020) 546 final REPORT FROM THE COMMISSION Greece



Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union



REPORT FROM THE COMMISSION Greece



Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union 1. Introduction On 20 March 2020, the Commission adopted a Communication on the activation of the general escape clause of the Stability and Growth Pact. The clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) 1466/97 and Articles 3(5) and 5(2) of Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic downturn. In its Communication, the Commission shared with the Council its view that, given the expected severe economic downturn resulting from the COVID-19 outbreak, the current conditions permit activation of the clause. On 23 March 2020, the Ministers of Finance of the Member States agreed with the assessment of the Commission. The activation of the general escape clause allows for a temporary departure from the adjustment path towards the medium-term budgetary objective, provided that this does not endanger fiscal sustainability in the medium term. For the corrective arm, the Council may also decide, on a recommendation from the Commission, to adopt a revised fiscal trajectory. The general escape clause does not suspend the procedures of the Stability and Growth Pact. It allows Member States to depart from the budgetary requirements that would normally apply while enabling the Commission and the Council to undertake the necessary policy coordination measures within the framework of the Pact. Data notified by the Greek authorities on 22 April 2020 and subsequently validated by Eurostat show that the general government surplus in Greece reached 1.5% of GDP in 2019, while general government gross debt stood at 176.6% of GDP. According the 2020 Stability Programme, Greece plans a deficit of -4.7% of GDP in 2020, while debt is planned at 188.8% of GDP. The planned deficit for 2020 provides prima facie evidence of the existence of an excessive deficit for as defined by the Stability and Growth Pact. Moreover, the data for 2019 imply insufficient progress towards compliance with the debt reduction benchmark, which also provides prima facie evidence of the existence of an excessive deficit as defined by the Stability and Growth Pact. Against this background, the Commission has therefore prepared this report, which represents the first step in the excessive deficit procedure. It analyses Greece’s compliance with the deficit and debt criteria of the Treaty. It takes into account all relevant factors and gives due consideration to the major economic shock linked to the COVID-19 pandemic. Table 1. General government deficit and debt (% of GDP) 2016 2017 2018 2019 2020 COM 2021 COM Deficit criterion General government balance 0.5 0.7 1.0 1.5 -6.4 -2.1 Debt criterion General government gross debt 178.5 176.2 181.2 176.6 196.4 182.6 Gap to the debt reduction benchmark n.r. n.r. n.r. n.r. 2.5 -1.0 Change in structural balance 2.3 -0.5 -0.1 -2.2 n.r. n.r. Required MLSA n.r. 0.1. 0.4 0.8 n.r. n.r. Note: MLSA refers to the Minimum Linear Structural Adjustment Source: Eurostat, Commission 2020 spring forecast 2.Deficit criterion Based on the 2020 Stability Programme, Greece’s general government deficit in 2020 is expected to reach 4.7% of GDP, above and not close to the Treaty reference value of 3% of GDP. The planned excess over the Treaty reference value in 2020 is exceptional, as it results from a severe economic downturn. Taking into account the impact of the COVID-19 pandemic on Greece’s economy, the Commission spring forecast projects a contraction of real GDP in 2020 by 9.7%. The planned excess over the Treaty reference value would be temporary, based on the Commission 2020 spring forecast, which projects the decifit to fall under 3% of GDP in 2021. However, those projections are surrounded by an exceptionally high degree of uncertainty. In sum, the planned deficit for 2020 is above and not close to the 3%-of-GDP Treaty reference value. The planned excess is considered to be exceptional as defined by the Treaty and the Stability and Growth Pact, while the nature of the excess is currently considered temporary. Hence, the analysis suggests that prima facie the deficit criterion as defined by the Treaty and Regulation (EC) No 1467/97 is not fulfilled. 3.Debt criterion The government debt-to-GDP ratio decreased from 181.2% in 2018 to 176.6% in 2019. The debt reduction was due to the high primary surplus reached in 2019, which was augmented by strong real GDP growth and the increase in the GDP deflator, and by a marginally debt-reducing impact of stock-flow adjustments.

Following the abrogation of the excessive deficit procedure in September 2017, Greece was subject to a three-year transition period to ensure sufficient progress towards compliance with the debt reduction benchmark. The transition period started in 2017 and ended in 2019. In order to ensure continuous and effective progress towards compliance during the transition period, Greece should respect simultaneously the following two conditions: a.First, the annual structural adjustment should not deviate by more than ¼% of GDP from the Minimum Linear Structural Adjustment (MLSA) ensuring that the debt reduction benchmark is met by the end of the transition period; b.Second, at any time during the transition period, the remaining annual structural adjustment should not exceed ¾% of GDP (unless the first condition implies an annual effort above ¾% of GDP); The notified data show that Greece did not make sufficient progress towards meeting the debt reduction benchmark in 2019, as the structural balance is estimated to have deteriorated by -2.2% of GDP last year, compared with the applicable MLSA of 0.8% of GDP. The analysis thus suggests that prima facie the debt criterion is not fulfilled based on the 2019 outturn data. 4. Relevant factors Article 126(3) of the Treaty provides that, if a Member State does not fulfil the requirements under one or both of those criteria, the Commission has to prepare a report. That report must also “take into account whether the government deficit exceeds government investment expenditure and take into account all other relevant factors, including the medium-term economic and budgetary position of the Member State”. Those factors are further clarified in Article 2(3) of Regulation (EC) No 1467/97, which also provides that “any other factors which, in the opinion of the Member State concerned, are relevant in order to comprehensively assess compliance with the deficit and debt criteria and which the Member State has put forward to the Council and to the Commission” need to be given due consideration. For the apparent breach of the debt criterion, the analysis of the relevant factors is particularly warranted given that debt dynamics are to a larger extent influenced by factors outside the control of the government than is the case for the deficit. This is recognised in Article 2(4) of Regulation (EC) No 1467/97, which provides that the relevant factors shall be taken into account when assessing compliance on the basis of the debt criterion irrespective of the size of the breach. In that respect, at least the following three main aspects need to be considered when assessing compliance with the debt criterion given their impact on the debt dynamics and sustainability: (i) adherence to the MTO or the adjustment path towards it, (ii) the implementation of structural reforms, and (iii) the prevailing economic conditions. As specified in Article 2(4) of Regulation (EC) No 1467/97, as regards compliance with deficit criterion in 2020, however, since the government debt-to-GDP ratio exceeds the 60% reference value and the double condition is not met - i.e. that the deficit remains close to the reference value and that its excess over the reference value is temporary - those relevant factors cannot be taken into account in the steps leading to the decision on the existence of an excessive deficit on the basis of the deficit criterion for Greece. In the current situation, a key additional factor to take into consideration regarding 2020 is the economic impact of the COVID-19 pandemic, which has a very substantial impact on the budgetary situation and results in a highly uncertain outlook. The pandemic has also led to the activation of the general escape clause. 4.1. COVID-19 pandemic and the activation of the general escape clause The COVID-19 pandemic has led to a major economic shock that is having a significant negative impact throughout the European Union. The consequences for GDP growth will depend on the duration of both the pandemic and of the measures being taken by national authorities and at European and global level to slow its spread, protect production capacities and support aggregate demand. Member States have already adopted or are adopting budgetary measures to increase the capacity of health systems and provide relief to those individuals and sectors that are particularly affected. Significant liquidity support measures and other guarantees have also been adopted. Subject to more detailed information, the competent statistical authorities are to examine whether those measures entail an immediate impact on the general government balance or not. Together with the fall in economic activity, these measures will contribute to substantially higher government deficit and debt positions. 4.2 Medium-term economic position including structural reforms Since 2016, real GDP growth has been recovering driven by net exports and private consumption. Nominal growth increased until 2018, but declined somewhat in 2019. Nevertheless, it cannot be argued that macroeconomic conditions are a mitigating factor in explaining Greece’s lack of sufficient progress towards meeting the debt reduction benchmark in 2019. Economic activity is expected to be severly impacted by the COVID-19 outbreak and the related containment measures. The Commission 2020 spring forecast projects GDP to decline by 9.7% in 2020, with tourism and shipping services – two very important sectors for Greece’s economy – expected to be hit particularly hard and the expected to increase in unemployment may also depress domestic demand. The macroeconomic outlook is marked by an exceptional degree of uncertainty related to the duration of the pandemic and its economic impact. This is a mitigating factor in the assessment of Greece’s compliance with the deficit criterion in 2020. In its 2020 Country Report, the Commission assessed that Greece had made some progress in addressing the 2019 Country Specific Recommendations. More specifically, Greece pursued reforms in line with the post-programme commitments given at the meeting of the Eurogroup of 22 June 2018. In 2019, Greece implemented important reforms aimed to increase the efficiency of the Greek public sector, strengthen the effectiveness of social policy, advance the privatisation agenda and further improve the quality of the business environment. Notably, the authorities continued taking steps to enhance the capacity of the Independent Authority for Public Revenue and enhance the human resource management in the public administration. Regarding the financial sector, some progress continued on reforms needed to clean up the stock of non-performing loans. The authorities also pursued a broader reform agenda, for instance in the area of good law-making, digital governance and education. 4.3 Medium-term budgetary position, including government investment The headline surplus increased from 1.0% of GDP in 2018 to 1.5% in 2019, due to solid economic growth, contained expenditure growth, and the receipt of transfers of equivalent amounts to the income earned by euro-area national central banks on Greek government bonds held under the Agreement on Net Financial Assets (ANFA) and the Securities Market Programme (SMP). Public investment is estimated to have fallen from 3.0% of GDP in 2018 to 2.2% in 2019. Since Greece was exempt from submitting Stability Programmes while it was subject to a macroeconomic adjustment programme (‘the programme’), the Greek authorities have not established a medium-term budgetary objective for 2019. In spring 2018, the Council issued no country-specific recommendation to Greece in the context of the European Semester because pursuant to Article 12 of Regulation (EU) No 472/20132 Greece was exempt the monitoring and assessment under the European Semester at that time since it was under the programme. Under those circumstances, the assessment of year 2019 is conducted in the absence of a medium-term budgetary objective, taking into account the factors mentioned above, the primary surplus target recommended by the Council and monitored under the enhanced surveillance procedure, as well as the structural budget balance for 2019.