EUROPEAN COMMISSION Brussels, 27.2.2019 SWD(2019) 1007 final COMMISSION STAFF WORKING DOCUMENT Country Report Greece 2019











Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2019) 150 final}



Contents Executive summary 1.Economic situation and outlook 2.Overall findings regarding imbalances, risks and adjustment issues 3.Reform priorities 3.1.Public finances and taxation* 3.2.Financial sector 3.3.Labour market, education and social policies 3.4. Competitveness reforms and investment Annex A: Overview Table Annex B: Commission Debt Sustainability Analysis and fiscal risks Annex C: Standard Tables Annex D: Investment Guidance on Cohesion Policy Funding 2021-2027 for Greece References LIST OF Tables Table 1.1:Key economic and financial indicators - Greece Table 2.1:MIP assessment matrix - Greece 2019 Table 3.2.1:Financial stability indicators

Table C.1:Financial market indicators Table C.2:Key Social Scoreboard indicators Table C.3:Labour market and education indicators Table C.4:Social inclusion and health indicators Table C.5:Product market performance and policy indicators Table C.6:Green growth LIST OF Graphs Graph 1.1: Real GDP growth Graph 1.2: Growth contributions and share of tradable sectors within the economy Graph 1.3: Employment and GDP levels compared to 2009 Graph 1.4: Trend in competitiveness (left) and unit labour cost in Greece, grouped by components and benchmarked against the euro area (right) Graph 1.5: Current account, government lending (left); net international investment position by economic agents (right) Graph 1.6: Non-performing loan ratio in the EU (left) and savings and investments by economic agents in Greece Graph 1.7: Regional convergence within Greece and with respect to the rest of the EU Graph 3.1.1: Underspending from the public investment budget*, 2012-2017 Graph 3.1.2: Drivers of changes in general government balance, 2019-2022 Graph 3.1.3: "Old debt" collection and "new debt" added Graph 3.3.1: Total population change Graph 3.3.2: Activity rate of women in Greece and the EU by age group, 2017

Graph 3.3.3: Education and labour market for youth Graph 3.3.4: Europe 2020 poverty indicators for Greece Graph 3.4.1: Investments in Greece by type (left); building permits and residential investments in Greece (right) Graph 3.4.2: Net foreign direct investments in Greece by economic sector Graph 3.4.3: Structural and demographic business statistics Employment and productivity according to company size Graph 3.4.4: Ease of doing business 2018 Graph 3.4.5: Components of the "Ease of doing business 2018" for Greece Graph 3.4.6: Wage costs in public administration LIST OF Boxes Box 3.3.1: Social welfare reforms in Greece 32 Box 3.3.2: Technical support by the Structural Reform Support Service Box 3.3.3: Monitoring performance in light of the European Pillar of Social Rights Box 3.4.1: Investment challenges and reforms in Greece Box 3.4.2: EU funds and programmes contribute to addressing structural challenges and to fostering growth and competitiveness in Greece. Executive summary Greece successfully exited the European Stability Mechanism stability support programme on 21 August 2018, marking the beginning of a new era for the country. It is now included in the European Semester for economic policy coordination, while being subject to the enhanced surveillance procedure (). Greece has substantially improved its budget balance and current account balance in recent years. However, potential growth has suffered, and large accumulated imbalances remain as a legacy of the economic crisis. These concern the high public debt, the negative net international investment position, the high non-performing loans on banks’ balance sheets and the still high unemployment rate. In addition, deep institutional and structural reforms initiated in recent years to modernise the economy and the State, require many years of sustained implementation for their impact to fully unfold. Potential growth remains low, burdened by the loss of physical and human capital due to the low investment rate and the emigration of skilled workers in the past decade. Unfavourable demographic trends are expected to continue affecting Greece's growth potential. Structural reforms are starting to bear fruit, and their continuation and completion will be essential for unlocking growth potential.

The Greek economy has continued to recover in 2018, in terms of both growth and employment. Real GDP growth is projected to gather pace in 2019 and 2020. Investment is set to become the biggest contributor to GDP growth while the contribution of net exports is expected to stall as domestic demand strongly relies on imports. Labour market conditions are expected to continue to gradually improve, though from a very weak base. Following substantial improvements in cost competitiveness over the past decade, wage rises are expected to remain moderate and aligned with productivity growth. Investment as a share of GDP bottomed out in 2015 and is slowly increasing; but at less than 13% in 2018, it is still the lowest in the EU. Both private and public investment fell significantly during the crisis and foreign direct investment is the lowest in the EU. There have been substantial reforms to improve the business climate and to unlock private investment. While reforms are expected to bear fruit, they need to continue for a long-lasting improvement of the investment environment. Greece has successfully restored its budget balance and is expected to maintain it over the next years. The headline balance has been in surplus since 2016 and the primary balance (i.e. the overall balance excluding interest payments) target was exceeded for the fourth consecutive year in 2018. The 2019 budget is projected to ensure that the primary surplus target of 3.5 % of GDP in 2019 is met. In the coming years, any fiscal space emerging above the target should provide an opportunity to adopt reforms to make public finances more growth friendly, such as measures already legislated for 2020 to widen tax bases while lowering tax rates on companies and labour. While the crisis strongly affected all of Greece’s regions, disparities between them significantly widened in the past decade. The gap between peripheral regions and Athens has not been bridged and the average Greek region has only 60 % of the capital’s GDP per capita. Employment, poverty and social exclusion also have large regional variations. Several years of underinvestment have led to major investment gaps in Greece. Strengthening investment will be instrumental in underpinning longer-term growth. Priority areas for public and private sector investment include transport and logistics; the sustainable regeneration of urban areas and the most disadvantaged and deprived areas; energy efficiency and infrastructures; environmental protection; digital technologies; employment, skills, education and training, social inclusion and integration, health and research and development, mainly through the development of smart specialisation strategies in sectors such as agro-food and tourism. Annex D identifies key priorities for support by the European Regional Development Fund, the European Social Fund Plus and the Cohesion Fund for 2021-2027 in Greece, building on the analysis of investment needs and challenges outlined in this report. Although Greece did not receive country-specific recommendations in 2018, it committed to continue and complete all key reforms adopted under the European Stability Mechanism programme, and it made well-specified commitments to European partners in June 2018. Commitments concern the areas of (i) fiscal and fiscal structural reforms; (ii) social welfare reforms; (iii) financial stability; (iv) labour and product market reforms; (v) State asset management and privatisation; and (vi) reforms of the public administration and justice. The Commission is monitoring these commitments under its ‘enhanced surveillance’ framework. The second quarterly report is being published in parallel to this country report. Greece’s broader reform agenda is set out in the growth strategy of July 2018 and covers similar areas. On the national targets under the Europe 2020 strategy, Greece is performing well on reducing the rate of early school leavers, increasing tertiary education attainment and reducing greenhouse emissions. It is on track to reach its targets on research and development, the use of renewable energy resources and energy efficiency. By contrast, the employment rate and the poverty reduction fall short of the target. Greece faces challenges for most indicators of the Social Scoreboard supporting the European Pillar of Social Rights. The rate of unemployment is among the highest in the EU, although there are signs of improvement. The effectiveness and adequacy of social transfers remains a concern, but recent reforms in the social welfare system are expected to improve the situation. Measures have been adopted in recent years to improve the quality of social dialogue, but there is still a need to ensure that social partners are properly involved in national policymaking. The main findings of the in-depth review contained in this report and the related policy challenges are as follows: Reducing accumulated imbalances will require many years of sustained implementation of deep institutional and structural reforms initiated in recent years to modernise the economy and the State, as well as many years of sustained growth. This should also reduce Greece’s vulnerability to international developments and increase market confidence. Although significant measures were adopted at the Eurogroup of June 2018 to ensure debt sustainability, interest rate spreads have remained high. This reflects market concerns about the commitment of policy makers in Greece to stick to sound economic and budgetary policies over the medium and long term. High interest rate spreads impede bank lending to non-financial businesses, which would be critical to support an investment-led recovery. The stock of government debt remains exceptionally high, but the debt measures adopted in 2017 and agreed in June 2018 ensure that the annual debt burden remains at a manageable level. The debt stock stood at over 180 % of GDP at the end of 2018, the highest in the EU. Given the highly concessional terms of the debt, gross financing needs are projected to remain below 15 % of GDP until the mid-2030s thus limiting the risks to debt servicing. Positive assessments of reform implementation under the enhanced surveillance framework will serve as a basis for Greece’s European partners to agree on the implementation of additional debt measures worth about 0.7 % of GDP per year. Private debt stocks (i.e. the liabilities held by non-financial corporations and households) remain contained, although the fundamentals of the economy suggest that the debt capacity of both households and non-financial companies in Greece is particularly low. Ensuring the sustainability of government debt in the medium and long term will require maintaining fiscal discipline and continuing and completing the fiscal structural reforms initiated in recent years. It will involve full implementation of the 2016 pension reform and completion of the health care reforms. Furthermore, it will include modernisation of the property tax system and usage of emerging fiscal space to shift towards a more growth-friendly tax structure, and further improving tax collection, by enhanced operational independence of the tax authority. Finally, it will address arrears, further improvement of public financial management, and continuation of improving the management of State assets. Greece’s net international investment position remains highly negative. In spite of the substantial improvement in the current account balance during the crisis and strong growth in exports of goods and services in the past two years, part of the improvement is expected to be reversed as the economy picks up and domestic demand increases. Further reallocation of productive resources to tradable sectors and a reduction of import dependence will be necessary. Wide-ranging policy measures to ensure financial stability and strengthen the viability of the banking system have helped to stabilise the financial sector. Capital buffers have increased, deposits have stabilised and reliance on central bank funding has decreased. Yet, banks’ profitability remains low. Banks’ balance sheets remain burdened by very high share of non-performing loans and tackling those remains the most important challenge facing the financial sector in the near and medium term. Ensuring the smooth functioning of the relevant legal framework and toolkit will be critical for banks to continue meeting revised and ambitious targets. The governance of the banking system has improved following an overhaul of the boards of banks. Reforms of wage negotiations and of other labour market institutions have helped Greece to regain cost competitiveness, and maintaining these gains will be critical to help increase employment and reduce unemployment. The government has increased the minimum wage by 10.9 % as from 1 February 2019. In parallel, the sub-minimum wage for people under 25 years old has been eliminated, leading to a 27 % increase in the minimum wage for this age group. This increase in the minimum wage leads in the medium term to higher risk of negative employment effects, especially on low-skilled, young workers and workers with a long tenure. Looking ahead, social partners will play a critical role, in the context of collective bargaining, in ensuring that wage formation takes due account of the need to protect competitiveness gains and has adequate scope to cater for the specific situation of firms, many of which remain in a distressed financial situation. Other key structural issues analysed in this report, which point to particular challenges for Greece’s economy, are the following: Despite recent improvements, youth unemployment and long-term unemployment are still a serious concern. Women’s labour market participation also lags far behind the EU average. To address these issues, the government has started to implement policies to improve employability and promoting labour market participation. In parallel, the government is continuing its fight against undeclared work. Putting in place a comprehensive strategy to improve the efficiency of the education and training system will be critical for reducing skill mismatches and increasing employability, especially that of younger people. Although still difficult, the social situation is expected to continue to improve in the coming years, thanks to the combined effect of the economic recovery and the social welfare reform. Major steps have been taken to improve the efficiency, effectiveness and adequacy of the social welfare system: the introduction of a guaranteed minimum income scheme, the reform of family benefits and an upcoming new means-tested housing benefit. The completion of the reform of the disability benefit system and the review of the system of subsidies for local public transport could further improve the efficiency of the welfare system. The significant under-execution of the public investment budget has been a problem for several years. This is due to structural shortcomings in developing projects of investment grade as well as suboptimal budgeting practices. An independent review of the investment budgeting framework will recommend measures to tackle the shortcomings. Following years of pronounced contraction, bank lending to the private sector continues to be very subdued, though there are slight signs of improvement for large companies. Access to finance remains extremely limited, affecting not only small and medium-size enterprises but also start-ups and scale-ups, causing liquidity problems and constraining investments. Continuing the structural reforms in the product markets will be essential for improving the business climate and attracting investment. Despite broad-based reforms to reduce the administrative burden, increase competition, simplify investment licensing procedures, alleviate disproportionate restrictions to regulated professions, set up a cadastre and improve spatial planning, Greece continues to lag behind EU and global best practices. The authorities are putting in place the remaining steps of the investment licensing reform and setting up the comprehensive property and land register. Full and smooth implementation of the privatisation plan is expected to attract investors.

Reforms of network industries such as energy and transport should reduce costs for customers and lead to improvements in infrastructure. The energy market remains characterised by a concentrated structure, relatively high wholesale prices and a reliance on fossil fuels. The transport system is largely road-based, dependent on oil-based transport and is characterised by low productivity. The digital transformation of the economy and society remains challenging, with low access to high-speed broadband networks and digital skills well below the EU average. Weak coordination and low administrative capacity in the public administration remain important bottlenecks, which also hamper business and investment. The national strategy for administrative reform aims to increase the administration’s efficiency through improved processes for managerial appointments and modern human resource practices. The reforms need to be fully implemented and any shortcomings on the appointments of senior managers properly addressed. Greece has updated its national anti-corruption action plan. Thanks to recent reforms, and with the exception of a slight decrease in 2018, Greece has steadily improved its scoring in the Corruption Perception Index over the past years. Nevertheless, the score remains relatively low and issues remain, particularly as regards a weak coordination mechanism of corruption cases, complex immunity and generous statute of limitation regimes, as well as legislative gaps regarding whistle-blower protection. The Greek judicial system still faces inefficiencies and reforms in this area are critical to the smooth functioning of the financial system and to unlocking investment potential. Despite recent improvements, the time to reach a decision is often too long and backlogs will require further targeted action. Ongoing reforms aim at reducing the backlog of household insolvency cases and implementing a three-year action plan, which features the creation of an electronic justice system. 1. Economic situation and outlook GDP growth After almost a decade of contraction and stagnation, Greece’s economy started to grow again in 2017 and expected to have accelerated in 2018. Following a domestic-demand-led real GDP growth of 1.5% in 2017, growth is forecast to have reached 2% in 2018. Growth is projected to exceed 2% in 2019 and 2020. Investment is expected to drive growth in the next years thanks to reforms and structural adjustments undertaken under the support programme, while growth in private consumption should also provide a steady support. Private consumption was a major driver of growth in 2018. Private consumption started to recover already in 2017 and is expected to have accelerated further in 2018. Although this improvement is supported by an increase in employment, though with real wage growth remaining subdued, households are still financing part of their spending by drawing on their savings. Despite an improvement since mid-2017, the saving rate of households remained negative — at around -4% in mid-2018. Graph 1.1:Real GDP growth Source: European Commission The household sector’s gross assets are depleting. While private debt stocks are below the EU average and below the threshold envisaged in the scoreboard underpinning the macroeconomic imbalance procedure of 133 % of GDP, the negative savings rate coupled with negative retail credit flows suggest that households are using their assets to finance some of their spending. Moreover, the fundamental aspects of the economy, including high unemployment, low expected income growth, high public debt and the projected increase in the age-dependency ratio, point to a low debt-servicing capacity of the private sector. Graph 1.2:Growth contributions and share of tradable sectors within the economy Source: Commission departments Exports provided a major contribution to growth in 2018 too. The tourism industry recorded a very good year and the country’s exports of goods increased rapidly as well. However, import growth was moderated because of the subdued domestic investment demand. The tradable sectors have steadily increased their shares in the economy and generated most of the growth since 2017. The expansion of Greece’s export capacities is expected to ease the pressure on the current account balance as demand for imports increases with the economic recovery. The investment-to-GDP ratio is still very low in particular due to a weak investment appetite in the private sector. Investment used to account for more than 25 % of GDP in the pre-crisis years while in 2018 it accounts for below 15 % of GDP, mostly due to the fall in housing investments. Investment in the construction sector is increasing but investment in equipment decreased significantly in 2018 compared to 2017. Both residential and non-residential construction activity increased in 2018, albeit from a very low base (see Section 3.4.1), meaning that their growth contribution is limited. Public investment is also lagging behind the pre-crisis levels. The investment-gap indicates that there is ample room for recovery if the business climate improves. Investment recovery is expected to be supported by the reform of the investment-licensing framework and by numerous other reforms that were adopted to improve the business environment. It will also hinge on the banking sector’s ability to provide companies with credit over the coming years. New investments through the privatisation programme and new foreign direct investment could support the economic recovery. The additional income and productive capacity associated with these investments could lead to higher levels of employment, income and private spending. Potential growth Implementing the reforms may help mitigate future challenges. Unfavourable demographic trends are expected to weigh on Greece’s growth potential. In the past years, the country faced a loss of physical and human capital due to a low investment rate and emigration of skilled workers. However, recent labour and product market reforms and the commitment of the Greek authorities to continue with the reforms initiated under the European Stability Mechanism programme – which are also reflected in their National Growth Strategy – have the potential to raise future productivity by improving the business and regulatory environment, reducing prices through increased competition, and strengthening governance and the justice system. The resulting increase in domestic and foreign investments, embedding state-of-the-art technologies and best practices, could thus start a virtuous circle of development attracting talents back into the country and providing opportunities for productive and rewarding jobs. However, the measurement and assessment of potential growth based on recent trends is particularly uncertain in an economy that is undergoing such a deep structural change as that of Greece. Inflation Inflation decreased in 2018. Inflation, measured in terms of the harmonised index of consumer prices (HICP), reached 1.1 % in 2017 and was positively affected by increases in indirect taxes. In 2018, the effect of the tax changes dissipated and headline inflation decreased to 0.8 %. Net of the tax effects, inflation rose moderately in 2018, reaching 0.7 %, up from 0.3 % in 2017. This increase is mainly due to an increase in energy prices, as core inflation in 2018 reached only 0.5 % thereby remaining under its 2017 value of 0.6 %. Inflation is expected to remain subdued in 2019, as the decline in energy prices are to compensate the effect of rising core inflation. From 2020, inflation is expected to increase as energy prices stabilise and core inflation rises in tandem with the economic recovery. Inflation is set to increase further in subsequent years and reach nearly 2 % by 2023. Graph 1.3:Employment and GDP levels compared to 2009 Source: Commission departments Labour market

Labour market conditions are set to continue to gradually improving though from a very weak base. The recovery of employment levels started in 2014, ahead of the recovery in the country’s economic growth. This suggests that labour market reforms have had a positive impact. The unemployment rate has also been decreasing steadily, from its peak of 27.9 % in September 2013, down to 18.5 % (November 2018). These positive developments are expected to continue steadily in line with the sustained economic recovery. Employment growth is expected to reach 1.8 % in 2019 and 1.4 % in 2020, and the unemployment rate is projected to fall to around 16 % by the end of 2020. Despite the substantial improvement, Greece continues to have one of the highest unemployment rates in the EU, which exceeds the pre-crisis level by about 10 percentage points. Particularly worrying is the very high share of long-term and very-long term unemployed (73 % have been unemployed for more than 1 year and half of them have been out of work for more than 4 years). The employment rate (59.3 %) is very low and significantly below the EU average (73.2%) but the activity rate, which remained rather stable during the crisis, is now about 2 percentage points higher than in 2008. Graph 1.4:Trend in competitiveness (left) and unit labour cost in Greece, grouped by components and benchmarked against the euro area (right) Source: Commission services Social development Despite recent improvements, the social consequences of the crisis are still visible in all social indicators. The strong increase in unemployment and the limited capacity of the Greek welfare system to protect against poverty had led to a strong reduction in households’ disposable incomes and to a sharp increase in poverty. In particular, in 2016 severe material deprivation had reached a peak of 22.4 %, up from 11 % in 2009, amongst the highest rates in the EU and about 3 times the EU average. However, the social situation 2017 improved in 2017 with the indicator of deprivation dropping to 21.1%. The reduction in incomes was broadly proportional across the income distribution. Therefore, over the same period income inequality, which was amongst the highest in the EU already before the crisis, did not evolve substantially. The social situation started to improve from 2017, thanks to the gradual labour market recovery and in light of the reforms, which strengthened the Greek social welfare system (with flash estimates for 2018 pointing to a further decline in the risk of poverty). Wage growth is expected to be positive but moderate, as the still very high unemployment is gradually reabsorbed. Following a strong wage adjustment during the crisis to regain competitiveness, with compensation per employee decreasing by 19.4 % in nominal terms since 2009, the wage adjustments came to a halt in 2017. Growth in nominal compensation per employee (which stood at 0.5 % in 2017) is forecast to have remained just below 1 % in 2018, and to rise only very gradually afterwards due to the considerable slack in the labour market, with still very high unemployment and modest labour demand. At the same time, wage developments will depend on the outcome of renewed collective bargaining negotiations (with sectoral agreements being once again the predominant level of bargaining). Further upward pressures may arise from policy decisions on the increase of the minimum wage, and in particular with the abolition of the sub-minimum wage for youth under 25 years of age. Graph 1.5:Current account, government lending (left); net international investment position by economic agents (right) Source: Commission services Competitiveness Following a substantial adjustment in unit labour costs (ULC) since the beginning of the crisis, they have broadly stabilised since 2016. A moderate increase is expected in 2018 as hourly wage is expected to start to rise. Given the persistently low investment rate, capital depletion is expected to continue to negatively affect the unit labour cost in 2018. The modest overall increase in 2017 and 2018 is still below the euro area’s (EA-19) growth rate. This increase should not erode the competitiveness gains of the past years. Increases in total factor productivity and in the investment rate are predicted to be high enough to offset the emerging trends of nominal hourly wage increases and reductions in working hours and to maintain the recent gains in competitiveness by keeping any raises in unit labour costs in line with euro area developments. External position There has been a major adjustment in Greece’s external position since the beginning of the crisis, as its current account balance swung from deficits above 15 % of GDP in 2008/2009 to small surpluses in 2015/2016. The legacy of these large past deficits is currently reflected in the very negative net international investment position (NIIP), which hovers around 140 % of GDP in the second quarter of 2018 and is still significantly higher than the prudential thresholds () and the level that would be in line with the fundamentals of the economy (). While the composition of the net international investment position stock is generally favourable in terms of short-term sustainability, as most liabilities are in the form of public debt obtained at concessionary terms during the assistance programmes, further adjustment efforts would be needed to ensure sustainability in the medium and long term. Taking into account that demand for imports is muted due to the relatively low levels of investment and consumption at present, the cyclically adjusted current account would still show a significant deficit of 5 % of GDP. This implies that future increases in investment and living standards will necessitate comparatively larger increases in exports to keep the current account balance in check. To ensure that the economy is resilient to future shocks, the net international investment position should converge towards the prudential level compatible with the characteristics of the Greek economy.

Such convergence could be achieved in full with an annual current account surplus of 6.4 % for 10 years. Half of the gap could be filled in 10 years with annual current account surplus of 1.8 %. Public finances Greece is expected to meet its fiscal targets in 2018 and 2019. Taking into account the package of measures incorporated into the 2019 budget, the headline balance is forecast to reach a surplus of 0.6 % of GDP in 2018 and 0.2 % of GDP in 2019. In terms of the primary surplus monitored under the enhanced surveillance framework, this corresponds to a primary surplus of 3.7 % of GDP in 2018 and 3.5 % of GDP in 2019(). Public debt is forecast to have peaked in 2018 and is expected to decrease swiftly in the near future supported by economic recovery and the projected surpluses in the general government balance. Graph 1.6:Non-performing loan ratio in the EU (left) and savings and investments by economic agents in Greece Source: European Central Bank and Commission services Financial sector The Greek financial sector still suffers from the highest ratio of non-performing loans (NPLs) on total exposures in the European Union. Even though the ratio has begun slowly decreasing since its peak in 2016 Q4, sustained efforts are needed to speed up its reduction. High non-performing loans ratios weigh considerably on bank performance and tie up significant amounts human and financial resources, thus reducing lending capacity and the capacity of businesses to invest. A number of initiatives has also been introduced to tackle this issue, as discussed in Section 3.4.2. The need for a healthy and liquid banking sector is even greater considering that households are increasingly drawing on their savings to consume, which reduces the amount of domestic resources to finance investments. This factor is only partly offset by higher corporate and public savings. Regional disparities Insufficient convergence is observed between peripheral regions and Athens, with the average Greek region having on average only 60 % of the capital's GDP per capita. The average annual improvement in the gap is negligible, at just 0.2 % of GDP, implying that at this pace it would take more than 200 years for the average Greek region to reach the income level of the capital region. The crisis hit all parts of Greece to a similar extent and did not contribute to reduce territorial disparities within the country. In fact, while the GDP per capita in the greater Athens area fell from 124 % of the EU average in 2009 to 92 % in 2016, following the adjustment in sectors such as construction, financial services and public administration, the other regions in Greece also contracted, to a lesser extent but starting from a lower base. Graph 1.7:Regional convergence within Greece and with respect to the rest of the EU Source: NUTS2 regional data are retrieved from Eurostat, data code 'nama_10r_2gdp', variable 'PPS_HAB_EU - Purchasing power standard (PPS) per inhabitant in percentage of the EU average'. The maps are drawn using a software application developed by the Regional Modelling team of European Commission's Joint Research Centre, Territorial Development unit.

Table 1.1:Key economic and financial indicators - Greece Source: Eurostat and ECB as of 31-1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for real GDP and HICP, Autumn forecast 2018 otherwise)

2. Overall findings regarding imbalances, risks and adjustment issues Introduction The 2019 Alert Mechanism Report concluded that a new in-depth review (IDR) should be undertaken for Greece to examine the possible existence of imbalances (European Commission, 2019d). An IDR was not prepared for Greece in 2018 (). This chapter summarises the findings of the analyses in the context of the macroeconomic imbalance procedure (MIP) in-depth review that is contained in various sections in this report (). Imbalances and their gravity Greece currently has large debt stocks, which are slowly unwinding. High levels of public and external debt, combined with high non-performing loans (NPLs) in the banking system, expose the country to adverse shocks with potentially harmful implications for the real economy. Subdued nominal growth in recent years also reduced the scope for passive deleveraging. Greece has the highest gross public debt in the EU. Public debt stood at 176.1 % of GDP at the end of 2017 and it is expected to have further increased in 2018, due to the large disbursement at the end of the European Stability Mechanism programme. Despite the high stock of debt, refinancing or debt servicing risks in the coming years are limited, as most of this debt was attributed at highly concessional terms and with a delayed repayment schedule. Greece also has a very large stock of external liabilities, which is primarily driven by foreign sovereign indebtedness. Greece's net investment position (NIIP) stood at -140.5 % of GDP in 2017, the second highest in the EU. This stock is mainly composed of debt instruments, primarily related to public debt (see Section 1). Such vast liabilities expose Greece to adverse external shocks and sentiment shifts. The external flow balances have substantially improved but the external position remains weak, rendering the economy vulnerable to shocks. Although the current account balance in 2017 recorded a mere 1 % deficit, the cyclically adjusted current account shows a deficit of 5.5 %, which is higher than what is required to keep the net international investment position at least stable in the next 10 years. The banking sector is burdened by a high stock of non-performing loans, which affects the profitability of banks. Although private debt stocks are contained, the fundamentals of the economy, including currently high unemployment, public debt, and the projected increase in the age-dependency ratio, imply that the debt capacity of both households and non-financial corporations in Greece is particularly low (see Section 3.2.1). Potential growth has been significantly limited by the ageing population, migration and the depletion of capital stock. The protracted crisis has weighed heavily on Greece’s growth potential, which is also reflected in decreasing labour productivity. Structural reforms implemented over the past years are expected to impact positively on productivity in the years to come (see Section 3.4.2). Low potential growth may represent a strong constraint on the deleveraging process. The labour market has been performing better than expected, but there is still a large gap compared with the pre-crisis situation and with the rest of the EU. Greece continues to have the highest unemployment rate and the lowest employment rate in the EU. Youth unemployment and long-term unemployment still need attention. In addition, due to its geographic position, Greece is highly affected by migration flows. However, Greece is no longer a pure transit country but has also become a settlement country as shown by the rising proportion of non-EU-born people in its population (8.4 %). This development brings a number of challenges, particularly in the area of employment and social policies (see Section 3.3). Evolution and prospects The current account deficit has improved during the crisis. Before and during the first years of the crisis, Greece's current account deficits were in double digits (more than 15 % of GDP in 2007 and 2008). By 2017, the current account balance adjusted to reach a deficit of 1 % of GDP (). Even though part of the adjustment is due to a cyclical contraction in domestic demand, past improvements in external competitiveness are starting to bear fruit. In addition to significant price adjustments in terms of real effective exchange rates (see Section 1), a number of reforms have been put in place under the European Stability Mechanism programme to open up the Greek economy and improve the efficiency of product and labour markets. The new framework is expected to: (i) ease the administrative burden; (ii) increase competition in key sectors; (iii) simplify investment licencing procedures: (iv) alleviate disproportionate restrictions to regulated professions; (v) open up the energy market, (vi) set up a cadastre and improve spatial planning; and (vii) ensure a better functioning labour market in the context of a modern social safety net. Greece’s goods exports recovered significantly in 2017-2018, reaching historically high levels in 2018. Tourism also recorded double-digit growth for two years in a row (2017 and 2018). Yet, this favourable development indicates that, barring massive investment, there may be limited potential left for growth in this sector. Nevertheless, in 2018 Greece managed to reverse its decade-long trend of falling world export shares and is currently enjoying a broad-based expansion, in terms of destination markets and economic sectors. Greece is also receiving a historically high level of foreign direct investments, albeit from a very low base (see Section 3.4.1). Given the limited fiscal space and reduced capacity of the private sector to leverage further, attracting foreign direct investments could be crucial to the adjustment process. The economy is undergoing both a structural change and a strengthening recovery, and both affect the prospects of the current account development. The recovery may generate increased import demand for investments and final consumption, thereby increasing the current account deficit. However, the increasing share of the tradeable sector in the Greek economy may improve the balance. In addition, the debt measures agreed at the Eurogroup in June 2018 that resulted in moderate foreign debt servicing costs, help Greece keep a lower current account deficit. Public debt is expected to decline gradually over the coming years and the pace of this decline will depend on compliance with fiscal targets. Given the composition of the debt stock, vulnerability to higher financing costs will only increase in the long term, while gross financing needs are projected to remain below 12 % until 2033 (). Greece's sovereign long-term credit ratings have improved, but are still below investment grade for all major rating agencies. Maintaining the downward adjustment in public debt through fiscal prudency is also crucial to improve external sustainability, given the large share of public debt in total foreign liabilities. The high stock of non-performing loans remains a key weakness in the financial system. After peaking in 2016 and 2017 for corporations and households, the ratio of non–performing loans to total credit is slowly decreasing, but is still one of the highest in the EU (as described in Section 3.2.1). Restructuring plans are being implemented by the four systemic banks to tackle the problem faster. These restructuring plans are supported by Greece's implementation in recent years of wide-ranging policy measures to safeguard financial stability and strengthen the viability of the banking system.

Potential growth and productivity are expected to increase in the medium term if reforms are implemented and the economic environment remains favourable. The ageing and shrinking of capital stock due to low investment is expected to be reversed thanks to improvements in the business environment and the increase in foreign direct investments. The outflow of skilled and unskilled workers due to decreasing nominal wages and high unemployment rates is also expected to go down as wages and labour productivity increase, unemployment decreases and employment rates rise. In addition, the reduced administrative burden to set up a company and the product and labour market reforms are also expected to stimulate competition and business innovation, bringing new competitors to the market. As a result of these factors, potential growth and productivity are expected to increase accordingly in the future. Employment growth turned positive already in 2014 and gained further traction in 2017-2018, but the level of employment is still considerably below the pre-crisis levels. The unemployment rate has steadily decreased since the end of 2014, reaching 18.6 % in September 2018 from the peak of 27.5 % in 2013. Wages have started to rise only recently. The nominal wage growth resumed in 2017 and has so far developed in line with productivity, inflation and unemployment. Compensation of employees per hour worked is significantly below the EU average, reflecting relatively low productivity levels. Wage-setting and employment protection arrangements were fundamentally reformed during the crisis years to facilitate adjustment by firms, better align wages and productivity and thus restore competitiveness. Following the end of the European Stability Mechanism programme, sectors are expected to become again the main level of bargaining with the reintroduction of the possibility of extensions and the favourability principle, and a new procedure for setting the minimum wage will be applied for the first time. These developments merit close attention, as strong wage increases could hamper job creation for the most vulnerable groups. Overall assessment Greece faces several sources of macroeconomic imbalances and adjustment is ongoing. Progress has been achieved in a number of areas, including the current account, labour market and external competitiveness. Deleveraging in the private sector is progressing and banks are reducing their non-preforming loans. Public debt is expected to decrease steadily in the next years, benefiting from favourable economic conditions and the projected developments in the fiscal balance. Two areas that are the slowest to adjust are the net external position, where the pace of improvement has been weak, and productivity, which is yet to pick up. Stock imbalances are still high despite positive flows. Although all the main indicators point to stocks of imbalances moving in the right direction, they still fall significantly short of the relevant benchmarks. The main vulnerabilities relate to the high stock of public debt and external liabilities. The recent reduction in non-performing loans and unemployment are slowly helping reduce the balance of risks. The main challenges are now concentrated on the implementation of reforms legislated during the programme years in order to enhance investment and boost productivity in a sustainable way. Effectively implementing and deepening the policy measures in place is essential to further reduce the imbalances. Notable progress has been made in some areas of business environment and administrative burden, such as the smooth implementation of electronic one-stop shops for business registration and the reform of licensing and inspection procedures. However, some issues such as the overlapping of multiple nuisance classifications for business establishment still hinder entrepreneurship and discourage investments. Product and labour market reforms were put in place during the programme years and their implementation is being monitored as part of the post-programme enhanced surveillance. Compliance with fiscal targets is expected to foster the sustainability of public debt in the medium-to-long term, while wide-ranging measures have been taken to support the stability and efficiency of the financial sector. Table 2.1:MIP assessment matrix - Greece 2019 (Continued on the next page) Table (continued) Source: European Commission 3. Reform priorities 3.1.Public finances and taxation* () This section looks at fiscal policy and fiscal frameworks, taxation, tax administration and compliance and public financial management and public procurement. The long-term sustainability of public finances is discussed in the Fiscal Sustainability Report 2018 (European Commission, 2019b) and in the second enhanced surveillance report published in parallel to this country report (European Commission, 2019a). Fiscal policy and fiscal frameworks In recent years, Greece has consistently exceeded its fiscal targets. Greece’s fiscal policy framework is anchored by the nominal primary surplus target of 3.5 % of GDP and requirements of the preventive arm of the Stability and Growth Pact (Council Implementing Decision (EU) 2017/1226 of 30 June 2017, OJ L 174, 7.7.2017, p. 22). The primary surplus targets were exceeded in all years of the European Stability Mechanism programme, in some years by a substantial margin. The main driver of the recurrent over-performance was underspending as compared with the initial budget ceilings, in particular on investment. On average, only 83 % of the public investment budget ceilings allocated to ministries was actually spent in 2012-2017. This is problematic for two reasons. Firstly, although public investment has partly recovered from the downturn during the crisis, the country’s investment needs are still large and investment in sectors such as health care remains deeply below the euro area average (Greece: 0.05 % of GDP, euro area: 0.18 % of GDP in 2016). Secondly, the unspent resources could have been re-directed to other useful purposes, had the underspending been detected early enough in the year. The budgeting framework for the public investment budget is undergoing an independent review with a view to addressing the recurrent underspending. The Ministry of Finance exercises only limited surveillance over the public investment budget, which is instead prepared and implemented by the Ministry of Economy. This means that the optimal allocation of limited resources is established separately for the ordinary and investment budgets, whereas a reallocation between the two could represent a better outcome with respect to reaching the authorities’ policy objectives. Greater involvement of fiscal experts in the investment budgeting process would be useful. It could help structure the discussion over the draft budget, reveal weak points among competing proposals and potentially expand the options for finding the optimum outcome. The authorities committed to improving their public investment budgeting practices and to implementing these improvements in early 2019. The achievement of fiscal targets is underpinned by yields of the already legislated fiscal consolidation measures and the ongoing economic recovery which translates into higher revenue. Greece is predicted to meet the primary surplus target in the medium term (see European Commission, 2019a). Notably the pension system reforms implemented under the economic adjustment programmes should continue to lower the proportion of social expenditure in GDP, with a positive impact on the general government balance. As shown in Graph 3.1.2, the achievement of the targets is likely to be further supported by a solid growth in households’ income and spending, which augurs well for the dynamics of taxes in coming years, and policy commitments that limit expenditure growth, in particular in public employment and in health care. Graph 3.1.1:Underspending from the public investment budget*, 2012-2017 Source: European Commission

Graph 3.1.2:Drivers of changes in general government balance, 2019-2022 Source: European Commission Greece has established a rule-based comprehensive fiscal governance framework, in line with the relevant European legislation (Budgetary Frameworks Directive, Two-pack, and Fiscal Compact). The country introduced a medium-term fiscal strategy and strengthened expenditure procedures and fiscal reporting to safeguard fiscal accountability. A structural budget balance rule was laid down coupled with an automatic correction mechanism and specific sectoral corrective mechanisms (i.e. local government, health care, extra-budgetary funds and State-owned businesses). The Hellenic Fiscal Council has made major progress in rolling out its activities since it became operational in late 2015. It has also published its mandatory semi-annual reports on the annual and medium-term fiscal plans and on compliance with domestic numerical rules. Taxation In the context of the financial assistance programmes, Greece implemented major reforms of the tax system. This included in earlier adjustment programmes the introduction of new income tax and tax accounting codes that modernised the personal income tax and corporate income tax, the introduction of the unified property tax (ENFIA) and a major reform of the criminal justice system for tax evasion and fraud. Under the European Stability Mechanism stability support programme, a major value added tax (VAT) reform was implemented and the personal income tax (PIT) system was further simplified. Concerning VAT, Greece had the second (29.2 %) highest VAT gap () in the EU in 2016, significantly above the EU average of 12.3 %. Greece’s VAT gap has remained relatively stable over the past few years (0.4 pp reduction since 2012). The VAT reform adopted in 2015-16 therefore considerably broadened the VAT base through limiting the scope of reduced rates and exemptions, reduced market distortions, and has stabilised compliance rates. The special VAT regime for five Aegean islands has been extended and its elimination made contingent on the reduction of migration flows. The PIT reform of 2016 broadened the tax base, integrated the former solidarity surcharge into the income tax system, and reduced the scope for tax avoidance. A major reform of property tax zonal values has been initiated to update and align tax values with market prices by 2020. This will improve the efficiency and fairness of the unified property tax. Other pending reforms include inter alia the simplification of the VAT code, the reform of Stamp duty, and the reform of the tonnage tax regime including the extension of the "voluntary tonnage tax" regime. The tax-to-GDP ratio in Greece has significantly increased during the crisis and has converged with the average 41.2 % ratio of the euro area. The share of taxes and social contributions in GDP in Greece stood at 41.6 % in 2017, a substantial increase from the pre-crisis ratio of 32.8 % in 2009. Partly reflecting this increase in taxation, investment surveys show tax instability as a negative factor for investment. Indirect taxes, environmental taxes, and property taxes have relatively high shares compared to other EU Member States. Corporate and personal tax rates and the implicit tax rate on labour (including social security contributions) remain high in Greece compared to other EU member states. The corporate tax rate of 29 % and the top personal tax rate of 55 % are above most other Member States. The pre-legislated reduction in the personal income tax credit in January 2020 is projected to raise some 1 % of GDP in additional revenue through broadening the PIT tax base and will facilitate personal and corporate tax rate reductions. Moreover, Greece continues to have a very high debt bias in corporate taxation (3rd highest in the EU in 2017) (European Commission, 2018h) that could limit investments by young, innovative and high-risk companies that rely on equity financing. Tax administration and compliance Greece has undertaken major reforms in recent years to remedy its longstanding weakness in tax collection and compliance. Reforms implemented under subsequent financial assistance programmes, covered the collection of taxes, custom duties and social security contributions. Major institutional reforms aimed to increase the transparency, accountability and efficiency of the system. The establishment of an Independent Authority of Public Revenue (IAPR) as from 1 January 2017 has consolidated the various reforms up to that point. More importantly, it has provided a coherent institutional framework for improving revenue collection. As part of improving the revenue administration, measures to strengthen customs efficiency and reinforce the fight against smuggling have been taken. As part of the 2016 pension reform, a single social security fund (EFKA) was established. This fund is responsible for collecting of social security contributions of all insured individuals. A single centre for the collection of social security debt (KEAO) has also been set up and has become part of the single social security fund. Key performance indicators measuring IAPR's performance have been largely met. This shows that the measures introduced to increase tax collection are proving to be both relevant and useful. As the graph below shows (Graph 3.1.4), whereas the collection of "old debts" continues to increase, less "new debt" is being added to the books. Notwithstanding in 2018, the decreasing trend on new debt has decelerated for certain groups (in particular self-employed), which may be related to the increased tax burden having affected their ability to pay on time. As concerns the social security contributions, although the debt collection continues to overall exceed the set targets, there is still an upward trend as concerns the overall debt accrued mainly relating to the surcharges (incl. interest) added. Graph 3.1.3:"Old debt" collection and "new debt" added Source: IAPR Notwithstanding the positive developments both in terms of reinforcing the institutional set-up and in providing new collection tools and resources, much remains to be done in these areas. The IAPR still needs to be fully staffed and the development of an integrated IT system still needs to be developed. In this context, the adoption of the IAPR Reform Action Plan ("Blueprint") for 2019-2021, a key strategic document, has been delayed. The "Blueprint" sets out specific measures and investments, including the development of the IT system and tools that will be required to continue transforming IAPR into a modern, flexible and effective organisation. Similarly, the adoption of the IAPR's human resources reform, which will introduce tailored job descriptions, grading, remuneration and performance assessment has also been delayed. The reform is vital for improving IAPR's prospects to attract and keep highly-qualified staff. Specific reforms to improve tax compliance and combat tax evasion include measures to increase electronic payments and timely submission of tax returns. A number of further measures are in the pipeline that should facilitate and enhance revenue collection. These include (i) automating VAT declarations and simplifying administrative procedures for declaring uncollectible taxes; (ii) improving data sharing/management between IAPR and other government services; and (iii) reinforcing liability provisions for revenue administration officials to enable modern and effective working/collection methods to be widely implemented. Public financial management and public procurement Various reforms since the beginning of the crisis aim to improve Greece’s public financial management system. The reform efforts focused particularly on: i) modernising the planning, execution and control of the budget, also by introducing a new budget classification, ii) ensuring prompt arrear payments and iii) improving liquidity management. The authorities made substantial efforts towards the full clearance of the outstanding arrears by the public administration. The European Stability Mechanism programme provided for significant financing to clear arrears, which resulted in a large reduction in the stock of net arrears. However, remaining structural bottlenecks have slowed down the clearance of arrears; the goal of full clearance has not been achieved. In order to address the structural weaknesses of the public administration in dealing with arrears clearance, the authorities have recently adopted detailed action plans. The action plans build on the recommendations issued by the Hellenic Court of Auditors. Moreover, the Ministry of Finance has altered the information recorded in the commitment registers and collected via the e-portal by the central and general government entities. Tackling the structural issues that lead to the accumulation of arrears should also ease Greece’s compliance with the Late Payment Directive, which remains problematic, particularly in the health sector.

To improve fiscal reporting and cash management functions and to move towards more result-based policies, the government is in the process of implementing a new government budget classification structure and Chart of Accounts (referred together as CoA). The authorities have updated their information technology system and have adopted the new economic and administrative classifications in the 2019 State budget. The authorities are working on the remaining segments also to advance towards a new performance budgeting framework. The adoption of the new CoA prepares also the grounds for supporting the new cash management functions as designed in the new Treasury Accounts System (see below). The fund and functional classifications for the central government are expected to be implemented as from 2021 State budget. In parallel, the general government entities are expected to adopt the new classifications in their budgeting and accounting as of 1 January 2023. Further progress is being made in improving the fragmented cash management system, ensuring transfers of cash reserves to the treasury accounts system in the Bank of Greece. A new legal framework for the cash management system was adopted in June 2018. It requires that all central administration entities mandatorily maintain their accounts within the Treasury Single Account in the Bank of Greece. The other central government entities and the entities belonging to the general government must participate in the Treasury Accounts System by transferring their surplus cash reserves daily to the Bank of Greece. The concentration of surplus reserves is deemed to make government's liquidity management more efficient while strengthening the debt management. The legal framework for State guarantees has been modernised and the administrative procedures governing the process streamlined. The authorities have made progress in implementing the recently designed action plan to improve the management of State guarantees issued to individuals and enterprises for proven damages as a result of natural disasters or to private enterprises operating at geographical areas characterized by exceptionally low economic activity. The action plan aims to streamline the bureaucratic burden of processing claims by: i) creating an electronic repository of borrowers, ii) agreeing on settlement schemes and iii) improving interoperability with local tax offices. The legislative framework was also modernised. Reforms have been carried out to further enhance the efficiency of public procurement. Over the last years, Greece has carried out significant reforms in the area of public procurement: consolidated and simplified legislation, a new prejudicial remedies system, use of electronic procurement, new centralised procurement scheme and adoption of the National Strategy on Public procurement including a set of actions to improve administrative capacity. These reforms are expected to address persistent deficiencies of the Greek public procurement market such as a high number of single bid procedures (34% in 2018, as opposed to 23% on average at EU level); lengthy award procedures (236 days, compared with a European average of 83 days); a high number of contracts awarded exclusively based on the lowest price (90 % in 2018, compared with 63 % at European level) often with excessively high discounts, and contrary to the best practice favouring the use of more quality-based criteria. Further improvements in administrative capacity and the full implementation of the new centralised procurement scheme is needed to achieve economies of scale and rationalise public expenditure. In the short term, priority needs to be given to measures such as streamlining electronic procurement facilities, systematically checking on excessively low bids, professionalising procurement staff and promoting central purchasing. In the long term, the country’s public procurement framework will need to be rendered more efficient, which, in turn, will contribute to more sustainable and efficient use of public resources. Regarding the public investment budget, applying the rules of the EU co-financed components to the purely national component would be advisable. 3.2. Financial sector 3.2.1 Financial sector overview and financial stability assessment* () While not at the origin of financial stress, the domestic banking sector was adversely affected during the protracted crisis in Greece. In the run-up to the crisis, rising concerns about the creditworthiness of the Greek sovereign adversely affected the banking sector and led to deposit withdrawals. Between 2010 and 2012, capital and liquidity deteriorated further, bank deposits fell sharply and banks’ access to capital and money markets was lost. The banking sector was recapitalised in 2013 and at the beginning of 2014 as part of the second financial assistance programme. The sector also received substantial emergency liquidity assistance from the European Central Bank. The subsequent nascent recovery in the Greek banking sector was halted by the confidence crisis in 2015. Large amounts of deposits were withdrawn from the banking sector, which led to the imposition of capital controls. Non-performing exposures increased further on the back of the protracted recession and deteriorated payment culture. In December 2015, the European Stability Mechanism disbursed EUR 5.4 billion for the recapitalisation of Piraeus Bank and the National Bank of Greece. Over the past several years, Greece has introduced wide-ranging policy measures to safeguard financial stability and strengthen the viability of its banking system. These focused on: (i) gradually normalising liquidity and payment conditions and strengthening capital; (ii) addressing the high level of non-performing exposures (NPEs) on banks’ balance sheets; and (iii) improving the governance of both banks and the Hellenic Financial Stability Fund (HFSF).() Progress has been made in these financial sector policy areas, but strong efforts are still needed, as the gap with EU peers has widened in respect of asset quality (NPE ratio), capital (fully-loaded common equity tier 1 (CET1) ratios) and quality of capital. Profitability is still negative and while emergency liquidity assistance and Eurosystem funding have decreased significantly, liquidity regulatory gaps are still in place (e.g. with respect to the liquidity coverage ratio). Banks have built up capital buffers and private sector deposits are stable. Banks’ average CET 1 ratio was slightly below 16 % during the second quarter of 2018, thus ensuring that banks are above capital requirements (see Table 3.2.1). Profitability remained negative, as provisioning and write-offs of NPEs continued. The cost-cutting efforts to reduce the number of bank staff and branches could offer some further relief in the future. The provisioning coverage ratio has increased as compared to the previous year, reaching 49 % in the second quarter of 2018. Private sector deposits have remained stable since the end of the European Stability Mechanism programme in August 2018. Most recently, banks’ reliance on central bank funding has further decreased and capital controls have been gradually eased. Greek banks managed to significantly reduce their reliance on Eurosystem funding. Two of the systemic banks have repaid emergency liquidity assistance entirely and the other two are expected to follow in 2019. The emergency liquidity assistance ceiling was reduced from EUR 90.4 billion in August 2015 to EUR 4.9 billion in early November 2018. An improved liquidity situation of Greek banks and greater confidence of depositors allowed capital controls to be further loosened from 1 October 2018. This enabled unlimited cash withdrawals from credit institutions in Greece and increased the limits on cash withdrawals and transfer of cash abroad. Cross-border business activities — particularly investment — should be further supported by the these recent provisions that increased the limit to the amount of funds that can be transferred abroad and provided the possibility to repatriate capital gains and dividends up to 100 % of the invested funds in Greece per year. Table 3.2.1:Financial stability indicators Source: ECB - CBD2 - Consolidate Banking data, Commission services Non-performing exposures (NPE) resolution remains a key challenge for the banking sector in Greece. Greece still faces the major task of cleaning up banks’ balance sheets. This will require major efforts in the post-programme period. As of June 2018, banks are reducing the NPE stock in line with supervisory targets. While these targets are going to become more ambitious over time, there is no simple solution to accelerate the pace of reduction. According to the targets agreed, the NPE ratio will be 35 % at end-2019 and banks have indicated that they expect to reduce the ratio to around 20 % by end-2021. These efforts are supported by several major reforms related to the out-of-court debt workout mechanism, the insolvency framework for households and corporations, the enforceability of collateral through electronic online auctions, as well as the activation of a secondary market for NPEs. While banks meet the capital requirements, the quality of the capital remains weak. In this context, it is important to note the high level of deferred tax assets (DTAs) that are eligible to be converted into deferred tax credits (DTCs), which banks do not have to deduct from their regulatory capital(). According to the latest data available, the amount of the eligible DTAs to be converted into DTCs by the four systemic Greek banks is EUR 15.9 billion as of June 2018, which is equivalent to around 59 % of their Common Equity Tier 1 Capital.

Reforms have been adopted to improve banks' governance, in particular through the reconstitution of bank boards, in line with the provisions in the Hellenic Financial Stability Fund (HFSF) law. The four systemic banks have been working on implementing the HFSF's recommendations resulting from the 2017 governance review. Acknowledging significant improvements, the review identified that additional actions are needed in the areas of risk culture, compliance and internal control framework and substantial time and effort is needed to implement the recommendations in full and especially until they become organic parts of the respective corporate cultures. A part of these recommendations has already been addressed, while work on others is still in progress. Three of the four systemic banks have implemented their restructuring plans by the end of 2018. This is likely to entail certain changes in their operational framework with the HFSF, starting most likely from January early 2019, as a substantial part of the HFSF's special rights is linked to the monitoring of the restructuring plans. The HFSF will work on selling its stakes in the systemic banks in the coming years, in line with its divestment strategy that the HFSF adopted in November 2018.



Asset quality in the banking sector Non-performing exposures() (NPEs) have been gradually decreasing, but remain high, amounting to EUR 88.6 billion at the end of June 2018, just below 48 % of total exposures, compared with the peak of EUR 107.2 billion of March 2016. The reduction of NPEs through sales accelerated over the past quarters while e-auctions appear to have produced some first results. Write-offs remain an important driver of the reduction followed by liquidations and collections. In terms of flows, in the second quarter the default rate exceeded the cure rate again. The default rate is driven by re-defaults on previously cured NPEs, implying that banks are still struggling to put in place viable long-term restructuring solutions. Looking at types of loans, e small and medium-size enterprises (SMEs) and corporate portfolios perform better. The NPEs in the mortgage book recorded a very slight annual reduction. The percentage of NPEs under the legal protection of the Household Insolvency law is still significant (14.4 % of NPEs and 30 % of non-performing mortgage loans at the end of June 2018). The strategy adopted under the European Stability Mechanism programme for tackling NPEs has included regulatory, judicial, supervisory and other measures. These included: (i) creating an active NPE servicing and sales market; (ii) applying the Code of Conduct adopted by the Bank of Greece; (iii) revising the Household Insolvency law; (iv) reforming the corporate insolvency law; (v) creating an out-of-court workout mechanism; and (vi) undertaking an extended reform of the Greek Code of Civil Procedure which included adopting an electronic auctions system to liquidate assets following executory enforcement. Greece also committed to strengthening the capacity of its courts to increase their efficiency in managing and accelerating the processing of their considerable backlogs of NPE-related cases and in swiftly resolving new ones. While the progress in implementing these strategies and/or measures by the end of 2018 has not been uniformly satisfactory, there are encouraging signs in the areas of sales and securitisations. However, sustainable restructuring solutions, either directly by the bank or by the servicer/acquirer of NPEs are not yet evident. In the NPE secondary market, the two first NPE sales by Greek banks occurred in the second half of 2017 and the first quarter of 2018, involving highly provisioned unsecured loan portfolios, with a focus on consumer loans. Several additional NPE transactions have been closed in the second and third quarter of 2018 or are currently under way. Completion of already conducted and currently planned transactions would bring the total face value of loans transferred by the country’s four systemic banks to around EUR 20 billion. Regarding corporate insolvency, despite a recent major reform of the Corporate Insolvency Code and the introduction of the new profession of Insolvency Administrator, there was no observable increase in the number of stakeholders making use of the new framework up to the end of 2018. For instance, only 35 new cases were reported as having been filed with the relevant division of the Athens first instance court in the first half of 2018. However, there is scope for an accelerated uptake as the impact of the numerous improvements and procedural streamlining becomes clear, enabling bona fide individual debtors to obtain discharge 3 years after the declaration of bankruptcy and further simplifying and accelerating insolvency proceedings for small and medium enterprises. Regarding the performance of the regulatory framework for household insolvency and its application by the courts, accelerated progress in processing backlogs is expected following the latest reform. Notably, the reform introduced measures for filtering out strategic defaulters, in particular by requiring applicants to consent to the lifting of their banking secrecy, and for expediting proceedings. A comprehensive action plan aims to eliminate the backlog of cases, including the processing of pending applications, by the end of 2021. The authorities have started to implement the plan but the pace of reduction needs to increase to attain that objective by the end of 2021. In addition, financial training is being provided to judges throughout Greece to facilitate the processing of household insolvency and non-performing exposures-related cases. Action is also being taken to address specific problems experienced by Magistrate’s courts. The authorities report that they are in the process of elaborating secondary legislation to improve the application of the Household Insolvency law, including the State subsidies to protect vulnerable households. The codification of the legislative and normative framework on household insolvency, implemented at the end of 2018, is expected to facilitate its interpretation and implementation. More generally, to further increase the case-processing capacity of courts, the Greek authorities are progressing with the gradual appointment of successful candidates to the public competition conducted in 2017 to hire courthouse support staff. The protection of primary residences was extended by two months and is expected to be adjusted after that. The protection on primary residences under the Household Insolvency law was set to expire on 31 December 2018. On 31 December 2018, the government issued a Cabinet Act extending the protection of primary residences under the Household Insolvency law until 28 February 2019(). The Greek authorities have indicated that they intend to proceed with the adjustment of the protection on primary residences, in consultation with the Hellenic Banking Association. The Out-of-Court Workout mechanism got off to a slow start in August 2017 when the electronic platform for submitting and processing applications became operational. While volume and turnover remain modest, regulatory and technical measures are being taken to improve the system’s performance. On the technical aspect, the electronic platform was upgraded during the last quarter of 2018, to enable the collection of data relevant to key performance indicators and the monitoring of statistics relevant to public and private creditors. The platform should be updated regularly to address any future stakeholders’ needs. The electronic platform for carrying out e-auctions that was first put into use in November 2017 to provide an alternative for and eventually replace the highly problematic and contested conduct of physical auctions, has been a success in terms of its performance. It has allowed for the resuming of liquidations of collateral, after a long moratorium followed by a de facto blockage of physical auctions by activists throughout Greece. By 31 December 2018, 17.223 properties were auctioned. Future prospects look positive. One point of concern is that four out of five successful auctions conducted since the platform was activated led to the purchase of the collateral by the bank. The owner and operator of the platform is therefore investigating how to make the platform more user-friendly so that it encourages participation by non-specialist prospective purchasers. Finally, in its efforts to increase the value of its participations, the HFSF closely monitors the banks' progress on NPE resolution and supports the banks in their efforts to reduce NPEs, including, among others, challenging the banks with respect to their NPE strategies and taking part as an observer in the interbank NPE Coordination Committee. Over the past months, as an addition to the NPE resolution toolkit, the HFSF has also been exploring the possibility of an Asset Protection Scheme and is currently working with the Greek authorities on setting up a workable structure. In order to assess the scope of both proposals for creating a workable structure, several elements still need to be elaborated and consulted with relevant stakeholders. Private sector access to finance Following years of pronounced contraction, bank lending remains very subdued, with slight signs of improvement for companies. Since 2016, the annual growth rate of loans extended to non-financial corporations has hovered around zero. The growth rate for loans to households has been progressively becoming less negative since July 2016. Factors that supported new credit to the private sector include the recent modest recovery in economic activity and a slight reduction in lending rates. On the downside, the burden of a NPE stock has been inhibiting new lending by banks. On average, in January-July 2018 new gross loans to households remained broadly stable as compared to the previous year, while higher volumes of new loans to non-financial corporations were recorded. In 2018, for the first time in many years banks reported some easing in credit standards for all types of new loans. Lending rates to non-financial corporations are decreasing, while interest rates on mortgage and consumer loans are increasing. The gradual decline in lending rates to non-financial corporations has continued during 2018, driven by lower credit risk and the favourable effect of the financing instruments available to SME (e.g. by the Hellenic Fund for Entrepreneurship and Development, the European Bank for Reconstruction and Development and the European Investment Bank Group). By contrast, lending rates to households have been following an upward trend for the past 4 years, mainly reflecting credit risk developments, as the NPE ratio for consumer loans is particularly high and the NPE ratio for mortgage loans has been deteriorating recently as compared to other loan categories. At the sectoral level, non-financial corporations are taking advantage of financing from alternative sources other than domestic banks, but important broader financial sector elements are still underdeveloped. The combined stock from the foreign intercompany and bank sources of funds (excluding corporate bond issues abroad) in 2018 represented around 13 % of outstanding bank credit to non-financial corporations. Leasing/hire purchase and factoring transactions currently stands at around 7 % of outstanding bank credit to non-financial corporations. Survey data point to the significance of trade credit from suppliers as a relevant alternative source for financing for Greek SMEs. Greek capital markets are still affected by the deep and prolonged crisis and dominated by trade in banks' securities, thus limiting the meaningful funding alternatives to non-financial corporations, except for some large corporations. Overall, raising capital from bond markets was and remains a difficult task for the average Greek non-financial corporation, due to country risk, low profitability and a shallow domestic investor base. SMEs in Greece continue to be disproportionately affected by the lack of access to finance. On average, 17 % of SMEs mention access to finance as their most important problem, well above euro area averages. The demand for external financing in Greece continued to be the strongest in the euro area. However, there is a recent positive trend in banks’ regarding the willingness to lend to SMEs. 3.3. Labour market, education and social policies

3.3.1.Labour market* () Although the Greek labour market still feels the effects of the crisis, major improvements have taken place. During the crisis, employment in Greece dropped by a sharp 19 %. Employment levels stabilised in 2014 and started rising more markedly from 2017, while the unemployment rate has been steadily decreasing from its peak of 27.9 % in July 2013 to 18.5 % by November 2018. The current level of 3.7 million people in employment (age group 20-64) still falls short of the 2008 level (4.5 million in employment) and almost 900 000 individuals are looking for a job (19 % of the active population). Of these, almost three out of four have been without a job for more than 1 year, and more than one third for more than 4 years. The overall population has been in decline since 2010 as a result of the combined effect of out-migration (with net migration turning positive only in 2016, mostly due to the large inflow of refugees) and a negative and deteriorating demographic balance. Graph 3.3.1:Total population change Source: Eurostat The more pronounced recovery in employment that has been taking place since the end of 2016 has been broad-based. There has been job creation in all sectors of the economy, with larger absolute gains in the tradable services sector (which accounts for one third of the Greek economy), but a relatively stronger growth in industry and construction, i.e. the sectors which had registered the largest job losses throughout the crisis. Most of the jobs created have been permanent ones, with the share of temporary employment remaining stable at around 11.3 % of total employment in 2017 (below the EU average of 13.4 %). Although the proportion of part-time employment has increased (from around 5 % before the crisis to close to 10 % in 2017), it is still very low when compared with other EU Member States and the EU average of 19 %. Yet, 70 % of part-time workers (one of the highest percentage in the EU) would prefer to work more, but have been unable to find a full-time job. At the same time, the social security system does not cover all people in employment; sub-groups of the self-employed do not have formal coverage to sickness benefits. Women’s participation in the labour market is extremely low. At 48 %, the employment rate of women in Greece is 19.7 percentage points lower than that of men and is one of the lowest in the EU. This already very wide gap between men and women (among the largest in the EU) has been widening in recent years, as the employment rate of women has been rising at a slower pace than that of men. This is matched by a very low level of labour participation among women in younger (15-24) and older (50-64) age groups (see Graph 3.3.2). With respect to work-life balance, caring responsibilities are less cited as a reason for women’s inactivity in Greece than the EU average, and parenthood does not currently seem to have a significant impact on the employment rate of women. At the same time, flexible working arrangements are very limited, parental leave arrangements are unequal between the public and private sector, and childcare enrolment rates are among the lowest in the EU and have been decreasing in recent years, raising concerns with respect to the Social Pillar principle on childcare and support to children. The proportion of children under three in formal childcare is 8.9 % (against the EU average of 32.9 %), and the proportion of children aged between three and mandatory school age is 55.6 % (EU average: 86.3 %). Mandatory enrolment of four year-olds in kindergarten is being gradually implemented and should apply in all municipalities by 2021. A considerable demand-supply gap remains, leading also to obstacles in the system of subsidies to low-income families. This calls for further investment, as it could become an impediment to a possible increase in female employment as the economy continues to recover. Although still very difficult, the labour market situation for young people has been improving. Youth unemployment has fallen considerably from its peak of almost 60 % in mid-2013 although, at 39.1 % in November 2018, it continues to be one of the highest in the EU. As reported in the Social Scoreboard, the proportion of young people (aged 15-24) not in employment, education or training (NEET) remains particularly high (15.3 % in 2017, compared to an EU average of 10.9 %). While the share of young unemployed (NEETs) has declined in line with the reduction in youth unemployment, the number of inactive youth (i.e. NEETs not seeking employment) has remained stable. Meanwhile, the reduction in youth unemployment has not been driven so much by an increase in youth employment, but rather by an increased participation in education (see Graph 3.3.3). The EU has been supporting the fight against youth unemployment though the Youth Employment Initiative. Over EUR 250 million have been allocated to Greece since 2014, reaching over 57 000 unemployed youth (NEETs 18-29 years old) but further investment is needed. Graph 3.3.2:Activity rate of women in Greece and the EU by age group, 2017 Source: Eurostat The labour market integration of people with a migrant background is also a challenge. Non-EU nationals legally residing in Greece represented 5.6 % of the population in 2017 (above the EU average of 4.2 %), and their employment rate is structurally lower than that of Greek nationals. This gap is mainly due to the low employment levels of non-EU born women (42.4 %, compared to 48.5 % for Greek women). In addition, people born in Greece with foreign-born parents have worse employment outcomes than natives with Greek parents (). The large migration experienced by Greece since 2015 has not yet modified the size of the non-EU born population, as only a relatively small proportion of the people who entered through Greece in 2015-2016 settled in the country. Nevertheless, considering the backlog of the asylum system, the integration of people benefiting from international protection into Greek society and the labour market will continue to be a major challenge for Greece in the coming years. Graph 3.3.3:Education and labour market for youth Source: Eurostat Ensuring that the long-term unemployed are not left behind in the recovery, is the main challenge for Greece and one that will need further investment. This can be achieved by ensuring: (i) that the overall framework conditions continue to be conducive to sustainable growth and job creation; and (ii) that policies aimed directly at improving employability prospects and promoting labour market participation are commensurate to the challenge. Greece is in the process of modernising its public employment service, with new tools and structures being put in place to improve the level of services provided to both jobseekers and employers, offering a more individualised approach and facilitating job matching. In addition to the reorganisation of the public employment service (which has also been reinforced with the hiring of additional qualified staff), the Greek authorities are reshaping the broader system of active labour market policies (ALMPs). This entails a shift to an open-framework delivery model, where a menu of labour market policies (ALMPs) would be available on a continuous basis to the unemployed, and the setting up of a continuous monitoring and evaluation system to inform on its future design. Steps have been taken to reduce the extent of undeclared work. Undeclared work has always been a significant feature of the Greek economy, characterised by a relatively high level of self-employment and a large share of micro- and small businesses. Addressing undeclared work is a complex task, particularly for a country in a difficult socioeconomic situation marked by high unemployment, a poor business environment and a high tax burden. In October 2016, a roadmap for fighting undeclared work was produced in consultation with the social partners, outlining a comprehensive strategy to address the phenomenon and promote a transition to the formal economy. To carry out this strategy, the Greek authorities adopted a detailed three-year action plan, which is now in its final year of implementation. Greece experienced a strong wage adjustment during the crisis, which helped rebalance the economy, but at a high cost for workers. In the public sector, salaries were cut to achieve the necessary fiscal savings. In the private sector, which was suffering from an unprecedented collapse of economic activity and a dramatic surge in unemployment, a number of measures were adopted to increase the margins of flexibility and allow firms to adapt to the new economic reality. In particular, firm-level negotiations were made the predominant level of wage bargaining, by suspending the ‘favourability principle’ (where firm-level agreements can only improve upon the terms set in higher-level agreements), setting a time limit to the validity of sectoral agreements, and no longer allowing them to be extended to the entire sector. In addition, the minimum wage (which used to be set autonomously by social partners) was made statutory, its level lowered (by 22 %) by a government decision, seniority top-ups were frozen and a sub-minimum wage rate for people under 25 was introduced. Wages are expected to recover, following a sizable increase in the minimum wage and with collective bargaining once again playing a stronger role in wage formation. Following the end of the European Stability Mechanism programme and a gradual economic recovery, the sectoral level has returned to be the main level of collective bargaining negotiations. Representative sectoral agreements can again be extended, and the ‘favourability principle’ has been re-instated. Since September 2018, ten sectoral agreements have been extended, resulting in the same minimum standards of employment being applied in the respective sectors throughout the country. This could imply some wage increases for workers not previously covered by the collective agreements, and the possible impact on competitiveness and employment is being monitored by the authorities. Furthermore, the government increased the minimum wage by 10.9 % on 1 February 2019, eliminating also the sub-minimum wage for workers under 25 years of age. This increase in the minimum wage leads in the medium term to higher risk of negative employment effects, especially on low-skilled, young workers and workers with a long tenure. With regard to overall wage developments, it will be for the social partners to ensure that the still very high unemployment and fragile financial situation of many Greek companies are properly taken into account when negotiating new collective agreements. Proper involvement of social partners in national policymaking needs to be ensured. During the crisis, social dialogue was characterised by very tense relations, with the government and social partners being unable to reach consensual solutions on how to help the country weather the recession. An attempt was made to improve the quality of social dialogue under the European Stability Mechanism programme between 2015 and 2018. In particular, the government was encouraged to actively involve social partners in the design and implementation of labour market policies. A welcome step was the revamping of the Supreme Labour Council’s role. The Supreme Labour Council is a tripartite body established to deal specifically with labour market policies. In 2017, it was confirmed as the main body responsible for monitoring collective dismissals under the new procedure, and for overseeing the action plan to tackle undeclared work. Currently, it is also responsible for verifying whether collective agreements fulfil the representativeness requirement for extension. However, there seems to be ample room to improve the social dialogue climate. For instance, social partners have complained that they are given insufficient time to provide reasoned opinions, while the Trade Union Confederation recently refused to take part in the consultation process for the revision of the minimum wage. 3.3.2.Social policies Though still difficult, the social situation should continue to improve in the coming years, thanks to the combined effect of the economic recovery and the full rollout of the social welfare reform. Incomes and living conditions deteriorated considerably with the crisis. The median equivalised disposable income () dropped by 35 % between 2009 and 2016 (from EUR 11 500 to EUR 7 500 per year), causing a sharp increase in absolute poverty, with the proportion of severe material deprivation () doubling from 11 % to 22 % of the Greek population, compared to the EU average of 6.9 % (European Commission 2018g). This was caused by the increase in long-term unemployment and the fall in wages, as unemployed people did not receive any form of income support after their unemployment benefits (which last 12 months) expired (), and by the limited capacity of the Greek welfare system to provide adequate protection against poverty (), with the exception of old-age poverty. In particular, in 2016, social transfers (other than pensions) were able to reduce the ‘at risk of poverty’ level by about four percentage points, while the average EU poverty reduction effect was double. Major steps have been taken in recent years to improve the efficiency, effectiveness and adequacy of the Greek social welfare system [see Box 3.3.1]. In particular: (i) a new guaranteed minimum income scheme was introduced in 2017; (ii) the system of family benefits was deeply reformed in 2018 to better address child poverty; and (iii) a new means-tested housing benefit is expected to be introduced in the course of 2019. The first signs of improvement became visible in 2017: (i) the decline in median disposable income finally came to a halt; (ii) severe material deprivation decreased; and (iii) at risk of poverty or social exclusion started to decline. The completion of the already initiated disability benefit reform and the review of the system of subsidies for local public transport are expected to further improve the efficiency of the social welfare system. Graph 3.3.4:Europe 2020 poverty indicators for Greece Source: Eurostat Greece is facing high income inequality, mainly due to the low redistributive power of the tax and benefit system. Income inequality has long been relatively high in Greece, and it remained stable during the crisis as the fall in incomes broadly affected the entire population. In 2017 % the disposable income of 20 % of the population with the highest income (top quintile) was 6.1 times that of the bottom 20 % of the population (bottom quintile), much above the EU average of 5.1. This is linked to a weak effect of taxes and benefits in reducing income inequality. In 2017, benefits reduced income inequality by only 20 %, as against an EU average of 40 %, while taxes had no inequality reducing effect. However, this should improve following the latest welfare reforms. Greece has taken major steps to improve the provision of social services, but major challenges remain. A network of ‘community centres’ — one-stop-shops where social assistance beneficiaries are offered access to various social services — has been set up at the local level (with the support of the European Social Fund), with the central administration ensuring proper coordination and monitoring. Such an integrated model of providing social services is considered in international literature to be highly effective. However, more investment would be needed to improve the level and quality of the services provided. De-institutionalisation also remains a key challenge. Significant shortcomings have been found with respect to residential care for children with disabilities, the lack of policies for alternative care settings, and the lack of suitable care for children and teenagers with mental health and behavioural problems. The procedures and criteria to determine the degree of disability are being reformed to reduce bureaucracy and align them more closely to the actual conditions of individuals with disabilities. However, a broader assessment is needed of the effectiveness of disability benefit policies in keeping individuals with disabilities out of poverty and ensuring that the required services — including facilitating access to the labour market — are available and accessible.

The social inclusion of migrants continues to be a challenge. Social indicators show huge gaps between Greek born and non-EU born. 43.1 % of non-EU born were at risk of poverty in 2017 against 17.4 % for Greek natives, a figure well above the EU average for non-EU born (30.8 %). A similar picture emerges when looking at severe material deprivation or in-work poverty. Unaccompanied minors form a large proportion of beneficiaries of international protection. There were more than 3 000 unaccompanied minors in Greece on 30 September 2018; 2 000 applied for asylum in 2016 and 2 500 in 2017. The Greek government is making efforts to address the needs of these children. For example, several ministerial decisions were adopted to increase educational support and harmonise the age assessment procedure in reception and identification and asylum procedures. A new law on guardianship intended to provide a legal guardian to every unaccompanied minor, has been adopted but is not yet operational. Adequate housing remains a major challenge and it is estimated that there are twice as many unaccompanied minors awaiting a place in a shelter as places currently available. In July 2018, the Greek government adopted a national integration strategy. The strategy focuses on the integration of those people benefiting from international protection and requesting such protection who are staying temporarily in the country and/or will remain after the recognition of protection status. It also aims to facilitate the return to legality of migrants who, due to the economic crisis are unable to maintain their legal status. The role of local authorities at regional and municipal level should also be strengthened. To put the integration strategy in motion, most of the measures will need EU funding, notably from the Asylum, Migration and Integration Fund and the Structural Funds. Investment priorities include financing the housing and accommodation needs of beneficiaries of international protection, their access to social welfare, to healthcare and vocational training w