Council Opinion of  14 March 2006  on the updated stability programme of Greece, 2005-2008
Date: 2006-03-14
Institutions: Council of the European Union
Subjects: Greece, budget estimate, economic forecasting, public finance, stability programme

5.4.2006

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Official Journal of the European Union

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(Information)

COUNCIL

COUNCIL OPINION

of 14 March 2006

on the updated stability programme of Greece, 2005-2008

(2006/C 82/01)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveil-
lance of budgetary positions and the surveillance and coordination of economic policies (1), and in particu-
lar Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

(3)

On 14 March 2006, the Council examined the updated stability programme of Greece, which
covers the period 2005 to 2008.

Over the last decade, driven by robust productivity growth, real GDP growth in Greece averaged
3,5 % and was among the highest in the EU. Sustained robust growth has led to strong real conver-
gence, accompanied by a dramatic fall in HICP inflation, which nevertheless remains well above the
EU average, and by rising external imbalances. The general government deficit, in spite of high
growth, remained on average well above 5 % of GDP and attained 6,6 % of GDP in 2004. Together
with large below-the-line operations,
it contributed to the accumulation of public debt which
remained close to or above 110 % of GDP during the last ten years.

On 5 July 2004, the Council decided that Greece was in excessive deficit. On 17 February 2005, the
Council decided to give notice to Greece, in accordance with Article 104(9) to correct the excessive
deficit by 2006. The Commission services' autumn 2004 forecast underlying this decision expected
the deficit to reach 5,5 % of GDP in 2004. In its opinion of 6 April 2005 on the March 2005
revised updated stability programme, covering the period 2004-2007, the Council invited Greece to
implement permanent measures to correct the excessive deficit by 2006 at the latest, reduce the
cyclically-adjusted deficit by at least 0,5 % of GDP from 2007 onward, ensure a faster debt reduction
path, implement the enacted pension reforms to ensure the sustainability of public finances, and
further improve the collection and processing of general government data.

(1) OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The

documents referred to in this text can be found at the following website:
http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm

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(4)

(5)

(6)

(7)

(8)

(9)

The update estimates the 2005 deficit at 4,3 % of GDP (1), which compares with an estimate of
3,7 % of GDP in the Commission services' autumn forecast and in the previous update. The differ-
ence with the latter mainly reflects carry-over effects of the September 2005 revisions of 2002-
2004 deficit outcomes, notably leading to a revised 2004 deficit of 6,6 % of GDP, while the
Commission services' autumn 2005 forecasts included one-off revenues from an announced securiti-
sation operation, which has not taken place.

The update was submitted on 21 December 2005, three weeks later than the deadline specified in
the new Code of Conduct on the content and format of stability and convergence programmes. The
new programme broadly follows the model structure and data provision requirements for stability
and convergence programmes specified in the new Code of Conduct (2).

The macroeconomic scenario underlying the programme expects real GDP growth will pick up
from 3,6 % in 2005 to 3,9 % on average over the rest of the programme period. Assessed against
currently available information, this scenario appears to be based on favourable growth assumptions,
with the projected evolution of growth in the medium term appears to be on the high side, implying
a relatively high estimate of the potential output growth. The programme's projections for inflation
appear realistic.

The update's budgetary strategy aims at reducing the deficit below the 3 % of GDP threshold by
2006, in compliance with the Council notice under Article 104(9), and at pursuing fiscal consolida-
tion towards a balanced budget. The fiscal correction is frontloaded in 2006. The deficit declines
from 4,3 % of GDP in 2005 to 2,6 % in 2006 and, then, to 1,7 % in 2008. The time profile for the
primary surplus is similar, improving from 0,9 % of GDP to 2,8 %. The projected adjustment is
achieved through both higher tax revenues and cuts in expenditures (interest payments and public
consumption). One-off revenues worth 0,6 % of GDP are envisaged for 2006. The favourable macro-
economic scenario partly explains the frontloading of the adjustment in the current update when
compared with the previous one.

According to the calculations of the Commission services on the basis of data in the programme
and the commonly agreed methodology, the structural balance (the general government budget in
cyclically-adjusted terms net of one off and other temporary measures) is projected to improve from
-4,8 % of GDP in 2005 to -2,4 % of GDP in 2008, thus providing for a reduction of around 0,6 %
of GDP per year. The update clearly sets a medium-term objective (MTO) for the budgetary position
as meant in the Stability and Growth Pact of a balanced budget in structural terms, which the
update does not envisage to achieve by 2008. As the MTO identified in the programme is more
demanding than the minimum benchmark (estimated at -1,25 %), its achievement should fulfil the
aim of providing a safety margin, against the occurrence of an excessive deficit. The MTO set in the
programme is at an appropriate level under the current assessment as it lies within the range indi-
cated for euro area and ERM II Member States in the Stability and Growth Pact and the code of
conduct and therefore, adequately reflects the debt ratio and average potential output growth in the
long term.

The budgetary outcomes could be worse than projected in the programme. There are risks asso-
ciated with the favourable macroeconomic scenario and information on measures envisaged at the
end of the programme is lacking. Moreover, there are still some pending statistical issues with Euro-
stat (the estimation of surpluses of social security funds and of local governments) which might lead
to an upward revision of deficit figures until 2005, with possible carry-over effects in 2006 and
beyond, while the one-offs planned for 2006 are still pending of Eurostat's classification as deficit-
reducing.

(1) This figure does not include 0,3 % of GDP (EUR 512 million) corresponding to the reimbursement of European
Regional Development funds. However, being a genuine one-off expenditure, its consideration would not have any
impact on the fiscal effort in 2005, neither on the 2006-2008 adjustment path.

(2) The programme has a gap in the compulsory data (Exchange rates are presented in terms of EUR/USD instead of
nominal effective exchange rates) and does not provide all optional data prescribed by the new code of conduct.

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(10)

Based on current information, and conditional on the risks above, Greece is broadly on track to
correct its excessive deficit by the 2006 deadline set by the Council. The planned 2005 deficit seems
consistent with a rigorous implementation of the 2005 budget, while the 2006 budget targets a
deficit of 2,6 % of GDP. Since this includes one-off revenues worth 0,6 % of GDP, the excessive
deficit would not be corrected in 2006 on a permanent basis. However, the structural correction in
2006 is above the minimum 0,6 % of GDP required by the Council. By contrast, the correction is
less than 0,5 % of GDP in 2008, when Greece should still enjoy an economic situation of good
times. Moreover, according to the calculations of the Commission services on the basis of data in
the programme and the commonly agreed methodology the cyclically-adjusted budget balance is not
expected to respect the minimum benchmark within the programme period.

(11)

The debt ratio is estimated to have reached around 108 % of GDP in 2005, far above the 60 % of
GDP Treaty reference value. The programme projects the debt ratio to decline by more than eleven
percentage points over the programme period, mainly driven by the projected improvement in the
primary surpluses, and lower debt-increasing financial operations. The evolution of the debt ratio is
likely to be less favourable than projected in the programme given (1) the risks to the budgetary
targets mentioned above; (2) uncertainty about the stock-flow adjustment, which has tended to be
large and predominantly debt-increasing in the past. In view of this risk assessment, the debt ratio
seems to be sufficiently diminishing towards the reference value.

(12) With regard to the sustainability of public finances (1), Greece appears to be at high risk on grounds
of the projected budgetary costs of ageing populations. The debt ratio is currently the highest in the
EU, and is projected to remain at very high levels throughout the projection period up to 2050. It is
therefore necessary to implement rigorously the planned consolidation of public finances over the
medium-term and to further strengthen the budgetary position in order to reduce risks to public
finance sustainability. At the same time, the projected increase of government expenditure, notably
on pensions, over the projection period is expected to put a high burden on public finances. To this
end, resolutely implementing measures enacted and designing and carrying out additional structural
reforms, notably on pensions, are necessary so as to reduce the risks to public finance sustainability.

(13)

The envisaged measures in the area of public finances are broadly consistent with the broad
economic policy guidelines included in the integrated guidelines for the period 2005-2008. In par-
ticular, the programme is consistent with the guideline (i) to secure economic stability; (ii) to safe-
guard economic and fiscal sustainability, and (iii) to promote a growth-and employment-oriented
and efficient allocation of resources However, actions to tackle important challenges on the pension
system are postponed to a future social agreement.

(14)

The National Reform Programme of Greece, submitted on 15 October 2005 in the context of the
renewed Lisbon strategy for growth and jobs, identifies the following challenges with significant
implications for public finances: (i) long-term sustainability of public finances;(ii) employment and
education;(iii) business environment and competition; and (iv) R&D and innovation. Its budgetary
implications are fully reflected in the update. The measures in the area of public finances envisaged
in the stability programme are broadly in line with the actions foreseen in the National Reform
Programme. In particular, the programme outlines, among others, measures to reduce the corporate
tax rate to 25 % by 2007, to fight against tax evasion, reform the property taxation, and to rationa-
lise healthcare spending.

(1) Details on long-term sustainability are provided in the technical assessment of the programme by the Commission

services
(http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm).

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In the view of the above assessment, the Council welcomes the efforts undertaken so far and the priority
given by the government to a permanent reduction of the deficit. The Council notes that, overall, the
programme is consistent with the correction of the excessive deficit by 2006, subject to a full implementa-
tion of the envisaged adjustment and conditional on the effects on the planned deficits of possible further
statistical revisions of budgetary data. In the light of the recommendations made by the Council under
Article 104(9) of 17 February 2005, the Council invites Greece to:

(i) implement the necessary permanent measures leading to the correction of the excessive deficit by

2006 at the latest;

(ii) further pursue the reduction of the deficit in structural terms towards the MTO set in the programme,

taking advantage of good economic times to reduce primary spending;

(iii) enhance the efforts to identify and control factors other than net borrowing that contribute to the
in order to ensure that the debt ratio is sufficiently diminishing and

change in the debt levels,
approaching the reference value at a satisfactory pace;

(iv) control public pension expenditure, resolutely implement the approved pension reforms and carry out

additional structural reform to ensure the long term sustainability of the public finances;

(v) further improve the collection and processing of the general government data, notably by enhancing
the mechanisms that ensure a prompt and correct supply of budgetary data, in particular on social
security.

Comparison of key macroeconomic and budgetary projections

Real GDP
(% change)

HICP inflation
(%)

SP Dec 2005

COM Nov 2005

SP March 2005

SP Dec 2005

COM Nov 2005

SP March 2005

Output gap
(% of potential GDP)

SP Dec 2005 (1)

COM Nov 2005 (5)

SP March 2005 (1)

2004

2005

2006

2007

2008

4,7

4,7

4,2

3,0

3,1

3,0

1,4

2,0

2,1

3,6

3,5

2,9

3,5

3,5

n.a

1,1

2,0

1,6

3,8

3,4

3,0

3,2

3,1

n.a

1,1

2,0

1,5

3,8

3,4

3,0

3,0

3,0

n.a

1,1

2,2

1,5

4,0

n.a.

n.a.

2,7

n.a.

n.a.

1,5

n.a.

n.a.

General government
balance
(% of GDP)

Primary balance
(% of GDP)

SP Dec 2005

– 6,6

– 4,3

– 2,6

– 2,3

– 1,7

COM Nov 2005

– 6,6

– 3,7

– 3,8

– 3,8

SP March 2005

– 6,1

– 3,7

– 2,9

– 2,4

SP Dec 2005

COM Nov 2005

SP March 2005

– 0,9

– 0,9

– 0,4

0,9

1,7

1,8

2,3

1,2

2,7

2,4

0,9

3,3

n.a.

n.a.

2,8

n.a.

n.a.

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Cyclically-adjusted
balance
(% of GDP)

Structural balance (2)
(% of GDP)

Government gross debt
(% of GDP)

SP Dec 2005 (1)

COM Nov 2005

SP March 2005 (1)

SP Dec 2005 (3)

COM Nov 2005 (4)

SP March 2005

SP Dec 2005

COM Nov 2005

SP March 2005

2004

2005

2006

2007

2008

– 7,2

– 7,5

– 7,0

– 7,2

– 7,5

– 7,0

109,3

109,3

110,5

– 4,8

– 4,5

– 4,4

– 4,8

– 5,3

– 4,4

107,9

107,9

109,5

– 3,1

– 4,6

– 3,5

– 3,7

– 4,6

– 3,5

104,8

106,8

107,2

– 2,8

– 4,8

– 3,0

– 2,8

– 4,8

– 3,0

– 2,4

n.a.

n.a.

– 2,4

n.a.

n.a.

101,1

96,8

106

104,7

n.a.

n.a.

Notes:
(1) Commission services calculations on the basis of the information in the programme
(2) Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures
(3) One-off and other temporary measures taken from the programme (0.6% of GDP in 2006)
(4) One-off and other temporary measures taken from the Commission services' autumn 2005 forecast (0.8% of GDP in 2005)
(5) Based on estimated potential growth of 3.2%, 3.5%, 3.4% and 3.2% respectively in the period 2004-2007.

Source:
Stability programme (SP); Commission services' autumn 2005 economic forecasts (COM); Commission services' calculations