Council opinion of 27 February 2007 on the updated stability programme of Greece, 2006-2009
Date: 2007-02-27
Institutions: Council of the European Union
Subjects: Greece, budget estimate, economic forecasting, public finance, stability programme

27.3.2007

EN

Official Journal of the European Union

C 70/9

COUNCIL OPINION

of 27 February 2007

on the updated stability programme of Greece, 2006-2009

(2007/C 70/03)

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 particular
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)

(4)

On 27 February 2007 the Council examined the updated stability programme of Greece, which
covers the period 2006 to 2009 (2) (3).

The macroeconomic scenario underlying the programme envisages that real GDP growth will be
broadly stable at around 4 % per year. Assessed against currently available information, this scenario
appears to be based on plausible growth assumption for 2006 and 2007 but on favourable ones
thereafter when the projected evolution of growth appears to be on the high side. The programme's
projections for inflation appear to be on the low side in the outer years of the programme period.

For 2006, the general government deficit is estimated at 2,6 % of GDP in the Commission services'
autumn 2006 forecast and in the new update, fully in line with the target set in the previous update
of the stability programme. Total expenditures achieved the target set in the 2006 budget. While the
main categories of expenditure broadly achieved the targets, a reduction in social transfers other than
in kind fully compensated a ½ % of GDP overrun in public investment. Total revenues were margin-
ally higher than expected. One-off measures were partly substituted by permanent measures imple-
mented in the middle of the year, namely increases of the excise tax on fuel and cigarettes, and a tax
increase on mobile connection bills. Revenues from these permanent measures compensated for the
reduction in one-off revenues from 0,6 % of GDP set in the 2006 budget to 0,4 % of GDP.

The budgetary strategy in the programme aims at correcting the excessive deficit in 2006. Thereafter,
the government deficit is planned to continue narrowing steadily over the programme period, to
1,2 % of GDP in 2009. The deficit reduction by 1½ percentage point of GDP between 2006 and
2009 is spread almost equally between revenue increase and expenditure reduction. On the revenue
side, total revenue is expected to increase by ¾ p.p. of GDP, mainly driven by indirect taxes and social
contributions. On the expenditure side, total expenditure is projected to fall by around ¾ p.p. of GDP
over the same period, of which ½ p.p., corresponds to lower interest payments. As a result, reduc-
tions in primary expenditure are projected to be limited to just ¼ p.p.. Social transfers are projected
to increase by ½ p.p., which would be more than compensated by reductions amounting ¾ p.p. in
other expenditure categories, mainly collective consumption. The primary surplus would improve by
around 1 percentage point over the programme period, to close to 3 % of GDP by 2009. Although,

(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

(2) The update was submitted 2 weeks beyond the 1 December deadline set in the code of conduct.
(3) The Greek authorities have transmitted to Eurostat new GDP data for the period 1995-2005, showing a sharp upward revi-
sion of GDP levels. This revision was carried out within the regular assessment of compliance with Eurostat's statistical
practices. Eurostat is currently reviewing these data. The updated Greek stability programme and its assessment are based
on unrevised GDP data. Eurostat has lifted its reservations on historical Greek budgetary data.

C 70/10

EN

Official Journal of the European Union

27.3.2007

compared with the previous programme, the targets for 2006-2008 are broadly unchanged with the
same macroeconomic scenario, the current adjustment in 2006 is more significant since the deficit
outcome for 2005 (5,2 % of GDP) is higher than projected in the update of December 2005 (4,3 %
of GDP).

(5)

(6)

(7)

(8)

(9)

The structural balance (i.e.
the cyclically-adjusted balance net of one-off and other temporary
measures) calculated according to the commonly agreed methodology is planned to improve from a
deficit of around 3½ % of GDP in 2006 to 1¾ % at the end of the programme period (2009). As in
the previous update of the stability programme, the medium-term objective (MTO) for the budgetary
position presented in the programme is balanced or in surplus in structural terms, which the
programme does not aim to achieve within the programme period. As the MTO is more demanding
than the minimum benchmark (estimated at a structural deficit of around 1½ % of GDP), achieving it
should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. The
MTO lies within the range indicated for euro-area and ERM II Member States in the Stability and
Growth Pact and the code of conduct and adequately reflects the debt ratio and average potential
output growth in the long term.

The risks to the budgetary projections in the programme appear broadly balanced until 2007 but the
budgetary outcomes could be worse than projected in the programme thereafter. In particular, for
2008 and 2009, the programme does not provide sufficient information on measures envisaged and
is based on a favourable macroeconomic scenario. Based on past experience, and although no slip-
pages have been recorded for the last two years, risks of expenditure overruns over the programme
period can not be excluded, while revenue shortfalls may materialise if the announced measures to
fight tax evasion would turn out ineffective.

In view of this risk assessment, the budgetary stance in the programme is consistent with a correction
of the excessive deficit by 2006 as recommended by the Council. However, the budgetary stance does
not seem to provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold
with normal macroeconomic fluctuations within the programme's horizon. In the years following the
correction of the excessive deficit, Greece is expected to continue to experience good times. In view
of this assessment, the pace of the adjustment towards the MTO implied by the programme should
be strengthened, especially after 2007, to be in line with the Stability and Growth Pact, which speci-
fies that, for euro-area and ERM II Member States, the annual improvement in the structural balance
should be 0,5 % of GDP as a benchmark and that the adjustment should be higher in good economic
times and could be lower in bad economic times.

Government gross debt is estimated to have reached 104 % of GDP in 2006, far above the 60 % of
GDP Treaty reference value. The programme projects the debt ratio to gradually decline by almost 13
percentage points of GDP over the programme period, while stock-flow adjustments are diminishing
rapidly starting from 2007. The evolution of the debt ratio after 2007 might be less favourable than
projected in the programme given the favourable growth projections and the risks to the deficit
targets mentioned above. Nevertheless, in view of this risk assessment, the debt ratio seems to be
sufficiently diminishing towards the reference value over the programme period.

The long-term budgetary impact of ageing in Greece is uncertain as long-term projections of pension
expenditure are not available; however, it is very likely to be well above the EU average; according to
the latest available information from the 2002 updated Greek stability programme, a significant
increase in pension expenditure as a share of GDP is projected over the long term. The initial
budgetary position, albeit improved compared with 2005, constitutes a significant risk to sustainable
public finances even before considering the long-term budgetary impact of an ageing population.
Moreover, the current level of gross debt is well above the Treaty reference value and reducing it
requires achieving high primary surpluses for a long period of time. Consolidating the public finances
as planned, together with urgent reform measures aimed at containing the likely significant increase
in age-related expenditures, would contribute to reducing risks to the long-term sustainability of
public finances. Overall, Greece appears to be at high risk with regard to the sustainability of public
finances. The availability of long-term projections of pension expenditure would improve the assess-
ment of long term budgetary sustainability.

27.3.2007

EN

Official Journal of the European Union

C 70/11

(10)

impact of the
The stability programme does not contain a qualitative assessment of the overall
October 2006 implementation report of the national reform programme within the medium-term
fiscal strategy. In addition, it provides no systematic information on the direct budgetary costs or
savings of the main reforms envisaged in the national reform programme and, excluding 2007, its
budgetary projections do not explicitly take into account the public finance implications of the
actions outlined in the national reform programme. Nevertheless, the measures in the area of public
finances envisaged in the stability programme seem consistent with those foreseen in the national
reform programme. In particular, the majority of the measures and actions planned for 2007 in the
implementation report of the national reform programme seem to have been included in the 2007
Budget Law, even if the lack of detailed description of the measures and their implementation raises
some doubts over the budgetary implications.

(11)

The budgetary strategy in the programme is broadly consistent with the broad economic policy
guidelines included in the integrated guidelines for the period 2005-2008.

(12) As regards the data requirements specified in the code of conduct for stability and convergence

programmes, the programme provides all required and most of the optional data (1).

The Council considers that, following a significant fiscal consolidation and in a context of strong growth
prospects, the programme is consistent with the correction of the excessive deficit by 2006 and it envisages
progress towards the MTO. However, the MTO would not be attained within the programme period. The
consolidation, which also relies on a significant decline in the interest burden, is subject to some risks as
specific measures are only partially spelled out after 2007.

In view of the above assessment, Greece is invited to:

(i) taking into account the good times, following the correction of the excessive deficit, strengthen the

adjustment towards the MTO and ensure that the debt-to-GDP ratio is reduced accordingly;

(ii) continue improving the budgetary process by further increasing its transparency, spelling out the
budgetary strategy within a longer time perspective and effectively implementing mechanisms to
monitor and control primary expenditure;

(iii) in view of the very high level of debt and the projected increase in age-related expenditure, improve the
long-term sustainability of public finances by achieving the MTO, controlling public pension and health-
care expenditures and resolutely implementing ambitious reforms; and produce as soon as possible
long-term projections for age-related expenditure.

Comparison of key macroeconomic and budgetary projections

Real GDP
(% change)

HICP inflation
(%)

SP Dec 2006

COM Nov 2006

SP Dec 2005

SP Dec 2006

COM Nov 2006

SP Dec 2005

Output gap
(% of potential GDP)

SP Dec 2006 (1)

COM Nov 2006 (5)

SP Dec 2005 (1)

2005

2006

2007

2008

2009

3,7

3,7

3,6

3,5

3,5

3,5

0,9

1,5

1,1

4,0

3,8

3,8

3,3

3,3

3,2

1,0

1,5

1,1

3,9

3,7

3,8

3,0

3,3

3,0

0,9

1,5

1,1

4,0

3,7

4,0

2,8

3,3

2,7

1,1

1,8

1,5

4,1

n.a.

n.a.

2,6

n.a.

n.a.

1,5

n.a.

n.a.

(1) In particular, data on general government expenditure by function, long-term sustainability and contributions to potential

GDP growth are missing.

C 70/12

EN

Official Journal of the European Union

27.3.2007

General government
balance
(% of GDP)

SP Dec 2006

COM Nov 2006

Primary balance
(% of GDP)

Cyclically-adjusted
balance
(% of GDP)

Structural balance (2)
(% of GDP)

Government gross debt
(% of GDP)

SP Dec 2005

SP Dec 2006

COM Nov 2006

SP Dec 2005

SP Dec 2006 (1)

COM Nov 2006

SP Dec 2005 (1)

SP Dec 2006 (3)

COM Nov 2006 (4)

SP Dec 2005

SP Dec 2006

COM Nov 2006

SP Dec 2005

2005

2006

2007

2008

2009

– 5,2

– 5,2

– 4,3

– 0,4

– 0,4

0,9

– 5,6

– 5,9

– 4,8

– 5,6

– 5,9

– 4,8

107,5

107,5

107,9

– 2,6

– 2,6

– 2,6

2,0

2,0

2,3

– 3,0

– 3,3

– 3,1

– 3,4

– 3,7

– 3,7

104,1

104,8

104,8

– 2,4

– 2,6

– 2,3

2,0

1,8

2,4

– 2,8

– 3,3

– 2,8

– 2,8

– 3,3

– 2,8

100,1

101,0

101,1

– 1,8

– 2,4

– 1,7

2,4

1,7

2,8

– 2,3

– 3,1

– 2,4

– 2,3

– 3,1

– 2,4

95,9

96,4

96,8

– 1,2

n.a.

n.a.

2,9

n.a.

n.a.

– 1,8

n.a.

n.a.

– 1,8

n.a.

n.a.

91,3

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 (0,4 % of GDP in 2006).
(4) One-off and other temporary measures taken from the Commission services' autumn 2006 forecast (0,4 % of GDP in 2006).
(5) Based on estimated potential growth of 3,7 %, 3,8 %, 3,6 % and 3,5 % respectively in the period 2005-2008.

Source:
Stability programme (SP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations