Council opinion of 4 March 2008 on the updated stability programme of Greece, 2007-2010
Date: 2008-03-04
Institutions: Council of the European Union
Subjects: Greece, budget estimate, economic forecasting, public finance, stability programme

20.3.2008

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COUNCIL OPINION

of 4 March 2008

on the updated stability programme of Greece, 2007-2010

(2008/C 74/08)

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)

On 4 March 2008, the Council examined the updated stability programme of Greece, which covers
the period 2007 to 2010 (2).

Over the recent years, Greece has recorded high growth rates driven by buoyant private consumption
and dynamic investment activity, while employment growth accelerated significantly. However, rela-
tively high inflation differentials with the euro area persist, and, in spite of a significant productivity
growth, is leading to competitiveness losses.

The high and widening external imbalances, that are partly explained by one of the highest invest-
if continued in the medium term, might affect the performance of the
ment ratios in the EU,
economy. In this context, fiscal policy has a crucial role to play in stabilising the economy, improving
its efficiency and diminishing the risks associated to overheating and widening external imbalances.
Significant progress has been made since 2004 to consolidate public finances in a sustainable
manner. On that basis, controlling current primary expenditure, preventing a pro-cyclical stance of
fiscal policy and stepping up public spending efficiency are paramount to further securing fiscal
discipline and improving the quality of public finances. Given the still high public debt level, the
long-term sustainability of public finances greatly depends on achieving and sustaining sound
budgetary positions, continuing the on-going reforms in the healthcare system and implementing
comprehensive reform of the pension system (3).

The macroeconomic scenario underlying the programme envisages that real GDP growth will be
sustained at about 4 % on average over the programme period. Assessed against currently available
information (4), this scenario appears to be based on favourable growth assumptions, in particular in
the outer years. In particular, private consumption and investment growth are projected in the stabi-
lity programme to remain favourable, on the back of somewhat high employment growth and an
optimistic assessment of the impact of some implemented measures, such as the second phase of tax
reform including further reduction in personal tax rates, legislated in 2006, the investment incentive
law and the speeding-up of PPP (public-private partnerships) projects.

(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://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2) The update was submitted 3 weeks beyond the 1 December deadline set in the code of conduct.
(3) On 15 February 2008, the Greek Prime Minister presented the main pillars of the envisaged pension reform to the General

Assembly of the Parliament.

(4) The assessment takes into account notably the Commission services' autumn 2007 forecast and the Commission assess-

ment of the October 2007 implementation report of the national reform programme.

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Moreover, the evolution of labour cost may induce inflationary pressures, despite the wage restraint
in the public sector, while competitiveness could deteriorate more than foreseen in the programme.
In addition, on recent information, the inflation projection may be subject to upside risks.

(4)

(5)

(6)

According to the programme,
for 2007 is estimated to have
the general government deficit
rebounded to 2,7 % of GDP in 2007 (from 2,5 % in 2006), compared to the target deficit of 2,2 %
of GDP set in the previous update (1). This deviation of 0,5 percentage point of GDP reflects, in addi-
tion to a small negative base effect, an expenditure overrun of some 0,25 percentage point of GDP
and a net deficit-increasing impact of one-offs of 0,3 percentage point of GDP (2). The projected
deficit outturn in the Commission services' autumn 2007 forecast is 2,9 % of GDP, 0,25 of a
tax
percentage point higher than in the programme, based on a more prudent assessment of
revenues. The estimated narrowing of the structural government deficit (i.e. the cyclically-adjusted
deficit net of one-off and other temporary measures) in 2007 by some 0,5 percentage point of GDP
is partly in line with the invitation in the Council opinion of 27 February 2007 on the previous
update of the stability programme (3) to ‘strengthen the adjustment towards the MTO’. The Council
notes that the implementation of the 2007 budget is also not fully consistent with the April 2007
Eurogroup orientations for budgetary policies.

The budgetary strategy outlined in the programme aims at speeding up fiscal consolidation towards
the medium-term objective (MTO) of a balanced position in structural terms, by reducing the struc-
tural deficit by more than 0,5 percentage point of GDP per year, in line with the invitation of Council
opinion of 27 February 2007 on the previous update of the stability programme ‘to strengthen the
adjustment towards the MTO’. In particular, the MTO is planned to be achieved earlier than the target
year set in the previous update (2012), although still beyond the programme horizon (2010). The
programme aims at attaining a balanced position in nominal terms by 2010, from a deficit of 2,75 %
of GDP in 2007. The primary surplus is projected to improve to 3,75 % of GDP in 2010 from
1,25 % in 2007. The planned adjustment is mainly revenue-based, stemming partly from the imple-
mentation of discretionary measures in indirect taxes and real estate taxation and partly from
improving the tax system and intensifying the fight against tax evasion and fraud. While overall
expenditure declines only marginally in terms of GDP, its composition is planned to shift, with social
payments rising by 1 percentage point of GDP, broadly offset by cuts in intermediate consumption.
Taking into account the mechanical impact of the recent GDP revision, the budgetary target presented
in the programme is broadly similar to the one in the previous update for 2008 and improved for
2009 against a broadly comparable macroeconomic scenario. Government gross debt, estimated at
93,4 % of GDP in 2007, clearly above the 60 % of GDP Treaty reference value, is projected to decline
by over 10 percentage points over the programme period.

The budgetary outcomes could be worse than projected in the programme. The increase in tax
revenues planned for 2008 is based on slightly favourable assumptions and reflects a possibly opti-
mistic assessment of the efforts to avoid tax evasion and fraud. However, the effective implementation
of revenue-enhancing discretionary measures in 2008 and the envisaged reforms to improve the insti-
tutional setting and transparency of the budgetary process based on the performance/programme
budgeting on a multi-annual basis, are expected to generate positive effects on the budgetary outcome
in the medium-term, although the precise budgetary impact remains uncertain. For 2009 and 2010,
the programme does not underpin budgetary targets with corresponding measures, while it assumes
a favourable macroeconomic scenario. In view of these risks to the budgetary targets, which are
compounded by uncertainty about sizable future stock-flow adjustments, the evolution of the debt
ratio could be less favourable than projected in the programme, especially after 2008.

(7)

In view of this risk assessment, the budgetary stance in the update may not be sufficient to ensure
that the MTO is achieved just after the end of the programme period, as implied by the programme.
In addition, a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal

(1) Due to the recent upward revision of the Greek GDP series by 9,6 % from 2000 onwards, the update's targets are not
directly comparable to the ones in the previous update. In order to allow for a meaningful comparison, the figures from the
previous update quoted here have been recalculated to take account of the denominator effect introduced by the GDP revi-
sion.

(2) This net one-off impact is the combination of deficit-increasing one-offs of 0,7 percentage point (mainly related to arrears
to the EU budget following the GDP revision, but also to expenditures related to the summer forest fires) and deficit-redu-
cing measures of 0,4 percentage point of GDP (deferred payments by banks to the pension funds).

(3) OJ C 70, 27.3.2007, p. 11.

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macroeconomic fluctuations may not be provided before 2010. The update plans an adjustment
towards the MTO above 0,5 percentage point of GDP per year, in line with the Stability and Growth
Pact and higher compared with the previous update. However, the adjustment should be backed up
with measures from 2009 onwards, in view of the risks identified above. The Council notes that as
the structural adjustment planned for 2008 is higher than foreseen in the previous update, the plans
for 2008 are consistent with the April 2007 Eurogroup orientations for budgetary policies. However
the risks identified above should be addressed. Finally, taking into account these risks, the debt ratio
seems to be sufficiently diminishing towards the reference value over the programme period.
However it remains much higher than the reference value of 60 % throughout the update horizon. In
addition, the adjustment path has slowed down and is conditional on ambitious deficit targets.

(8)

(9)

Greece appears to be at high risk with regard to the sustainability of public finances. The long-term
budgetary impact of ageing cannot be duly assessed as long as commonly agreed long-term
projections of pension expenditure are not available. However, it is likely to be well above the EU
average. According to the latest available information dating from the 2002 stability programme
update, a substantial
increase in pension expenditure as a share of GDP is projected over the
long-term. The budgetary position in 2007 as estimated in the programme, which is similar to the
starting position of the previous programme, constitutes a 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. Reducing it requires achieving high
primary surpluses for a long period of time. Consolidating the public finances as planned together
with continuing the on-going reform in the healthcare system and reforming the pension system
aiming at containing the likely significant increase in age-related expenditures would contribute to
reducing risks to the long-term sustainability of public finances.

The stability programme is consistent to some extent with the October 2007 implementation
report of the national reform programme (NRP). While the measures in the area of public finances
envisaged in the stability programme are consistent with those foreseen in the NRP, the stability
programme contains only a partial qualitative assessment of the overall impact of the NRP within the
medium-term fiscal strategy. According to the programme, the majority of the measures and actions
planned for 2008, included in the implementation report of the NRP, and the relevant budgetary
provisions have been included in the 2008 Budget Law. However, no systematic information on the
direct budgetary costs or savings of the main reforms envisaged in the national reform programme is
provided and, excluding 2008, budgetary projections do not explicitly take into account the public
finance implications of the actions outlined in the implementation report of the NRP.

(10)

The budgetary strategy in the programme is broadly consistent with the country-specific broad
economic policy guidelines and the guidelines for euro area Member States in the area of budgetary
policies issued in the context of the Lisbon strategy.

(11) As regards the data requirements specified in the code of conduct for stability and convergence
programmes, the programme provides some gaps in the required and optional data (1). However, it
deviates on some material points from the model structure specified in the code of conduct (2).

The overall conclusion is that the programme envisages speeding up the reduction of the budget deficit, in a
context of strong growth, to achieve a nominal budget balance in 2010, although the MTO is not planned
to be achieved in structural terms within the programme period. This consolidation, which relies on a
prompt implementation of the 2008 budget and a significant increase in tax revenues throughout the

(1) In particular, general government expenditure by function, long-term sustainability of public finances and information on
debt developments (differences between cash and accruals, net accumulation of financial assets, valuation effects and other,
liquid financial assets, net financial debt) are not provided.

(2) In particular, Section 6 (‘Long-term sustainability of public finances’) provides limited information on pensions and refers

to the projections included in the December 2002 update of the stability programme.

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programme horizon, is subject to risks as the underlying macroeconomic scenario is favourable and the
revenue-enhancing measures are not fully spelled out after 2008. Moreover, there are uncertainties about
sizeable projected stock-flow adjustments. Also, the reliance on results from the fight against tax evasion is
significant and only partly backed up with reforms in tax collection. In addition, the planned cutbacks in
some expenditure items (as a share of GDP) are not substantiated by specific measures and partly offset by
plans to increase social payments. Ensuring a strong fiscal consolidation path would help address the imbal-
ances of the Greek economy, notably persistent inflation, competitiveness losses and a large external deficit.
The level of debt which remains among the highest in the euro area, coupled with the projected increase in
age-related spending, will affect negatively the long-term sustainability of public finances, which remains at
high risk.

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

(i) carry out the envisaged adjustment towards the MTO, reduce the debt-to-GDP ratio accordingly, and use
any budgetary overperformance to speed up the consolidation process to reach the MTO within the
programme period;

(ii) pursue the ongoing reforms of tax administration and continue improving the budgetary process by
further increasing its transparency, spelling out the medium-term budgetary framework and effectively
implementing mechanisms to monitor, control and improve the efficiency of primary expenditure;

(iii) in view of the level of debt and the projected increase in age-related expenditure, improve the long-term
sustainability of public finances by achieving the MTO, continuing the on-going reforms in the health-
care system and reforming the pension system; updated long-term projections for age-related expendi-
ture should be produced as soon as possible.

The Council also notes that such policy actions would be consistent with the April 2007 Eurogroup orienta-
tions for fiscal policies.

Greece is also invited to improve compliance with the submission deadline for stability and convergence
programmes specified in the code of conduct.

Comparison of key macroeconomic and budgetary projections (1)

Real GDP
(% change)

HICP inflation
(%)

SP Dec 2007

COM Nov 2007

SP Dec 2006

SP Dec 2007

COM Nov 2007

SP Dec 2006

Output gap (2)
(% of potential GDP)

SP Dec 2007

COM Nov 2007 (3)

SP Dec 2006

2006

2007

2008

2009

2010

4,2

4,3

4,0

3,3

3,3

3,3

0,8

1,1

1,0

4,1

4,1

3,9

2,9

2,8

3,3

0,8

1,3

0,9

4,0

3,8

4,0

2,8

3,1

2,8

0,8

1,2

1,1

4,0

3,7

4,1

2,7

3,1

2,6

0,9

1,2

1,5

4,0

n.a.

n.a.

2,6

n.a.

n.a.

1,1

n.a.

n.a.

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Net lending/borrowing
vis-à-vis the rest of the
world
(% of GDP)

General government
balance
(% of GDP)

Primary balance
(% of GDP)

Cyclically-adjusted
balance (2)
(% of GDP)

Structural balance (4)
(% of GDP)

Government gross debt
(% of GDP)

2006

2007

2008

2009

2010

SP Dec 2007

– 12,3

– 12,8

– 12,7

– 12,5

– 12,2

COM Nov 2007

SP Dec 2006

SP Dec 2007

COM Nov 2007

SP Dec 2006

SP Dec 2006 adj

SP Dec 2007

COM Nov 2007

SP Dec 2006

SP Dec 2007

COM Nov 2007

SP Dec 2006

SP Dec 2007

COM Nov 2007

SP Dec 2006

SP Dec 2007

COM Nov 2007

– 9,6

– 8,9

– 2,5

– 2,5

– 2,6

– 2,4

1,6

1,6

2,0

– 2,8

– 3,0

– 3,0

– 3,2

– 3,5

– 3,4

95,3

95,3

– 9,4

– 7,9

– 2,7

– 2,9

– 2,4

– 2,2

1,2

1,0

2,0

– 3,1

– 3,4

– 2,8

– 2,8

– 3,1

– 2,8

93,4

93,7

SP Dec 2006

104,1

100,1

SP Dec 2006 adj

95,0

91,3

– 9,5

– 7,6

– 1,6

– 1,8

– 1,8

– 1,6

2,4

2,1

2,4

– 1,9

– 2,4

– 2,3

– 2,0

– 2,4

– 2,3

91,0

91,1

95,9

87,5

– 9,4

– 7,3

– 0,8

– 1,8

– 1,2

– 1,1

3,1

2,0

2,9

– 1,2

– 2,3

– 1,8

– 1,2

– 2,3

– 1,8

87,3

88,8

91,3

83,3

n.a.

n.a.

0,0

n.a.

n.a.

n.a.

3,8

n.a.

n.a.

– 0,5

n.a.

n.a.

– 0,5

n.a.

n.a.

82,9

n.a.

n.a.

n.a.

Notes:
(1) The December 2007 update uses the official revised GDP (upward revision by 9,6 %), according to the Eurostat press release of
22 October 2007 and are therefore not directly comparable with the figures of the December 2006 update. In order to allow for a
meaningful comparison, the rows ‘SP Dec 2006 adj.’ show the targets in the December 2006 update as recalculated to take into
account the denominator effect of the revised GDP. The Commission services' autumn 2007 forecast is based on an estimation of the
revised GDP components, due to the lack of official statistical data on National Accounts by the cut-off date of the forecast.

(2) Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the

information in the programmes.

(3) Based on estimated potential growth of 3,9 %, 3,8 % and 3,7 % respectively in the period 2007-2009.
(4) Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,4 % of GDP
in 2006, 0,3 % in 2007 and 0,1 % in 2008, deficit-reducing in 2006 and 2008, but deficit increasing in 2007, according to the most
recent programme and 0,4 % of GDP in 2006 and 0,3 % in 2007, deficit-reducing in 2006 and deficit increasing in 2007 according to
the Commission services' autumn forecast.

Sources:
Convergence programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.