Council opinion of 10 March 2009 on the updated stability programme of Greece, 2008-2011
Date: 2009-03-10
Institutions: Council of the European Union
Subjects: Greece, budget estimate, economic forecasting, public finance, stability programme

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COUNCIL OPINION

of 10 March 2009

on the updated stability programme of Greece, 2008-2011

(2009/C 64/02)

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) (for SP) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

(3)

On 10 March 2009, the Council examined the updated stability programme of Greece, which covers
the period 2008 to 2011 (2).

Greece has experienced strong economic growth at 4 % per year over the current decade. In parallel,
domestic and external macro-economic imbalances have widened considerably, which has led to a
rapid foreign debt accumulation while public debt remained at high levels. In the light of the impact
of the ongoing global economic and financial crisis on the Greek economy, the implied re-pricing of
risks puts further pressure on the debt burden.

According to the Commission services' January 2009 interim forecast, GDP growth slowed down
in 2008, to 2,9 % in real terms and is expected to decelerate strongly in 2009, but remain positive.
With the general government deficit having remained above the 3 % of GDP threshold since 2007 (3),
and one of the highest public debt ratios in the EU, Greece has no room for a fiscal impulse, so as
not to jeopardise further the long-term sustainability of public finances and the competitiveness posi-
tion of the country. As a result, no fiscal stimulus package is envisaged. The Greek authorities have
law some measures, aiming at safeguarding social cohesion,
put
including benefits to low-income households. Greece is facing the challenge to achieve substantial
fiscal consolidation, while improving the quality of public finances and correcting the factors behind
the large domestic and external imbalances of the economy.

forward in the 2009 budget

The macro-economic scenario underlying the programme envisages that real GDP growth will fall
from 3 % in 2008 to 1,1 % in 2009 before picking up again to 1,75 % on average over the rest of
the programme period. Assessed against currently available information (4), the macro-economic
scenario is based on favourable growth assumptions for 2009 and thereafter. In particular, private
consumption and to a lesser extent investment growth are projected in the programme to remain
robust, on the back of favourable employment growth and an optimistic assessment of the impact of
investment and enhance the absorption of EU Structural Funds.
recent

initiatives to support

(1) OJ L 209, 2.8.1997, 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) On 6 February 2009, the Greek authorities submitted an addendum to the programme, providing clarifications on
changes to the budgeted tax-enhancing measures and the planned budgetary process reform. The addendum does not
introduce any change in the fiscal strategy outlined in the stability programme, while both the macro-economic scenario
and the budgetary projections remained unchanged.

(3) According to data notified by the Greek authorities in October 2008 and validated by Eurostat, the general government
deficit reached 3,5 % of GDP in 2007, thus exceeding the 3 % of GDP reference value. In view of the notified breach of the
Treaty reference value, the Commission prepared on 18 February 2009 a report under Article 104(3) of the Treaty.

(4) The assessment notably takes into account the Commission services' January 2009 forecast, but also other information

that has become available since then.

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(4)

(5)

(6)

(7)

Moreover, the decline in Greece's trading partners' economic activity and the weakening international
trade prospects entail considerable downside risks
the
programme, reflecting mainly the vulnerability of the shipping and tourism sectors to the current
crisis. The programme's projections for inflation appear to be realistic, while the evolution of the
external imbalances in the medium term is somewhat favourable.

to the macro-economic scenario of

For 2008, the general government deficit is estimated at 3,7 % of GDP in the update (including 0,4 %
of GDP deficit-decreasing one-off measures), which is 0,25 of a percentage point higher than the
projection in the Commission services' January 2009 interim forecast. This compares with a target of
1,6 % of GDP set in the previous update. This deviation of 2 percentage points reflects both revenue
shortfalls and expenditure overruns. In particular, revenue is estimated at about 1 percentage point of
GDP lower than budgeted, mainly stemming from the lower-than-expected yield of the revenue-
enhancing measures implemented in 2008. Expenditure overruns amount
to around another
1 percentage point of GDP, resulting mainly from primary current expenditure slippages and, in par-
ticular, higher-than-expected public consumption and wages.

According to the update, the deficit target for 2009 is set at 3,7 % of GDP (including 0,5 % of GDP
deficit-decreasing one-off measures), in line with the Commission services' interim forecast. Compared
with the budgetary target set in the 2009 budget law, approved by the Parliament on 21 December
2008, it represents an upward revision by 1,75 percentage points of GDP. The new budgetary target
takes into account the worse-than-expected budgetary outturn in 2008.
It also reflects a more
prudent projection for total revenue, which is revised downwards by 1 percentage point of GDP,
while public expenditure is revised up by 0,4 percentage point of GDP. Nevertheless, the revenue
ratio is still projected to grow by almost 1 percentage point of GDP in 2009, on the back of the tax
revenue-enhancing package adopted in September 2008 and included in the 2009 budget law. To
ensure meeting the revised targets, the update envisages a number of measures, on top of those
included in the 2009 budget law, aiming at constraining primary public expenditure and rationalising
the public expenditure management. These new measures, which should be adopted in the course
of 2009, are not clearly detailed in the programme. The overall stance of fiscal policy will be broadly
neutral in 2009.

terms (i.e.

in structural

The budgetary strategy outlined in the programme aims at reducing the structural deficit from 4,5 %
of GDP in 2008 to 4,3 % in 2009 and 2,2 % by 2011, while the medium-term objective (MTO) of a
in cyclically-adjusted terms net of one-off and other
balanced budget
temporary measures) is not projected to be attained within the programme horizon. After targeting
3,7 % of GDP in 2009, the headline deficit will decline over the programme period to 3,2 % of GDP
in 2010 and 2,6 % by 2011. Similarly, the primary balance will reach a surplus of 1,7 % of GDP by
2011, which compares with 0,8 % in 2009. In structural terms, this would amount to an improve-
ment of 0,75 percentage points of GDP on average. Budgetary consolidation in 2010 and 2011 is
mainly based on an ambitious expenditure retrenchment, which is however not fully backed with
concrete measures. Government gross debt, estimated at 94,6 % of GDP in 2008, is projected to
exceed 96 % of GDP in 2009 and 2010, before returning to 94,75 % in 2011. Apart from the rise in
the deficit and the decline in GDP growth, a significant stock-flow adjustment contributes to the rise
in the debt ratio in 2009.

In particular, the underlying
The budgetary outcomes are subject to significant downside risks.
macro-economic scenario is based on favourable growth assumptions. Risks in 2009 are also linked
to possible slippages in the implementation of the revised 2009 budgetary target, especially when
taking into account track record of recurrent expenditure overruns and revenue shortfalls. From 2010
onwards, risks stem from the lack of information on the measures to support the envisaged consoli-
dation, particularly on the expenditure side. Moreover, the envisaged cuts in some expenditure cate-
gories appear, prima facie, ambitious. Risks associated with the projected evolution of the debt-to-GDP
ratio also appear to be on the upside, stemming from the risks attached to the deficit projections.
These risks may be compounded by uncertainty about the stock-flow adjustments about which, as in
the past, the programme does not provide information on components. In addition, possible debt-
increasing financial transactions within the framework of the financial sector support package may
put further upward pressure to the debt-to-GDP ratio. The programme does not include the potential
impact of this financial package on the debt developments.

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(8)

(9)

Long-term projections of pension expenditure according to the commonly agreed method are under
preparation; the long-term budgetary impact of ageing is likely to be well above the EU average. The
budgetary position in 2008 as estimated in the programme, which is worse than the starting position
of the previous update, would compound 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. Maintaining high primary surpluses over
the medium term and further reforming the pension system aiming at containing the likely significant
increase in age-related expenditures would contribute to reducing the high risks to the long-term
sustainability of public finances. The above-mentioned risks from financial sector stabilisation
schemes put in place by Greece could have a potential negative impact on the long-term sustainability
of public finances, primarily via their impact on government debt, although some of the cost of the
government support could be recouped in the future.

The medium-term budgetary framework remains weak, characterised by a poor track record. Fiscal
developments in Greece reflect insufficient control of public expenditure, while revenue projections
have proven to be systematically optimistic. Moreover, and despite some progress recorded in recent
years, structural and endemic problems related to the recording of Greek government accounts have
also been detrimental for timely and effective revenue and expenditure control. The programme envi-
sages the continuation of the ongoing budgetary reform and further progress with the implementa-
tion of programme budgeting, with a view to improving the public expenditure monitoring and
management,
increasing transparency and introducing a multi-year planning perspective in the
budgetary process. The full implementation of the budgetary process reform, however, is scheduled
for 2012.

(10)

the financial sector,

In response to the financial crisis, the Greek government has adopted a number of measures to
ensure the stability of
including the measure of deposit guarantees up to
EUR 100 000. The package of measures consists of a recapitalisation scheme, making available new
capital to credit institutions in exchange of preferential shares, a guarantee scheme covering new debt
with a maturity between three months and three years, and a securities scheme providing government
bonds to eligible credit institutions and enhancing their access to liquidity, in particular with the ECB.
The overall amount of the package stands at EUR 28 billionn (around 10 % of GDP).

(11) According to the programme, fiscal policy is geared towards restoring investor confidence and addres-
sing the macro-economic imbalances. The Greek government, given the lack of room for fiscal
manoeuvre, and in view of the large economic imbalances, has not adopted a short-term stimulus
package in response to the economic slowdown which would be in line with the EERP. The
programme foresees a number of structural measures, including sectoral specific measures in the
tourism sector without direct budgetary impact, such as those aimed at sustaining employment,
enhancing business investment including private-public partnerships, boosting lending to SMEs and
improving EU funds absorption. The update also includes a series of other structural reform measures,
which are part of the longer-term strategy for improving the quality and sustainability of public
finances, such as the reform in the public expenditure management and control and the implementa-
tion of the recently adopted pension reform. These measures are related to the medium-term reform
agenda and the country-specific recommendations proposed by the Commission on 28 January 2009
under the Lisbon Strategy for Growth and Jobs.

(12) Greece has adopted a consolidation programme with the aim of limiting the extent of the fiscal dete-
rioration in 2009 and reducing the general government deficit below the 3 % of GDP threshold
by 2011. On the basis of the change in the (recalculated) structural balance, the overall fiscal stance is
broadly neutral in 2009 and restrictive in 2010. More specifically, the programme targets for 2010 a
structural adjustment of 1,5 percentage points of GDP and a further structural
improvement of
some 0,5 in 2011. However, taking into account risks to the budgetary plans, the envisaged consoli-
dation may fall short of the targets and the headline deficit remain above the 3 % of GDP reference
value. In light of the large domestic and external imbalances of the Greek economy, the pace of the
fiscal adjustment is insufficient and not fully backed by concrete permanent measures in 2010
and 2011, especially on the expenditure side. Finally, taking into account the risks to the debt projec-
tions mentioned above, the debt-to-GDP ratio may be increasing over the whole programme period,
mainly reflecting insufficient progress in the reduction of the government deficit.

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

programmes, the programme has some gaps in the required and optional data (1).

The overall conclusion is that the programme envisages reducing the budget deficit over the medium term,
but falls short to address timely and effectively the structural imbalances of the Greek economy and reverse
the upward trend of public debt. Although the consolidation strategy beyond 2009 relies on permanent
expenditure restraint and increasing tax revenues, the programme does not spell out concrete measures to
back fully the planned budgetary adjustment in 2010 and 2011. Moreover, against the background of a
sharp deterioration in the global economic environment, the budgetary strategy is also subject to significant
downside risks, with the growth assumptions underlying the macro-economic scenario of the programme
being favourable.

Consolidation relies to some extent on the results from the fight against tax evasion, which is only partly
supported by reforms in tax administration, while the planned cutbacks in expenditure are partly offset by
plans to increase wages and social transfers. Strengthening the fiscal consolidation path, based on permanent
measures to control current primary expenditure including public wages, would be paramount to achieve
sound and sustainable public finances in Greece. Moreover, the envisaged adjustment in the programme is
only partly supported by structural policies to improve the quality of public finances. The structural nature
of the factors underlying competitiveness losses and the widening external imbalances urgently requires the
implementation of bold structural reforms. In the long term, the level of debt which remains among the
highest in the EU, coupled with the projected increase in age-related spending, will also affect negatively the
long term sustainability of public finances.

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

(i) strengthen significantly the fiscal consolidation path already in 2009, through well-specified permanent
measures curbing current expenditure, including a prudent public sector wage policy, thereby contri-
buting to a necessary reduction in the debt-to-GDP ratio;

(ii) ensure that fiscal consolidation measures are also geared towards enhancing the quality of public
finances, within the framework of a comprehensive reform programme, in the light of the necessary
adjustment of the economy, with a view to recovering competitiveness losses and addressing the
existing external imbalances;

(iii) implement swiftly the policies to reform the tax administration and further improve the functioning of
the budgetary process by increasing its transparency, spelling out the budgetary strategy within a longer
time perspective and set up mechanisms to monitor, control and improve the efficiency of primary
current expenditure;

(iv) in view of the mounting level of debt and the projected increase in age-related expenditure, improve the
long-term sustainability of public finances, by continuing the on-going reforms in the healthcare and
pension system.

Greece is also urged to improve statistical governance and the quality of its statistical data, and invited to
improve compliance with the data requirements of the code of conduct.

Comparison of key macroeconomic and budgetary projections

Real GDP
(% change)

SP Jan 2009

COM Jan 2009

SP Dec 2007

2007

2008

2009

2010

2011

4,0

4,0

4,1

3,0

2,9

4,0

1,1

0,2

4,0

1,6

0,7

4,0

2,3

n.a.

n.a.

(1) In particular, general government expenditure by function and information on debt developments and the components of
stock-flow adjustment (differences between cash and accruals, net accumulation of financial assets, valuation effects and
other), liquid financial assets and net financial debts are not provided.

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HICP inflation
(%)

SP Jan 2009

COM Jan 2009

SP Dec 2007

Output gap (1)
(% of potential GDP)

SP Jan 2009

COM Jan 2009 (2)

SP Dec 2007

2007

2008

2009

2010

2011

3,0

3,0

2,9

2,2

3,0

1,3

4,3

4,3

2,8

1,9

2,8

1,2

2,6

2,5

2,7

0,3

0,5

1,2

2,5

2,7

2,6

2,4

n.a.

n.a.

– 0,8

– 1,0

– 1,2

n.a.

n.a.

n.a.

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

General government
revenue
(% of GDP)

General government
expenditure
(% of GDP)

General government
balance
(% of GDP)

SP Jan 2009

– 12,1

– 12,8

– 11,4

– 10,8

– 10,0

COM Jan 2009

– 12,1

– 11,7

– 11,2

– 11,6

n.a.

SP Dec 2007

– 12,8

– 12,7

– 12,5

– 12,2

n.a.

SP Jan 2009

39,9

40,0

41,0

41,1

41,2

COM Jan 2009

40,0

39,9

40,8

40,0

SP Dec 2007

39,9

41,1

41,7

42,3

n.a.

n.a.

SP Jan 2009

43,4

43,7

44,7

44,3

43,8

COM Jan 2009

43,4

43,4

44,5

44,2

SP Dec 2007

42,6

42,7

42,5

42,3

n.a.

n.a.

SP Jan 2009

– 3,5

– 3,7

– 3,7

– 3,2

– 2,6

COM Jan 2009

– 3,5

– 3,4

– 3,7

– 4,2

SP Dec 2007

– 2,7

– 1,6

– 0,8

Primary balance
(% of GDP)

SP Jan 2009

COM Jan 2009

SP Dec 2007

0,6

0,6

1,2

0,3

0,6

2,4

0,8

0,6

3,1

0,0

1,2

0,0

3,8

n.a.

n.a.

1,7

n.a.

n.a.

Cyclically-adjusted
balance (1)
(% of GDP)

SP Jan 2009

– 4,4

– 4,5

– 3,8

– 2,8

– 2,2

COM Jan 2009

– 4,8

– 4,7

– 3,9

– 3,7

SP Dec 2007

– 3,4

– 2,4

– 2,3

n.a.

n.a.

n.a.

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Structural balance (3)
(% of GDP)

Government gross debt
(% of GDP)

SP Jan 2009

COM Jan 2009

SP Dec 2007

SP Jan 2009

COM Jan 2009

SP Dec 2007

2007

2008

2009

2010

2011

– 4,4

– 4,6

– 3,1

94,8

94,8

93,4

– 4,5

– 5,0

– 2,4

94,6

94,0

91,0

– 4,3

– 4,7

– 2,3

96,3

96,2

87,3

– 2,8

– 3,7

n.a.

96,1

98,4

82,9

– 2,2

n.a.

n.a.

94,7

n.a.

n.a.

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

information in the programmes.

(2) Based on estimated potential growth of 3,2 %, 2,7 %, 2,8 % and 2,5 % respectively in the period 2008-2011.
(3) Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,4 % of GDP
in 2008 and 0,5 % in 2009 (all deficit-reducing) according to the most recent programme and 0,4 % of GDP in 2008 and 0,8 %
in 2009 (all deficit-reducing) in the Commission services' January interim forecast.

Source:
Stability programme (SP); Commission services' January 2009 interim forecasts (COM); Commission services' calculations.