Proposal for a Council Decision making public the Recommendation with a view to ending the inconsistency with the broad guidelines of the economic policies in Greece and removing the risk of jeopardising the proper functioning of economic and monetary union {SEC(2010) 93 final} {SEC(2010) 94 final} {SEC(2010) 95 final}
Date: 2010-02-03
Institutions: European Commission
Subjects: Economic and Monetary Union, Greece, budget policy, economic policy, economic recession, economic situation, public debt, public finance, stability programme

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EUROPEAN COMMISSION 

Brussels, 3.2.2010 
COM(2010) 26 final 

2010/0031 (NLE) 

Proposal for a 

COUNCIL DECISION 

making public the Recommendation with a view to ending the inconsistency with the 
broad guidelines of the economic policies in Greece and removing the risk of 
jeopardising the proper functioning of economic and monetary union 

{SEC(2010) 93 final} 
{SEC(2010) 94 final} 
{SEC(2010) 95 final} 

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EXPLANATORY MEMORANDUM 

1. 

INTRODUCTION 

Greece  has  experienced  strong  economic  growth  at  4%  per  year  over  the  past  ten  years, 
attributed  also 
to  expansionary  fiscal  policies.  In  parallel,  domestic  and  external 
macroeconomic  imbalances  have  widened  considerably,  which  have  led  to  a  rapid 
accumulation of external debt while government debt remained very high. In the light of the 
impact  of  the  global  economic  and  financial  crisis  on  the  Greek  economy,  the  implied  re-
pricing of risks puts further pressure on these debt burdens.  

According to the Commission services’ autumn 2009 forecast, real GDP growth slowed down 
in 2009, to just above 1% and is expected to remain negative in 2010. The downturn has taken 
a heavy toll on public finances and financing conditions. With the general government deficit 
well  above  3%  of  GDP  on  average  over  the  past  ten  years,  and  recurrently  large  debt-
increasing  financial  operations,  government  debt-to-GDP  ratio  exceeds  100%.  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, under an unfavourable macroeconomic context. 

The  situation  of  the  Greek  economy  combines  a  fiscal  crisis  with  broader  macroeconomic 
imbalances,  which  are  rooted  in  deep-seated  structural  problems.  To  this  respect,  a  joint 
deployment of instrument of economic and budgetary surveillance foreseen by the Treaty is 
appropriate.  Besides  responding  to  the  objective  gravity  of  the  situation  in  Greece  and  its 
possible  spill-over  to  other  euro  area  countries,  a  simultaneous  deployment  of  the  available 
instruments of surveillance under the Treaty would enhance its effectiveness.  

This explanatory memorandum reviews briefly the macroeconomic and budgetary situation in 
Greece, elaborates on the modalities of application of the instruments and their interplay and 
presents  the  scope  of  addressing  recommendations  to  Greece  under  Article  121(4)  of  the 
Treaty on the Functioning of the European Union (TFEU); to take action under Article 126(9) 
TFEU;  and  to  address  an  opinion  on  the  January  2010  update  of  the  stability  programme 
pursuant  to  Council  Regulation  (EC)  No  1466/971.  This  represents  the  first  time  that  a 
Decision  giving  notice  to  take  action  under  Article  126(9)  and  a  Recommendation  under 
Article 121(4) are applied together.  

2. 

MACROECONOMIC DEVELOPMENTS, COMPETITIVENESS AND FISCAL IMBALANCES 

2.1.  Recent macroeconomic developments 

The macroeconomic and budgetary situation and outlook in Greece substantially deteriorated 
since April 2009 when the Council adopted a decision on the existence of an excessive deficit 
in  Greece  and  gave  recommendations  in  accordance  with  Article  104(7)  of  the  Treaty 
establishing the European Community (TEC). Both consumer and business confidence were 
hit by the crisis, weakening economic activity since late-2008 and weighing on the medium-
term prospects of the economy. Compared to the Commission services’ January 2009 interim 
forecast, underpinning the recommendations by the Council in April 2009, in accordance with 

1 

OJ L 209, 2.8.1997, p. 1. 

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Article 104(7) TEC, growth projections have been revised downwards. Instead of almost flat 
real GDP growth in 2009 followed by a mild recovery in 2010, real GDP has contracted by 
around 1% in 2009 and is projected to contract further by ¼% in 2010, under an unchanged 
policy  scenario,  according  to  the  Commission  services’  autumn  2009  forecast2  (Table  1). 
Moreover,  given  latest  developments,  one  cannot  exclude  that  the  contraction  in  economic 
activity  in  2010  will  be  more  severe  than  projected  in  the  autumn  2009  forecast.  The 
contraction  of  economic  activity  weighs  also  heavily  on  employment  which  fell  in  2009  by 
more  than  1%,  pushing  unemployment  rate  up  to  around  9%,  and  according  to  the 
Commission forecast, in excess of 10% in 2010.  

Macroeconomic  developments  have  led  to  a  sizable  correction  of  the  external  deficit  (net-
borrowing/net-lending  vis-à-vis  the  rest  of  the  world)  from  above  12%  of  GDP  in  2008  to 
7½% of GDP in 2009. However, according to the Commission services' forecast, the expected 
further  improvement  in  the  external  accounts  and  competitiveness  over  the  medium  term  is 
likely to be much more moderate, given the structural weaknesses of the economy. Notably, 
the  external  imbalances,  although  improving,  may  still  account  for  almost  8%  of  GDP  by 
2011.  In  a  context  of  weak  growth  in  both  real  and  nominal  terms,  external  constraints  are 
becoming more severe and require substantial adjustment.  

Table 1: Macroeconomic developments and forecasts 

Real GDP (% change) 
Private consumption (% change) 
Public consumption (% change) 
Gross fixed capital formation (% 
change) 
Exports of goods and services (% 
change) 
Imports of goods and services (% 
change) 
GNI (GDP deflator)(% change) 
Contributions to real GDP growth: 
- Final domestic demand 
- Change in inventories 
- Net exports 
Employment (% change) 
Unemployment rate (Eurostat 
definition) 
Compensation of employees/head 
Unit labour costs (whole economy) 
Real unit labour costs 
GDP deflator (% change) 
Harmonised index of consumer 
prices 
Net-borrowing/net-lending vis-à-vis 
RoW 

2009 

2008 
COM COM 
-1.1 
-2.5 
2.0 

2.0 
2.3 
0.6 

2011 

2010 
SP  COM  SP  COM 
-1.2 
-1.5 
11.0 

-0.3 
-1.3 
-0.1 

-0.3
-1.0
-4.4

0.7 
0.8 
0.7 

SP 
1.5 
0.3 
-5.9 

2012  2013
SP 
SP 
2.5 
1.9 
1.0 
0.8 
0.7 
-5.9 

-7.4 

-16.2 

-18.8

-3.9 

-1.6

1.3 

4.5 

5.5 

8.4 

4.0 

-11.8 

-16.0

2.7 

2.5 

3.1 

4.0 

6.5 

7.2 

0.2 
1.6 

0.1 
1.0 
0.8 
0.1 

7.7 
5.9 
3.9 
0.3 
3.5 

-20.3 
-1.6 

-24.7
n.a. 

-4.9 
-0.6 
4.4 
-0.9 

9.0 
2.3 
2.5 
0.8 
1.7 

-3.3 
-2.9 
5.0 
-1.1 

9.0 
5.7 
n.a. 
n.a. 
1.6 

-3.1 
-0.7 

-1.6 
-0.1 
1.5 
-0.8 

10.2 
1.4 
0.9 
-0.5 
1.4 

-3.0
n.a. 

-1.8
0.2 
1.3 
-0.5

9.9 
1.6 
n.a. 
n.a. 
2.0 

1.9 
0.7 

0.9 
-0.4 
0.1 
-0.2 

11.0 
1.8 
0.9 
-1.3 
2.3 

2.0 
n.a. 

2.8 
n.a. 

0.0 
1.2 
0.3 
-0.2 

0.6 
0.7 
0.7 
0.4 

10.5  10.5 
2.2 
2.4 
n.a. 
n.a. 
n.a. 
n.a. 
1.9 
2.0 

3.4 
n.a. 

2.3 
-0.5 
0.7 
0.6 

10.3 
2.7 
n.a. 
n.a. 
1.9 

4.2 
-12.4 

1.2 
-7.5 

1.2 
-8.8 

1.4 
-6.8 

1.4 
-6.6

2.1 
-6.7 

1.9 
-5.9 

1.8 
-4.9 

1.8 
-4.0 

Source: AMECO, Commission services, stability programme (January 2010). 

Mounting competitiveness losses over the last decade are reflected in the relative evolution of 
unit  labour  costs  vis-à-vis  trading  partners.  The  rapid  rise  of  wage  costs  and  mark-ups  in 
excess  of  productivity  growth,  has  contributed  to  the  persistence  of  a  positive  inflation 

2 

European Economic Forecast - autumn 2009, European Economy, 10.  

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differential with the euro area. While nominal compensation per employee has increased by 
about 2¼% in 2009, HICP inflation remained close to 1% in 2009, resulting in high real wage 
growth, well above productivity growth. The disconnection between wages and labour-market 
conditions and productivity developments, including the weak response of wage growth to the 
current downturn, if extended in the medium-term, would undermine further the competitive 
together  with  appropriate  wage 
position  of 
developments, would help to regain lost competitiveness. Although current inflation rates are 
low,  they  are  projected  to  quickly  return  to  an  upward  trend  over  the  medium-term.  Core 
inflation is also forecast to rise more rapidly than the euro area average. The poor functioning 
of domestic markets, especially services, is reflected in high mark-ups in sheltered sectors.  

the  economy.  Enhancing  productivity, 

2.2.  Competitiveness and growth potential 

According to Eurostat, in 2008 GDP per capita in PPS stood at 94¼% of the EU-27 average, 
resulting from relatively low hourly productivity levels. In contrast, labour resource utilization 
is  higher  than  in  the  EU-27  average,  due  to  high  average  annual  hours  worked.  At  present, 
Greece faces severe challenges to bridge the gap in income per capita with the euro-area. To 
begin  with,  the  crisis  may  hurt  the  productive  capacity  of  the  Greek  economy.  Commission 
calculations estimate that by 2020 the cumulated loss of potential GDP may be around 16¼% 
compared with the 2000-2006 trend. This decline is amongst the highest within the group of 
euro area countries, though it partly stems from the high rate of potential growth in Greece in 
the pre-crisis period. In addition, in 2020, Greece will start suffering the negative effects of 
ageing populations, which will also reduce potential growth rates from 2020 on.  

Hence, bringing the Greek economy back to a sustained convergence path calls for correction 
of imbalances via strong fiscal adjustment and the implementation of a comprehensive reform 
package.  The  weaknesses  of  the  Greek  economy  have  been  repeatedly  highlighted  by  the 
Commission. For example, the Commission forecasts have long commented on Greece's price 
competitiveness  problems;  in  particular,  to  the  appreciating  trend  of  the  real  effective 
exchange rate. Moreover, the Lisbon strategy recommendations3, have also identified specific 
areas  to  improve  Greece's  non-price  competitiveness,  such  as  R&D  investment,  public 
administration reform, as well as the quality of education. Furthermore, the calculations of the 
Ageing  Working  Group  of  the  Economic  Policy  Committee  show  that  pension  reform  is  a 
priority4. In addition, the Commission's Labour market review5 has also identified problems in 
the  Greek  labour  market,  namely  in  terms  of  its  segmentation  and  wage  bargaining 
regulations.  Finally,  various  indicators  show  that  there  is  room  for  improvement  in  product 
market functioning, ranging from network industries to professional services. Taken together, 
these elements undermine Greece's structural competitiveness and give reasons to believe that 
its  large  external  imbalance  is  not  just  due  to  strong  domestic  demand.  The  following 
paragraphs give a more detailed explanation on the challenges within each policy area.  

On price competitiveness, two indicators stand out. First, over the past 10 years Greece has 
been accumulating inflation  differentials of around 1 percentage point per year vis-à-vis the 
euro  area.  Second,  wage  growth  has  been  higher  than  in  the  euro  area  and  in  excess  of 
productivity growth, leading to real unit labour cost rises. Inflation differentials are thought to 
derive from strong domestic demand (in pre-crisis years), but also, from labour and product 

3 
4 

5 

OJ 183, 15.7.2009, p. 1. 
European Economy, 2/2009, 2009: Ageing Report: economic and budgetary projections for the EU-27 
Member States (2008-2060).  
European Economy, 8/2009, Labour market and wage developments in 2008.  

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market  imperfections  leading  to  excessive  wage  and  mark-up  growth,  respectively.  Wage 
growth  in  excess  of  productivity  is  encouraged  by  the  nature  of  Greece's  wage  bargaining 
settings, as well as by the public sector behaviour. Indeed, public wages account for a sizable 
share of the overall wage bill, have a strong influence on private sector wage setting and have 
outgrown the latter over the past few years6.  

More generally, enhancing the quality of public administration plays a major role for raising 
the  overall  efficiency  of  the  economy.  The  number  of  public  institutions,  organisations, 
municipalities and local councils has grown over time. The Lisbon strategy recommendations 
have underscored the need to build effective regulatory, control and enforcement capacities, 
both  in  general  terms  and  related  to  the  use  of  structural  funds.  The  Greek  authorities  have 
made  commitments  to  improve  the  functioning  of  public  administration  and  an  operational 
programme  on  'Administrative  Reform'  is  in  place.  At  present,  there  is  still  the  need  to 
strengthen the role of impact assessments and the transparency of public consultations, speed 
up codification work, creating in each ministry specialized units for better regulation, as well 
as increasing the absorption of structural funds. This last feature will be addressed below.  

Pensions are another major reform area. Pension spending by the social security system, as a 
percentage  of  GDP,  is  projected  to  rise  significantly  over  the  next  decades,  from  11¾%  of 
GDP  in  2007  to  almost  24%  of  GDP  in  2060.  Consequently,  the  Commission's  latest 
Sustainability  Report7  puts  Greece  at  high  risk  with  respect  to  public  finance  sustainability. 
Demographic  developments,  with  the  old-age  dependency  ratio  nearly  doubling  over  the 
projection period up to 2060 have a large impact on rising pension expenditure throughout the 
projection period8. In addition, the benefit ratio9 in Greece ranks among the highest in the EU, 
even if people aged 65 and more are exposed to higher at-risk-of-poverty rates than in the EU 
on average. Recent reforms –e.g. Law 3655/200810 - have addressed some weaknesses of the 
pension  system  such  as  its  excessive  fragmentation.  The  2010  update  of  the  Stability 
Programme also includes some commitments on pension and healthcare reform. Overall, the 
pension  system  remains  unsustainable  and  inequitable.  Early  retirement  schemes  provide 
alternative, but costly, pathways to retirement with a negative impact on incentives to work. 
Hence,  reforms  need  to  curb  the  substantial  increase  in  age-related  expenditure  to  reinforce 
the long-term sustainability of public finances. The health care system also needs reform, in 

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7 
8 

9 

10 

This  comparison  uses  national  accounts  data  comparing  public  compensation  per  employee  in  the 
public administration to total industry compensation per employee over 2000-2007. The rise in public 
sector over private sector wages is also higher than in other euro area Member States for which data are 
available –e.g. Spain or Italy.  
European Economy, 9/2009. 
Indeed, the demographic challenge in Greece has consistently been projected to be more severe than the 
EU average and the 2008 Eurostat projections show a rise in the old-age dependency ratio from 27.8% 
in 2008 to 57.1% in 2060. The relation between insurants and pensioners has reached 1.75:1 instead of 
4:1 which is required for a viable pay-as-you-go pension system.  
The  benefit  ratio  is  the  average  benefit  of  public  pensions,  as  a  share  of  the  economy-wide  average 
wage. 
Law 3655/2008 addresses some of the administrative weaknesses of the Greek pension system, while 
introducing a number of parametric adjustments. First, the Law reduces the number of funds from 113 
to  13,  thus  lowering  administrative  costs  and  improving  monitoring.  Second,  the  Law  introduces  an 
individual  social  security  number  to  improve  expenditure  control  and  reduce  contribution  evasion. 
Third,  it  sets  up  the  Insurance  Fund  for  Intergenerational  Solidarity  to  safeguard  future  pension 
payments. In addition, the Law gives financial incentives to extend working lives by up to three years 
past  the  statutory  retirement  age  and  strengthens  provisions  on  maternity  leave  to  increase  female 
participation in the labour market. 

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particular  to  improve  the  quality  of  services,  especially  in  primary  care,  efficiency,  and  its 
budgetary management as these have been a cause of budgetary overruns11.  

Product  market  reforms  are  also  present  in  the  Stability  Programme  update.  Several  areas 
warrant attention. First, competition in professional services should be strengthened, a sector 
which accounts  for  2½% of  GDP  and  7%  of  employment12.  In  the  OECD's  Product  Market 
Indicator on professional services ranks Greece poorly, especially for legal services. Second, 
barriers  to  competition  are  amongst  the  highest  within  the  OECD  European  group  of 
countries,  based  on  the  OECD  Barriers  to  Competition  index.  Third,  the  liberalization  of 
network industries (e.g. energy) is lagging behind the EU average13, as well as the opening of 
markets  in  the  transport  sector,  especially  in  rail14.  For  example,  in  the  gas  sector,  the  first 
private  LNG  (liquid  natural  gas)  import  was  cancelled  (December  2009)  due  to  State-
controlled  grid  operator  DESFA  failing  to  agree  until  then  contracts  providing  access  to 
network. This lack of liberalisation has concrete impact on Greek businesses. To illustrate, in 
the  electricity  market,  the  World  Bank15  shows  that  it  takes  longer  and  it  costs  more  to 
connect a new business to the electrical network than the OECD average. 

Lastly,  on  business  environment,  firms  are  faced  with  complex,  burdensome,  lengthy 
procedures  and  legal  uncertainty  in  their  relations  with  the  public  administration.  Despite 
progress  made,  Greece  is  the  worst  EU  and  OECD  performing  country  in  the  2009  World 
Bank  Doing  Business  indicators.  This  is  explained  by  the  time  and  cost  needed  to  start  a 
business, the overall rigidity in employment, the little protection given to investors as well as 
difficulties  in  accessing  to  finance.  Greece  has  adopted  the  target  of  reducing  25%  of 
administrative  burdens  by  2013,  though  implementation  needs  to  move  beyond  the  initial 
stages. In short, reforms in these areas, along the lines of the EU Small Business Act, could 
increase  private  investment  and  employment,  at  little  public  finance  cost.  They  could  also 
help the implementation of labour market reforms, by reducing cost pressures.  

Over and above attempts to reform public sector employment, Greece's labour market is also 
in need of reform in line with the common principles of flexicurity. The Greek labour market 
is strongly segmented in gender (more than in any other EU country), age (with young people 
having difficulties to enter the labour market), type of contract (with relatively more stringent 
employment  protection  legislation  (EPL)  for  temporary  contacts  than  for  regular  contracts) 
and skills (with higher EPL for white collar than for blue collar workers). At the same time, 
there is much scope to improve the qualification of the labour force, as well as labour market 
matching  through  improvements  in  the  quality  of  secondary  and  tertiary  education,  the 
efficiency of public employment services and active labour market policies (ALMP). Some of 
these issues have been addressed in the latest update of the Stability Programme. Lastly, the 
definition of collective dismissals is extremely wide, as it applies to firms between 20 to 200 
employees  when  4  workers  are  dismissed.  Collective  dismissals  are  cumbersome,  so  the 
current regulation in Greece hinders employment creation. It is also a hurdle to firms' growth.  

11 

12 
13 

14 
15 

OECD (2009), Economic Survey of Greece 2009, chapter 3: Chapter 3 Improving the performance of 
the health care system.  
Source: EU KLEMS 2005. 
This  is  shown  in  the  2007  OECD  indicators  of  regulation  of  energy,  transport  and  communication. 
Greece's  regulation  indicator  in  electricity  is  2.1  and  3.5  in  gas,  compared  to  1.5  and  2.5  in  the  EU 
OECD countries.  
2007 OECD index of 5.3 compared to 3.4 in the OECD EU countries.  
Getting Electricity. A pilot indicator set from the Doing Business project. World Bank. 2010  

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Finally, the faster and more effective absorption of EU funds could play a critical role in the 
success  of  efforts  to  restore  competitiveness  and  sustainable  public  finances.  Since  2007, 
Greece  has  submitted  relatively  few  payment  claims  to  the  Commission.  This  shows  a  low 
level of absorption at the beginning of the fourth year of the 2007-2013 programming period, 
compared to most Member States. By aligning national investment priorities to the goals of 
structural  and  cohesion  policy  and  working  with  the  Commission  to  improve  the 
implementation of operational programmes, Greece could finance key public investments that 
support long-term growth potential whilst at the same time allowing budgetary consolidation 
to  proceed.  Particular  attention  should  be  paid  to  the  operational  programme  on 
'Administrative  Reform'  and  'Digital  Convergence'  which  support  essential  reforms  in  the 
public  administration,  as  well  as  human  resources  development'  and  'education  and  lifelong 
learning which support labour market and educational reforms, as all are central to the reform 
and growth strategy outlined in the January 2010 update of the stability programme. EU funds 
could  be  relied  on  to  increase  the  efficiency  of  the  public  administration  and  supporting 
reforms of the health care system, public employment services, life-learning reforms, plus the 
building up of effective regulatory control and enforcement capacities  

2.3.  Banking sector 

Greek  banks  remain  relatively  robust  from  a  solvency  perspective,  with  an  average  capital 
adequacy  ration  of  11.7%  and  continued  profitability.  Banks  received  state  support  in  the 
form  of  guarantees  and  capital  injections,  but  less  than  in  most  other  EU  Member  States. 
Nonetheless, the ongoing performance will be conditioned by the structural weaknesses in the 
economy,  as  it  emerges  from  the  current  downturn  with  subdued  credit  growth  as  a 
consequence. 

Despite  having  a  relatively  low  loan-to-deposit  ratio,  the  Greek  banking  sector  has 
experienced  difficulties  in  accessing  liquidity  on  wholesale  markets,  leaving  it  substantially 
reliant  on  Eurosystem  lending16.  Currently,  Greek  banks  hold  approximately  8%  of  their 
assets in government securities, mainly from Greece. If a further sovereign rating downgrade 
were  to  occur,  the  continued  willingness  of  Greek  banks  and  other  investors  to  hold  Greek 
government securities could be in doubt. This would potentially apply further constrain on the 
capacity of the government to finance itself.  

As regards the wider financial sector and more specifically the insurance sector, a weakness 
related  to  the  default  of  one  major  and  four  smaller  companies  is  in  the  process  of  being 
addressed by the Greek supervisor.17 

2.4.  Public finances imbalances 

In  2009,  the  Greek  public  finances  have  worsened  much  beyond  what  could  have  been 
expected to result from the downturn and the financial-sector support measures. According to 
the official estimation included in the 2010 budget, the government deficit has reached 12¾% 
of GDP in 2009 (this estimate includes a net deficit-increasing impact of temporary nature of 

16 

17 

Access  to  Eurosystem  lending  has  been  accommodated  by  changes  to  the  ECB  collateral  rules. 
However, the Eurosystem is expected to restore its pre-crisis criteria for collateral eligibility at the end 
of 2010. 
Aspis Pronoia S.A. licence was withdrawn on 21 September 2009 together with that of the other four 
smaller  insurance  companies  of  Aspis  Group  operating  in  Greece.  This  was  mainly  due  to  the  very 
fragile state of the balance sheet of these companies. However, the amount that the Greek government 
might be called upon to sustain in order to preserve stability in the sector is small. 

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1¼%  of  GDP18).  This  is  in  line  with  the  Commission  services'  autumn  2009  forecast  and 
compares with the budgetary target of 3.7% of GDP in 2009, set in the January 2009 update 
of the stability and growth programme (Table 2)19. The currently estimated deficit outturn for 
2009  is  substantially  higher  than  expected  when  the  Council  adopted  the  recommendation 
according to Article 104(7) TEC in April 2009. 

Table 2: Revised estimations of economic growth and budgetary outcome 

Budget 2009 
COM 2009 Jan forecast 
SP 2009 Jan 
EDP notification (2009 Apr) 
COM 2009 Spring forecast 
EDP notification (2009 Oct) 
COM 2009 Autumn forecast 
Budget 2010 
SP 2010 January 

Real GDP growth (% change)
2013 
2011 
2009 
n.a. 
n.a. 
2.7 
n.a. 
n.a. 
0.2 
n.a. 
2.3 
1.1 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
-0.9 
n.a. 
n.a. 
n.a. 
n.a. 
0.7 
-1.1 
n.a. 
n.a. 
-1.2 
2.5 
1.5 
-1.2 

2010 
n.a. 
0.7 
1.6 
n.a. 
0.1 
n.a. 
-0.3 
-0.3 
-0.3 

2012 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
1.9 

Net lending/Net borrowing 
general government (% GDP)
2011  2012  2013 
2009 
n.a. 
n.a. 
n.a. 
-2 
n.a. 
n.a. 
n.a. 
-3.7 
n.a. 
n.a. 
-2.6 
-3.7 
n.a. 
n.a. 
n.a. 
-3.7 
n.a. 
n.a. 
n.a. 
-5.1 
n.a. 
n.a. 
n.a. 
-12.5 
n.a. 
n.a. 
-12.8 
-12.7 
n.a. 
n.a. 
n.a. 
-12.7 
-2 
-2.8 
-5.6 
-12.7 

2010 
n.a. 
-4.2 
-3.2 
n.a. 
-5.7 
n.a. 
-12.2 
-9.1 
-8.7 

 Source: Commission services, updates of the stability programme 

The much higher-than-budgeted 2009 deficit is only partially explained by the unfavourable 
macroeconomic  conditions  (Table  3).  According  to  the  Greek  authorities’  latest  official 
estimates,  real  GDP  growth  is  estimated  at  -1¼%  in  2009,  broadly  in  line  with  the 
Commission  services’  autumn  2009  forecast.  However,  only  a  small  part  of  the  fiscal 
slippages in 2009 (around 1½% of GDP) is attributable to the working of automatic stabilizers 
as the economy entered a recessionary phase. Another part of the deficit slippage is related to 
a  base  effect  due  to  the  large  upward  revision  in  the  2008  general  government  deficit  (in 
October 2009, the 2008 deficit ratio was revised upwards by 2¾% of GDP, as compared to 
data reported in spring)20.  

On top of these factors, the deterioration in the government deficit reflects revenue shortfalls 
of around 2½% of GDP and expenditure overruns of almost 2½% of GDP, compared to the 
budgetary  target  in  the  January  2009  update  of  the  stability  programme.  The  bulk  of  the 
revenue shortfall is a result of deficiencies in the tax collection mechanism. More specifically, 
indirect  taxes  shrunk  by  1¼%  of  GDP,  while  social  contributions  by  almost  ½%  of  GDP 
following rising unemployment, confirming also that the initial budgetary revenue projections 
underpinning the budgetary target were markedly favourable (with regard to both direct and 
indirect taxes). On the expenditure side as stated above, a number of one-off expenditures21, 

18 

19 
20 

21 

This can be further disentangled to a deficit increasing impact of one-off expenditure of 1¼% of GDP 
and one-off revenue of some ¼% of GDP. The latter includes one-off revenue from the special income 
to high income households and the tax amnesty measures implemented in 2009. 
http://ec.europa.eu/economy_finance/publications/publication_summary16053_en.htm  
According  to  Article  15(1)  of  Council  Regulation  (EC)  No  479/2009,  Eurostat  has  expressed  a 
reservation on the quality of data reported by Greece, due to significant uncertainties over the figures 
notified  by  the  Greek  statistical  authorities  (Eurostat  News  Release  149/2009  of  21  October  2009). 
Eurostat’s reservation on the Greek government finance statistics has not yet been withdrawn. See also 
the Commission’s Report on Greek Government Deficit and Debt Statistics - COM(2010) 1, 8.1.2010. 
A special allowance paid to low-income households (EUR 203 million euro), administrative cost related 
to  the  October  2009  snap  elections  (EUR  244  million)  and  payment  of  hospital-related  arrears  (EUR 

EN 

8 

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amounting  to  around  1¼%  of  GDP  have  contributed  to  the  expenditure  overruns.  On  top, 
public  wage  bill  went  up  by  some  0.7%  of  GDP,  mostly  due  to  the  increase  in  short-term 
public  employment  contracts  and  public  wages  raises.  In  addition,  the  debt  servicing  cost 
increased  by  0.5%  of  GDP,  given  the  large  increase  in  debt  ratio.  These  expenditure  and 
revenue  slippages  more  than  offset  the  fiscal  consolidation  measures  announced  by  the 
government in June 200922, also because they were only partially implemented in the course 
of the year23. 

Table 3: Major factors determining the government deficit outturn in 2009 (*) 

Initial target in the 2009 budget law 
January 2009 update of the Stability programme 
Base year effect 
Automatic stabilisers 
One-off expenditure 
Impact of revenue enhancing measures 
Impact of expenditure restraining measures 
Revenue shortfalls 
Expenditure overruns 
Difference in swaps 
January 2010 update of the Stability programme 

Deficit in 2009 

Effect on 
the deficit 
(°) 

1.4  
1.5  
1.5  
-1.0  
-0.3  
3.5  
2.2  
0.2  

2.0 
3.7 

12.7 

(*) The table summarises, in % of GDP, the main revisions, corrections and discrepancies in the 2009 budget since its 
adoption by the (former) Greek government at the end of 2008, and the new stability programme. 

(°) a ‘+’ indicates deficit-increasing, while a ‘–‘ means deficit-decreasing. 

In  conclusion,  although  macroeconomic  conditions  have  worsened  beyond  what  was 
anticipated,  the  rapid  deterioration  of  fiscal  imbalances  can  only  in  part  be  attributed  to  the 
worse-than-expected macroeconomic conditions.  

2.5.  Fiscal statistics 

As  regards  the  Greek  statistical  system,  the  shortcomings  in  government  finance  statistics 
remain  a  recurrent  issue  and  a  serious  concern.  On  22  October  2009,  Eurostat  expressed  a 
general  reservation  over  the  figures  notified  by  the  Greek  authorities,  “due  to  significant 
uncertainties over the figures reported” and thus, did not validate the data. More specifically, 

22 

23 

975  million),  subsidies  and  grants  to  other  public  entities  (EUR  394  million),  payment  of  a  penalty 
following a court decision on the national air-transport company and other (EUR 541 million). The total 
is EUR 3 228 million or 1¼% of GDP. 
The bulk of the planned measures aimed mainly at increasing revenue on a temporary (tax settlement, 
supplementary  tax  contribution  for  high-income  earners,  levy  on  buildings  with  land-use  violations, 
etc.) or permanent (increase in excise duties on tobacco and alcohol, higher tax rate on dividends and 
stock  options,  etc.)  basis.  On  the  expenditure  side,  some  measures  (such  as  reduction  in  current 
expenditure, wage and pension freeze in the public sector, reduction in overseas development aid, etc.) 
were announced in the course of the year. 
For  example,  the  imposition  of  a  levy  on  buildings  with  land-use  violations  (with  an  estimated 
budgetary impact of around ½% of GDP) announced in June 2009 was not implemented, as it has been 
declared  unconstitutional  by  Greek  courts.  Further  examples  of  measures  that  yielded  less  than  the 
initially planned amounts included the wage and pension freeze in the public sector, the extension of the 
deadline for tax settlement, duties on mobile phone use, levies on yacht owners, etc. 

EN 

9 

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substantial revisions of the government deficit and debt data for the previous years were set 
out in the October 2009 notification.  

The general government deficit for 2008 was revised to almost 7¾% of GDP, up by 4 points 
compared  to  the  January  2009  update  of  the  stability  programme  and  2¾  points  of  GDPs 
compared  to  the  April  2009  notification.  The  recent  Commission  report  on  the  Greek 
government  deficit  and  debt  statistics24  has  found  evidence  of  “severe  irregularities  in  the 
EDP  notifications  of  April  and  October  2009,  including  submission  of  incorrect  data,  and 
non-respect  of  accounting  rules  and  of  the  timing  of  the  notification;  poor  cooperation 
between the national services involved in the compilation of EDP figures, as well as lack of 
independence of the National Statistical Service of Greece and the General Accounting Office 
from  the  Ministry  of  Finance;  an  institutional  setting  and  a  public  accounting  system 
inappropriate  for  a  correct  reporting  of  EDP  statistics,  especially  non-transparent  or 
improperly  documented  bookkeeping,  which  has  lead  to  several,  and  in  some  cases 
significant, revisions of data by the Greek authorities over an extended period of time; lack of 
accountability in the individual provision of figures used in EDP notifications, (e.g. absence 
of written documentation or certification in some cases, exchange of data by phone); unclear 
responsibility and/or lack of responsibility of the national services providing source data or 
compiling statistical data, combined with ambiguous empowerment of officials responsible for 
the  data”.  Therefore,  further  efforts  are  needed  to  improve  the  collection  and  processing  of 
general  government  data.  Given  the  persistent  failures  of  Greece  in  providing  adequate 
government deficit statistics for the implementation of the SGP, fiscal consolidation efforts in 
future years need to be monitored not only on the basis of the government deficit figures but 
also through an assessment of developments in the government debt levels. 

Structural and endemic problems related to the recording of Greek government accounts, have 
been  detrimental  for  timely  and  effective  revenue  and  expenditure  control.  Moreover,  a 
number of interventions with a view to improve budgetary process and execution, as well as 
the quality of fiscal data are also paramount, in the context of the much necessary overhaul of 
the  Greek  statistical  system  (including  the  General  Accounting  Office)  and  the  professional 
independence of the national statistical authorities.  

The  Commission  is  initiating  an  infringement  procedure  in  relation  to  the  non-compliance 
with a series of EU legal acts, concerning the compilation and reporting of fiscal statistics in 
Greece.  

3. 

THE JANUARY 2010 UPDATE OF THE STABILITY PROGRAMME OF GREECE 

Council Regulation (EC) No 1466/97, on the strengthening of the surveillance  of  budgetary 
positions and the surveillance and co-ordination of economic policies, stipulates that countries 
adopting  the  single  currency  shall  submit  updated  stability  programmes  annually.  In 
accordance  with  Article  5(3)  of  this  Regulation,  the  Council  may  examine  the  updated 
stability  programmes  based  on  the  assessments  prepared  by  the  Commission  and  the 
Economic  and  Financial  Committee.  In  its  assessment,  the  Council  shall  also  include  an 
examination  of  whether  economic  policies  are  consistent  with  the  broad  economic  policy 
guidelines. 

24 

http://epp.eurostat.ec.europa.eu/portal/page/portal/product_details/publication?p_product_ 
code=COM_2010_report_greek  

EN 

10 

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The  2010  budget  was  adopted  by  Parliament  on  23  December  2009  setting  a  general 
government  deficit  target  of  9.1%  of  GDP  in  2010.  In  the  meantime,  the  Greek  authorities 
announced the need to step up the fiscal adjustment already in 2010, setting a more ambitious 
budgetary  target  for  2010  at  8.7%  of  GDP.  The  January  2010  update  of  the  stability 
programme,  which  was  submitted  on  15  January  2010  covers  the  period  2010-2013  and, 
confirmed  the  revised  budgetary  target  for  2010  at  8.7%  of  GDP.  To  ensure  meeting  the 
revised targets, the updated stability programme envisages a number of measures, on top of 
those announced in the 2010 budget law. The programme presents a detailed package of fiscal 
consolidation measures for 2010, aiming at enhancing tax revenue collection and, to a lesser 
extent,  constraining  and  rationalizing  primary  public  expenditure.  It  provides  also  the 
estimated  quantification  of  each  one  of  the  main  fiscal  measures  for  2010,  as  well  as  the 
timeframe of their adoption and implementation. Some of these measures have already been 
submitted to Parliament and will be implemented in the first months of 2010. The plans for 
2011, 2012 and 2013 include a wide range of structural reforms but are less detailed and do 
not include a precise calendar of implementation.  

In  the  absence  of  the  2010  budget,  which  was  made  available  after  the  cut-off  date  of  the 
autumn  2009  forecast,  the  Commission  services  projected  the  government  deficit  to  remain 
above  12%  of  GDP  in  both  2010  and  2011.  According  to  the  macroeconomic  scenario 
underlying the 2010 budget law, confirmed also by the January 2010 update of the stability 
programme,  real  GDP  growth  is  projected  at  -0.3%  in  2010,  broadly  in  line  with  the 
Commission services' autumn 2009 forecast. The latter however, had been made under a no-
policy scenario assumption and before recent financial market reactions and thus, the central 
macroeconomic scenario for 2010 included in the updated programme is optimistic.  

According  to  the  January  2010  update  of  the  stability  programme,  the  general  government 
budgetary  target  for  2010  implies  a  fiscal  adjustment,  measured  by  the  change  in  headline 
deficit  ratio  of  4  percentage  points  of  GDP,  reflecting  an  increase  in  total  revenue-to-GDP 
ratio of 2.6 percentage points of GDP and a reduction in total expenditure-to-GDP ratio of 1.4 
percentage  point  of  GDP.  Thus,  the  main  bulk  of  the  adjustment  in  2010  is  planned  to  be 
achieved from the revenue side of the budget, on the back of the implementation of temporary 
revenue enhancing measures (one-offs) of some ¼% of GDP25 and a permanent tax revenue-
enhancing  package,  which  is  expected  to  be  adopted  by  Parliament  in  March  2010.  On  the 
expenditure  side,  the  foreseen  retrenchment  reflects  the  discontinuation  of  the  one-off 
expenditures of more than 1% in 2009, while the impact of a number of permanent spending 
cuts  announced  is  actually  cancelled  out  by  an  increase  in  education  spending,  health-care 
services and public investment.  

More specifically, the programme presents a number of permanent revenue-side consolidation 
measures,  to  be  implemented  in  2010,  amounting  to  around  2½%  of  GDP.  It  provides  the 
description of tax revenue enhancing measures including the implementation of a progressive 
taxation  scheme  for  all  household  incomes  and  the  elimination  of  tax  exemptions  (with  an 
estimated  budgetary  impact  of  0.4%  of  GDP),  the  reform  of  the  real  estate  taxation  regime 
(with an estimated budgetary impact of 0.2% of GDP), the rise on excise duties on tobacco 
and alcohol products (already submitted to Parliament, with an estimated budgetary impact of 

25 

This would be the net budgetary impact of one-off revenues of ½% of GDP (fees collected in relation to 
the  financial  sector  liquidity  scheme,  and  a  special  tax  on  highly  profitable  enterprises  and  large  real 
estate) and one-off expenditure of ¼% of GDP (related to the second instalment of the social solidarity 
benefit paid to poor households). 

EN 

11 

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0.4% of GDP) and the rise on mobile telephony usage fees and excise duties on fuel26 (with 
an  estimated  budgetary  impact  of  0.4%  of  GDP).  However,  a  significant  part  (some  1%  of 
GDP) of the total projected permanent revenue increase in 2010, relies on the intensification 
of  the  fight  against  tax  evasion.  The  programme  presents  a  number  of  policy  interventions 
with regard to improving the tax collection mechanism, widening the tax base and increasing 
tax  compliance27.  It  is  important  that  the  legislative  amendments  necessary  for  the 
implementation of most of the outlined tax measures, and which are planned to be submitted 
to  Parliament  in  March,  be  adopted  without  delay  for  the  measures  to  have  the  expected 
impact still in 2010. Moreover, given past experience, the planned measures to fight against 
tax evasion must be forcefully implemented for the expected gains to materialize.. 

On  the  expenditure  side,  the  decrease  foreseen  in  2010,  results  mainly  from  the 
discontinuation of one-off expenditure in 2009. Although effort has been given to reduce the 
public  sector  wage  bill,  operational  cost  and  defence  spending  (by  around  ¾%  of  GDP), 
increased spending in education and public investment (by some ¾% of GDP) actually offsets 
any  deficit  reducing  budgetary  impact  and  thus,  the  net  budgetary  impact  should  be 
negligible.  More  specifically,  the  updated  programme  provides  for  measures  in  view  of 
achieving  efficiency  gains  in  hospital  procurement  (with  estimated  permanent  budgetary 
impact of 0.3% of GDP), the government's commitment to restrain operational cost by 0.1% 
of GDP, to cut military procurement by 0.2% of GDP, to cut public servants allowances28 by 
0.3% of GDP, to freeze recruitment in 2010 in the public sector and implement the rule of 1 
hiring  for  every  5  retirements  thereafter.  However,  the  nominal  wage  bill  is  estimated  to 
remain around the levels of 2009, on the back of wage drift. 

On top of these measures and without including any budgetary impact in the budgetary target, 
the  Ministry  of  Finance  has  set  up  a  contingency  reserve  and  frozen  all  budgetary 
appropriations  per  ministry  by  10%  (other  than  wages,  pensions  and  interest  payments). 
Depending  on  the  expenditure  outturn  of  the  first  six  months  of  2010,  the  budgetary 
appropriations blocked in this way may not be fully reallocated among the spending ministries 
securing a further reduction in related expenditures by year-end. 

Overall, on the basis of the detailed information included in the update, and in spite of several 
risks,  the  2010  budgetary  target  seems  within  reach,  provided  that  there  is  a  timely  and 
successful  implementation  of  all  measures  announced.  A  large  part  of  the  correction  in  the 

26 

27 

28 

The rise on mobile telephony usage fees and on excise duties on fuel has already been legislated by the 
previous Parliament, prior to the October general elections. 
Unification  of  the  tax  collection  and  the  social  security  collection  systems,  adoption  of  a  risk-based 
approach in the audit process, the imposition of legal obligation for enterprises to maintain professional 
accounts with commercial banks and settling payments through the banking system, review of existing 
cross-matching  checks,  shift  focus  from  formal  checks  on  books  and  documents  into  in-depth  audits, 
collect data from utility companies (power, phone, water) and use them for performing cross-matching, 
collect details of all issued receipts, eliminate bargaining in the penalty assessment process and shift to 
a point-system based on objective criteria, establish and use an IT-based audit case management system, 
amnesty  for  individuals  or  companies  that  assist  in  bringing  corrupt  officials  to  justice,  remove  the 
regional  tax  office  directors  from  the  dispute  resolution  process  by  handling  such  disputes  in  a 
centralized location, reduce the number of regional tax offices by adopting other means for obtaining 
forms, getting help, and filing returns (web-based, postal and call center) etc.  
Monthly  allowances  to  civil  servants,  on  top  of  their  nominal  wage  are  not  streamlined  across  the 
several government departments. There are allowances in ministries exceeding the 100% of the nominal 
statutory  wage  that  actually  double  the  ministry's  employees'  monthly  earnings,  while  there  are  other 
ministries  and  public  entities,  where  monthly  allowances  do  not  exceed  the  30%  of  the  nominal 
statutory wage.  

EN 

12 

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headline  deficit  planned  in  the  updated  stability  programme  reflects  on  the  one  hand,  the 
discontinuation  of  one-off  deficit-increasing  measures  in  2009  and  on  the  other  hand,  the 
implementation of one-off deficit-reducing measures in 2010. The discontinuation of one-off 
expenditure,  as  presented  in  the  update,  will  have  an  automatic  deficit  reducing  budgetary 
impact  of  somewhat  more  than  1%  of  GDP  in  2010,  while  the  one-off  revenue-enhancing 
measures will have a total net budgetary impact of some ¼% of GDP. Thus, the overall deficit 
reducing  budgetary  impact  of  temporary  factors  in  2010  stands  at  just  below  1½%  of  GDP 
(almost one-third of the total 4 percentage points of GDP consolidation projected for 2010). 
The reduction in the headline deficit not relying on one-off measures in 2010 is expected to be 
in the order of 2½% of GDP.  

At this stage, the uncertainty surrounding the 2010 budgetary target of 8.7% of GDP remains 
high  and  the  risk  of  fiscal  slippages,  stemming  mainly  from  the  favourable  macroeconomic 
assumptions  underlying  the  programme  and  the  optimistic  official  estimation  of  the  results 
from  the  fight  against  tax  evasion  is  large.  Although  there  is  detailed  information  on  the 
measures  (and  their  estimated  budgetary  impact)  underpinning  the  budgetary  target,  the 
prompt  and  rigorous  implementation  of  the  announced  policies  is  crucial.  Apart  from 
uncertainties concerning the impact of the envisaged consolidation measures, the revenue and 
expenditure  projections  underpinning  the  2010  budgetary  target  are  subject  to  risks.  In 
particular,  given  the  projected  increase  in  the  debt-to-GDP  ratio  by  7  percentage  points  of 
GDP in 2010 and the increase in interest rates on new debt (or debt with variable rates), the 
interest  expenditure  projection  in  the  update  for  2010  appears  to  be  on  the  optimistic  side. 
Moreover, the 2008 budgetary outcome has not been validated by Eurostat. Any revision in 
the  data  for  past  years  may  have  carry-over  effects  for  2010.  Similarly,  any  government 
deficit  for  2009  in  excess  of  the  estimate  of  12¾%  of  GDP  would  imply  a  less  favourable 
starting point for 201029. Therefore, it is of key importance that the measures presented in the 
stability programme (including their estimated budgetary impact) underpinning the budgetary 
target, be promptly and rigorously implemented and that Greece stands ready to announce and 
implement further measures, if such risks materialise. 

Over the medium term, the general government deficit is set by the programme to decrease 
further to 5.6% of GDP in 2011, 2.8% of GDP in 2012 and 2% of GDP in 2013. Similarly, the 
primary  balance  will  reach  a  surplus  of  3.2%  of  GDP  by  2013,  which  compares  with  a 
primary  deficit  of  7.7%  in  2009.  The  budgetary  strategy  outlined  aims  at  reducing  the 
structural deficit (as recalculated by the Commission services based on the commonly agreed 
methodology) from 11½% of GDP in 2009 to 7¾% of GDP in 2010 and 1½% by 2013, while 
the medium term objective (MTO) of a balanced budget in structural terms (i.e. in cyclically-
adjusted  terms  net  of  one-off  and  other  temporary  measures)  is  not  projected  to  be  attained 
within  the  programme  horizon.  Budgetary  consolidation  in  2011  to  2013  is  based  on  both 
revenue enhancement and expenditure retrenchment, details of which, however, have not been 
yet  disclosed.  Thus,  the  budgetary  outcomes  in  2011  and  afterwards,  are  subject  to  risks. 
Moreover,  the  underlying  central  macroeconomic  scenario  is  based  on  favourable  growth 
assumptions,  implying  that  real  GDP  growth  will  return  to  the  positive  territory  in  2011  at 
1.5% and in 2012 at 1.9%, reaching 2.5% in 2013. All in all, risks attached to the medium-
term adjustment path are large.  

29 

So far, available incomplete indicators suggest that a slippage in 2009 budgetary outcome, on top of the 
12.7% of GDP, if any, should be small. As required by Council Regulation (EC) No 479/2009, the first 
fiscal outturn for 2009 will be notified by the National Statistical Service of Greece by 1 April 2010. 

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Government  gross  debt,  estimated  at  113.4%  of  GDP  in  2009,  is  projected  by  the  stability 
programme to exceed 120% of GDP in 2010, before returning to a downward path in 2012. 
Apart  from  the  rise  in  the  deficit  and  the  decline  in  GDP  growth,  a  significant  stock-flow 
adjustment contributed to the rise in the debt ratio in 2009, because of financial transactions 
related to the financial sector liquidity scheme and the settlement of arrears. 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  and  GDP  projections.  These  risks  may  be 
compounded by uncertainty about the stock-flow adjustments in which, although significantly 
shrunk compared to the past (0.2% of GDP for each of the years covered by the programme), 
the programme does not provide information on components. 

The  January  2010  update  of  the  stability  programme  provides  also  information  on  a  wide 
range of structural reforms, to be launched or implemented in the course of 2010. According 
to the update, the timely and successful implementation of these reforms will have a positive 
impact on the quality of public finances and address structural home-made weaknesses of the 
Greek  economy.  More  specifically,  the  government has already submitted  to  Parliament the 
draft law to render the Statistical Service independent, and plans to set up a budget execution 
monitoring  office  under  the  auspices  of  Parliament  and  adopt  binding  fiscal  rules  for  the 
effective medium-term preparation and execution of the budget. In the medium-term and no 
later  than  2011,  the  Greek  authorities  commit  to  launch  activity-based  budgeting  which  by 
2012 will fully substitute the current system. This will also be framed in a binding multi-year 
budget framework and based on a double-entry accounting system. Moreover, a wide reform 
package  is  also  presented  in  the  programme,  putting  forward  policies  in  the  areas  of 
promoting environmentally-friendly investment projects, and revising the current Investment 
Law,  promoting  Public  Private  Partnerships  and  establishing  a  Hellenic  Development  Fund, 
containing  inflationary  pressures  through  better  market  regulation,  implementing  active 
labour market policies (ALMP), improving public administration, increasing transparency and 
accountability,  reducing  the  number  of  municipalities  and  local  councils,  supporting 
investment in research, technology and innovation.  

4. 

EU SURVEILLANCE IN THE CURRENT JUNCTURE 

4.1. 

The combination of instruments of surveillance 

Many  EU  countries  are  presently  facing  general  government  deficits  above  the  3%  of  GDP 
reference value set in the Treaty. The often strong deterioration in the deficit, as well as, in the 
debt  positions  must  be  seen  in  the  context  of  the  unprecedented  global  financial  crisis  and 
economic  downturn.  Several  factors  are  at  play.  First,  the  economic  downturn  brings  about 
declining  tax  revenue  and  rising  social  benefit  expenditure  (e.g.  unemployment  benefits). 
Second,  recognising  that  budgetary  policies  have  an  important  role  to  play  in  the  current 
extraordinary economic situation, the Commission called for a fiscal stimulus in its November 
2008  European  Economic  Recovery  Plan  (EERP)30,  endorsed  by  the  European  Council  in 
December31. The Plan explicated that the stimulus should be timely, targeted and temporary 
and differentiated across Member States to reflect their different positions in terms of public 
finance sustainability and competitiveness and should be reversed when the recovery becomes 

30 

31 

‘A  European  Economic  Recovery  Plan,’  Communication  from  the  Commission  to  the  European 
Council - COM(2008) 800, 26.11.2008.  
See  Presidency  Conclusions  of  the  Brussels  European  Council,  11  and  12  December  2008,  reference 
17271/1/08 REV 1. 

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14 

   EN 

                                                 
self-sustaining. Finally, several countries have taken measures to stabilise the financial sector, 
some of which have impacted on the government debt position or constitute a risk of higher 
deficits and debt in the future32, although some of the costs of the government support could 
be recouped in the future.  

While  in  Greece  the  current  deterioration  in  public  finances  must  also  be  seen  in  the  same 
context,  fiscal  imbalances  have  been  high  and  persistent  for  many  years,  in  spite  of  the 
buoyant  economic  activity  up  to  2008,  thus  suggesting  structural  roots.  In  particular, 
government deficits reflect insufficient control of government expenditure, while revenue and 
GDP  growth  projections  have  proven  to  be  systematically  overoptimistic.  Moreover, 
structural and endemic deficiencies related to the recording of Greek government accounts in 
the recent past, have also been detrimental for timely and effective revenue and expenditure 
control,  and  macroeconomic  surveillance.  High  deficits  have  led  to  one  of  the  highest 
government  debt  ratio  in  the  EU,  which  is  not  only  substantially  above  the  60%  of  GDP 
reference value, but remains on an unsustainable upward path.  

Greece's situation of combining a fiscal crisis with broader macroeconomic imbalances which 
are  rooted  in  deep-seated  structural  problems  requires  a  joint  deployment  of  instrument  of 
economic  and  budgetary  surveillance  foreseen  by  the  Treaty  and  relevant  secondary 
legislation.  To  this  end,  the  simultaneous  application  of  instruments  to  attain  fiscal  durable 
consolidation  and  proceed  with  necessary  structural  reforms  in  the  wider  area  of  economic 
activity is paramount. A recommendation under Article 121(4), a notice to take action under 
Article 126(9) and an opinion on the January 2010 update of the stability programme pursuant 
to  Regulation  (EC)  No  1466/97  (the  so-called  preventive  arm  of  the  Stability  and  Growth 
Pact) and their joint deployment should strengthen the scope of EU surveillance. 

4.2. 

The Application of Article 121 of the Treaty on the Functioning of the European 
Union 

Article 121(2) TFEU requires the Council to adopt a recommendation for the broad guidelines 
of  the  economic  policies  for  the  Member  States  and  the  Community,  acting  on  a 
recommendation from the Commission and a conclusion from the European Council. Article 
121(3) of the Treaty requires the Council to monitor economic developments in each Member 
States  and  in  the  Union,  as  well  as  the  consistency  of  economic  policies  with  the  broad 
guidelines of the economic policies, on the basis of reports by the Commission. In the case it 
has been established that economic policies are not consistent with the broad guidelines of the 
economic policies, or that they risk jeopardising the proper functioning of the economic and 
monetary union, Article 121(4) establishes that the Commission may address a warning to the 
Member  State  concerned  and  may  recommend  the  Council  to  make  the  necessary 
recommendations  to  the  Member  State  concerned.  Given  the  gravity  of  the  situation  in 
Greece,  and  in  order  to  ensure  consistency  with  the  Decision  under  Article  126(9),  it  is 
appropriate  that  the  Council  adopts  the  necessary  recommendation.  In  addition,  the  Council 
may, acting on a proposal from the Commission, decide to make its recommendations public. 

32 

See  the  Eurostat  decision  on  the  statistical  recording  of  public  interventions  to  support  financial 
institutions and financial markets during the financial crisis, Eurostat News Release No 103/2009 of 15 
July 2009, and ‘Accounting for Bank Rescues’ in Public Finances in EMU-2009, European Economy, 
5, p. 59-63. 

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15 

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The  Council  adopted  their  most  recent  broad  economic  policy  guidelines  for  the  Member 
States and the Community on 14 May 200833. The broad guidelines of the economic policies 
for 2008-2010 include policy guidance that Member States should “respect their medium-term 
budgetary objectives” and should “take effective action in order to ensure a prompt correction 
of  excessive  deficits”.  In  addition,  Member  States  with  external  imbalances  should  correct 
them  “by  implementing  structural  reforms,  boosting  external  competitiveness  and  (…) 
contributing  to  their  correction  via  fiscal  policies”.  On  this  basis,  on  25  June  200934,  the 
Council in its structural recommendations noted that for Greece it is "imperative to intensify 
efforts  to  address  the  macro-economic  imbalances  and  structural  weaknesses  of  the  Greek 
economy" and directed country-specific recommendations to Greece including that it should 
pursue  with  fiscal  consolidation;  increase  competition  in  professional  services,  reform  to 
increase  investments  in  R&D;  use  structural  funds  more  efficiently;  reform  public 
administration  and  take  a  broad  range  of  labour  market  measures  within  an  integrated 
flexicurity  approach.  At  the  same  time,  as  a  member  of  the  euro  area,  Greece  was 
recommended  by  the  Council  to  secure  the  sustainability  of  public  finances;  improve  the 
quality  of  public  finances  including  modernising  public  administration  as  well  as 
implementing the EU common principles of flexicurity.  

In the light of the impact on the Greek economy of the global economic and financial crisis, 
the implied re-pricing of risks puts further pressure on these debt burdens, raises risk premia 
on  government  debt  and  may  raise  issues  concerning  the  solvency  of  the  Greek  economy, 
with possible spill over to other euro area economies. 

4.3. 

The Application of Article 126 of the Treaty and Previous Steps in the Excessive 
Deficit Procedure in Relation to Greece 

Article 126 TFEU lays down an excessive deficit procedure (EDP). This procedure is further 
specified  in  Council  Regulation  (EC)  No  1467/97  on  speeding  up  and  clarifying  the 
implementation of the excessive deficit procedure35, which is part of the Stability and Growth 
Pact. 

According  to  Article  126(2)  TFEU,  the  Commission  has  to  monitor  compliance  with 
budgetary discipline on the basis of two criteria, namely: (a) whether the ratio of the planned 
or actual government deficit to GDP exceeds the reference value of 3% (unless either the ratio 
has  declined  substantially  and  continuously  and  reached  a  level  that  comes  close  to  the 
reference value; or, alternatively, the excess over the reference value is only exceptional and 
temporary  and  the  ratio  remains  close  to  the  reference  value);  and  (b)  whether  the  ratio  of 
government debt to GDP exceeds the reference value of 60% (unless the ratio is sufficiently 
diminishing and approaching the reference value at a satisfactory pace). 

Article  126(3)  TFEU  (ex  104(3)  TEC)  stipulates  that,  if  a  Member  State  does  not  fulfil  the 
requirements under one or both of these criteria, the Commission has to prepare a report. This 
report  also  has  to  “take  into  account  whether  the  government  deficit  exceeds  government 

33 
34 
35 

Council Recommendation 2008/390/EC (OJ L 137, 27.5.2008, p. 13). 
OJ L 183, 15.7.2009, p. 1. 
OJ  L  209,  2.8.1997,  p.  6.  Account  is  also  taken  of  the  Opinion  of  the  Economic  and  Financial 
Committee  on  the  “Specifications  on  the  implementation  of  the  Stability  and  Growth  Pact  and 
guidelines  on  the  format  and  content  of  stability  and  convergence  programmes”,  endorsed  by  the 
ECOFIN Council of 20 November 2009, available at: 
http://ec.europa.eu/economy_finance/sgp/deficit/legal_texts/index_en.htm  

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16 

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investment expenditure and take into account all other relevant factors, including the medium-
term economic and budgetary position of the Member State”. 

On the basis of the actual deficit and debt data notified by the Greek authorities in October 
200836  and  subsequently  validated  by  Eurostat37  and  taking  into  account  the  Commission 
services’  January  2009  interim  forecast,  the  Commission  adopted  a  report  under  Article 
104(3) TEC for Greece on 18 February 200938. Subsequently, and in accordance with Article 
104(4)  TEC,  the  Economic  and  Financial  Committee  (EFC)  formulated  an  opinion  on  the 
Commission report on 27 February 2009. On 24 March 2009 the Commission, having taken 
into account its report under Article 104(3) TEC and the opinion of the EFC, addressed to the 
Council, in accordance with Article 104(5) TEC, its opinion that an excessive deficit existed 
in Greece. 

On  27  April  2009,  upon  a  recommendation  by  the  Commission,  the  Council  decided,  in 
accordance with Article 104(6) TEC that an excessive deficit existed in Greece39. At the same 
time, and in accordance with Article 104(7) TEC the Council, addressed recommendations to 
Greece  to  put  an  end  to  the  excessive  deficit  situation  by  2010,  by  bringing  the  general 
government  deficit  below  3%  of  GDP  in  a  credible  and  sustainable  manner.  The  Council 
further recommended “that to this end, the Greek authorities should (i) strengthen the fiscal 
adjustment  in  2009 through permanent measures, mainly on the expenditure side, including 
by  implementing  the  measures  already  announced;  (ii)  implement  additional  permanent 
measures  in  2010,  in  order  to  bring  the  headline  deficit  clearly  below  the  3  %  of  GDP 
reference value by the end of the year; (iii) continue efforts to control factors other than net 
borrowing,  which  contribute  to  the  change  in  debt  levels,  with  a  view  to  ensuring  that  the 
government gross debt ratio diminishes sufficiently and approaches the reference value at a 
satisfactory  pace;  and  (iv)  continue  efforts  to  improve  the  collection  and  processing  of 
statistical  data  and  in  particular  general  government  data”.  The  Council  established  a 
deadline  of  27  October  2009  for  Greece  to  take  effective  action  to  strengthen  the  fiscal 
consolidation path already in 2009 and to specify the measures that seem sufficient to ensure 
adequate progress towards the correction of the excessive deficit by 2010.  

On  11  November  2009,  the  Commission  assessed  the  action  taken  by  Greece  to  correct  the 
excessive deficit by 2010 in response to the Council recommendation of 27 April 2009, and 
concluded that the action taken by Greece was inadequate and addressed a recommendation 
for a decision to the Council40. The Council decided accordingly on 2 December 2009 under 
Article 126(8) TFEU. 

According to Article 5(1) of Council Regulation (EC) No 1467/97, “Any Council decision to 
give  notice  to  the  participating  Member  State  concerned  to  take  measures  for  the  deficit 
reduction  in  accordance  with  Article  104(9)  of  the  Treaty  (126(9)  TFEU)  shall  be  taken 

36 

37 
38 

39 
40 

According  to  Council  Regulation  (EC)  No  3605/93  (which  in  the  meantime  has  been  replaced  by 
Council Regulation (EC) No 479/2009), Member States have to report to the Commission, twice a year, 
their planned and actual government deficit and debt levels. The most recent notifications of Greece can 
be found at: 
http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/procedure/edp_notific
ation_tables  
Eurostat news release No 147/2008 of 22.10.2008. 
All EDP-related documents for Greece can be found at the following website:   
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm  
Council Decision 2009/415/EC (OJ L 135, 30.5.2009, p. 21). 
http://ec.europa.eu/economy_finance/publications/publication_summary16243_en.pdf 

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17 

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within two months of the Council decision establishing that no effective action has been taken 
in accordance with Article 104(8) (126(8) TFEU)”, that is “give notice to the Member State to 
take,  within  a  specified  time-limit,  measures  for  the  deficit  reduction  which  is  judged 
necessary by the Council in order to remedy the situation”. 

5. 

THE NEED FOR FISCAL ADJUSTMENT IN 2010 AND BEYOND AND EXTENSION OF THE 
DEADLINE FOR CORRECTING THE EXCESSIVE DEFICIT 

On  the  basis  of  the  autumn  2009  Commission  services’  macroeconomic  projections  and 
potential growth estimates, the structural deficit in 2009 stands at 11½% of GDP. Therefore 
the  total  structural  adjustment  necessary  for  Greece,  to  bring  the  headline  deficit  below  the 
reference value of 3% of GDP is more than 9% points of GDP. Therefore, a correction of the 
excessive deficit in 2010, as previously recommended by the Council is no longer realistic. 

A frontloaded and credible structural budgetary consolidation is indispensable to improve the 
medium-term growth prospects in Greece, but such a large effort in a single year is obviously 
not feasible, while an adjustment of this magnitude in a three-year period will be challenging. 
Nevertheless,  the  high  and  persistent  fiscal  imbalances,  coupled  with  the  high  and  rapidly 
increasing level of debt and the available longer-term sustainability indicators are matters of 
serious  concern  and  require  determined  action  in  the  short-term.  According  to  the 
Commission  services’  2009  Sustainability  Report41,  Greece  is  at  high  long-term  risk  with 
regard to the long-term sustainability of public finances. The long-term budgetary impact of 
ageing  is  well  above  the  EU  average,  mainly  as  a  result  of  a  relatively  high  increase  in 
pension expenditure as a share of GDP over the coming decades, if the pension system is not 
reformed.  The  budgetary  position  in  2009  compounds  the  budgetary  impact  of  population 
ageing  on  the  sustainability  gap.  Achieving  primary  surpluses  over  the  medium  term  and 
especially a further reform of the pension system aimed at curbing the substantial increase in 
age-related expenditures would contribute to reducing risks to the long-term sustainability of 
public finances. If Greece’s budgetary imbalances are not corrected promptly, they will weigh 
on economic agents’ expectations and be detrimental to growth prospects not only in a longer-
term prospect, but already in the near future.  

In view of the above, the Commission considers that, by extending to 2012 the deadline for 
the elimination of the excessive deficit in Greece as outlined in the January 2010 update of the 
stability programme, it would set up the conditions for a balanced and lasting consolidation 
(demanding correction afterwards to reach a medium-term objective of close to balance or in 
surplus).  To  reach  such  a  target,  the  Greek  government  should  rigorously  implement  the 
deficit-reducing measures and structural reforms included in the January 2010 update of the 
stability programme, and stand ready to adopt further measures in case the adjustment would 
not  suffice  to  attain  the  target.  This  would  contribute  to  the  credibility  of  the  target  of 
reducing the government deficit to below 3% of GDP in 2012. 

If  the  2010  headline  general  government  deficit  ratio  is  brought  to  a  level  of  8.7%  of  GDP 
based  on  the  envisaged  permanent  measures,  a  credible  adjustment  path  with  a  view  to 

41 

According  to  the  projections  included  in  the  2009  Sustainability  Report  (European  Economy,  9), 
government  expenditure  in  age-related  expenditure  could  increase,  on  unchanged  policies,  by  16% 
points  of  GDP  from  2010  to  2060,  of  which  12.5  points  refer  to  pensions.  See  also  Commission’s 
Communication  to  the  European  Parliament  and  the  Council  ‘Long-term  Sustainability  of  Public 
Finances for a Recovering Economy’ - COM(2009) 545, 14.10.2009. 

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bringing  the  deficit  durably  below  3%  of  GDP  by  2012  at  the  latest  would  also  require  a 
significant improvement in the structural  balance  (cyclically-adjusted balance  net of one-off 
and  temporary  measures),  also  in  2011  and  2012.  Thus,  for  those  two  years  the  structural 
fiscal effort should be of at least 3½% of GDP in 2010 and 2011 and 2½% of GDP in 2012. 

If revenue performance in 2010  turns out better-than-expected, the  Greek authorities should 
use the additional room for manoeuvre to reduce deficit further on in order to contribute to a 
sustained  downward  correction  in  public  debt  levels.  In  the  opposite  case,  the  Greek 
government  should  take  necessary  measures  to  compensate  for  the  revenue  shortfalls  by 
cutting current expenditure. 

Albeit decreasing, the contribution of factors affecting the debt-ratio other than net borrowing 
and  nominal  GDP  growth  (i.e.  financial  operations  and  other  components  of  the  so-called 
stock-flow adjustment), which have driven up the debt ratio in the past years, is projected to 
decrease in 2010. Although this planned development of the stock-flow adjustment represent 
an improvement with respect to the past, their contribution to overall increase in the debt level 
still  remains  a  source  of  concern.  Consequently,  it  is  necessary  that  the  Greek  government 
takes further action in order to control debt-increasing transactions other than the deficit. 

The annual change in general government debt levels in 2010 to 2012 should not exceed the 
increase implied by the nominal deficit targets of not above 8.7% of GDP in 2010, 5.6% of 
GDP in 2011 and 2.8% of GDP in 2012, and the debt issuance required for the settlement of 
arrears and normal liquidity management. Thus, the change in the gross debt level should not 
exceed  EUR  22.240  billion  in  2010,  EUR  11.320  billion  in  2011  and  EUR  4.510  billion  in 
2012.  This  corresponds  to  a  total  stock-flow  adjustment  of  ¼%  of  GDP  per  year,  in  2010, 
2011 and 2012.  

Once  the  excessive  deficit  has  been  corrected,  Greece  shall  take  the  necessary  measures  to 
ensure  that  a  balanced  budget  in  structural  terms  is  achieved  quickly  in  order  to  attain  a 
sufficient and sustained reduction in debt levels. Achieving a balanced budget for appropriate 
budgetary management of economic downturns remains a key issue.  

Over  the  last  several  years,  the  external  accounts  of  the  Greek  economy  have  deteriorated 
significantly, with the high and persistent external imbalances mirroring to a large extent, the 
marked  deterioration  of  the  country's  fiscal  position.  The  net  international  position  has 
markedly  worsened  since  2004.  The  negative  net  international  investment  position  already 
exceeds  115%  of  GDP  in  2009.  Consequently,  the  government  sector  is  not  only  absorbing 
the main part of the available external financing, but also crowding out private-sector access 
to  financing.  Thus,  bold  fiscal  consolidation  is  also  crucial  for  recovering  competitiveness 
losses  and  addressing  the  existing  external  imbalances.  Structural  measures  and  wage 
moderation would also be crucial for restoring price competitiveness and correcting external 
imbalances. 

Fiscal consolidation is also crucial for recovering competitiveness losses and addressing the 
existing external imbalances. To this end, the Greek authorities should implement permanent 
measures to control current primary expenditure, including the wage cost in the public sector; 
and urgently implement structural reforms. In particular, the Greek authorities should ensure 
that  fiscal  consolidation  measures  are  also  geared  towards  enhancing  the  quality  of  public 
finances  within  the  framework  of  a  comprehensive  reform  programme,  while  swiftly 
implementing policies to further reforming the tax administration.  

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The Commission recommends that Greece submits by 16 March 2010 a report spelling out the 
measures and the calendar for implementation, to achieve the 2010 budgetary targets. Greece 
should also  submit a report by  15 May  2010  (and thereafter  on  a  quarterly  basis),  outlining 
measures to be implemented in compliance with the Council Recommendation under Article 
121(4)  and  Decision  under  Article  126(9).  In  particular,  the  report  should  contain  detailed 
information on concrete measures implemented by the date of the report to comply with this 
Decision; concrete measures planned to be implemented after the date of the report to comply 
with  this  Decision;  the  calendar  of  the  adoption  of  the  structural  measures,  outlined  in  the 
January 2010 update of the stability programme; monthly State budget execution; infra-annual 
data  on  budgetary  implementation  by  social  security,  local  government  and  extra  budgetary 
funds;  government  debt  issuance  and  reimbursement;  information  on  permanent  and 
temporary  public  sector  employment  developments,  government  expenditure  pending 
payment  (cumulated  arrears);  and  financial  situation  in  public  enterprises  and  other  public 
entities (with yearly frequency). 

* 

* 

* 

In  view  of  the  above  assessment,  the  Commission  recommends  the  Council  (i)  to  give 
recommendations to Greece with a view to ending the inconsistency with the broad guidelines 
of  the  economic  policies  and  removing  the  risk  of  jeopardising  the  proper  functioning  of 
economic  and  monetary  union,  in  accordance  with  Article  121(4)  of  the  Treaty  on  the 
Functioning of the European Union, (ii) to give notice to Greece in accordance with Article 
126(9), to take the necessary measures the Council judges necessary, in order to remedy the 
situation  of  excessive  government  deficit  and  (iii)  to  deliver  an  opinion  on  the  updated 
stability  programme.  Moreover,  the  Commission  considers  that  making  public  this  Council 
Recommendation  under  Article  121(4)  will  facilitate  the  co-ordination  of  economic  policies 
of  Member  States  and  the  Community  and  will  contribute  to  a  better  understanding  among 
economic  agents,  facilitating  the  implementation  of  the  recommended  measures.  Therefore, 
the Commission also proposes to the Council to decide to make the attached Recommendation 
public; the other recommendations and decision are also public. 

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2010/0031 (NLE) 

Proposal for a 

COUNCIL DECISION 

making public the Recommendation with a view to ending the inconsistency with the 
broad guidelines of the economic policies in Greece and removing the risk of 
jeopardising the proper functioning of economic and monetary union 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty on the Functioning of European Union, and in particular Article 
121(4) thereof, 

Having regard to the proposal of the Commission, 

Whereas: 

(1) 

On [16 February 2010], the Council adopted Recommendation [No. ...] with a view to 
ending the inconsistency with the broad guidelines of the economic policies in Greece 
and  removing  the  risk  of  jeopardising  the  proper  functioning  of  economic  and 
monetary union. 

(2)  Making  public  the  Recommendation  should  facilitate  the  co-ordination  of  economic 
policies  of  Member  States  and  the  Union  and  should  contribute  to  a  better 
understanding  among  economic  agents,  facilitating  the  implementation  of  the 
recommended measures, 

HAS DECIDED AS FOLLOWS:  

Article 1 

Recommendation [No. ... of 16 February 2010] with a view to ending the inconsistency with 
the broad guidelines of the economic policies in Greece and removing the risk of jeopardising 
the  proper  functioning  of  economic  and  monetary  union  shall  be  published  in  the  Official 
Journal of the European Union. 

Article 2 

This Decision shall take effect on [16 February 2010]. 

Done at Brussels, [16 February 2010]. 

For the Council, 
The President 

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