Greece has made a reasonable start in the post-programme period but its reform effort has slowed in the last few months, the European Commission said in its third report for Greece under the Enhanced Surveillance framework that was put in place following the conclusion of the European Stability Mechanism stability support programme (full report at: https://ec.europa.eu/info/publications/enhanced-surveillance-report-greece-may-2019).
The report notes that Greece has made a reasonable start to the post programme environment since August 2018, but finds that reform implementation in Greece has slowed in recent months, and that the consistency of some measures with commitments given to European partners is not assured and poses risks to the achievement of agreed fiscal targets. However, it noted that the "extent of the risk will depend on the implementation of new schemes on debt repayment in instalments and its impact on existing debt."
The European Commission said it expected an economic recovery to continue in 2019, with GDP growth estimated at 2.2 pct in 2019 and 2010, from 1.9 pct in 2018, based mostly on domestic demand. A strong export performance was a key growth factor in 2018, but it is expected to moderate in 2019, the Commission noted, estimating that exports will rise by around 5.0 pct in 2019 and almost 4.0 pct in 2020 in real terms.
The report said that the government has over-achieved its goal for a primary surplus of 3.5 pct for three years in a row, although it noted a reduction in public investments. The labor market shows further improvement although the unemployment rate froze to 18.6 pct from October 2018 to February 2019, it said. Commenting on an increase in the minimum wage in Greece, the Commission said its impact will be assessed in a later stage, although it acknowledged that employment in the private sector rose strongly in the February-April period.
"Real growth and job creation were preserved and Greece once more exceeded its main target on budget surplus in 2018," the report said, adding that, although with some delay, completion of specific reform commitments in the end of 2018 allowed for additional debt measures worth 970 million euros in April 2019. It noted that Greece has begun regaining access to capital markets and has benefited from upgrades by credit rating agencies.
The report said that although the financial sector continues facing problems, liquidity in the banking sector has further improved while efforts were currently underway to combat non-performing loans – although at a slower that expected rate. The European Commission sees "risks" in the short- and long-term from a slowdown in reforms and a reversal of some reforms. "The most significant consequences of the impact remain, such as high levels of public debt, non-performing loans and unemployment. Reducing these imbalances will need several years of continuous implementation of institutional and structural reforms to modernize and economy and the state along with several years of economic growth," the report said.
The Commission noted that forecasts made by European institutional agencies showed that following approval of fiscal measures in May 2019 there are risks to achieving an agreed primary surplus target of 3.5 pct of GDP in 2019 and adhering to a medium-term fiscal framework in 2020. It stressed that "the quality of recent fiscal measures is a cause of concern, given the fact of the target to turn public finances more friendly to growth and to channel a biggest part of social spending to groups more threatened by poverty."
The Commission recommends that Greek authorities should achieve a sustainable economic recovery and tackle the excessive macroeconomic imbalances by continuing and completing reforms in line with the post-programme commitments given at the Eurogroup of June 22, 2018. Focus should be on investment-related economic policy on sustainable transport and logistics, environmental protection, energy efficiency, renewable energy and interconnection projects, digital technologies, research and development, education, skills, employability, health, and the renewal of urban areas, taking into account regional disparities and the need to ensure social inclusion.