Greece: Maintain reform momentum as recovery slows amid global headwinds

Greece’s strong economic rebound from the COVID-19 crisis is being put to the test by surging energy and food prices and renewed global uncertainty, according to a new OECD report. 

The latest OECD Economic Survey of Greece says continued policy reforms over recent years have been a key factor behind the country’s robust post-pandemic recovery and have put the economy in a stronger position to face current headwinds.

GDP has returned to pre-pandemic levels, helped by effective government support, a revival in tourism and exports, and improved investor and consumer confidence. Employment growth has been strong, creating over a quarter of a million new jobs since before the start of the pandemic, reducing the unemployment rate to a 12-year low of 11.6%.

To sustain the recovery, the Survey recommends to better allocate public spending, strengthen public revenues, improve the  functioning of the labour market and keep up efforts to create a more dynamic business sector. 

“Greece’s robust and targeted policy response to the COVID-19 pandemic secured a strong and rapid recovery. The government’s ‘Greece 2.0’ recovery plan is already laying the strong foundations for Greece’s ability to tackle future challenges,” OECD Secretary-General Mathias Cormann said, presenting the Survey alongside Greek Prime Minister Kyriákos Mitsotákis. “Ensuring the ambitious reform and investment agenda is fully implemented will help to further improve opportunities for businesses and households and will be essential for the Greek economy to navigate past the current headwinds towards a path of sustainable growth.” 

Structural reforms are the key to continued economic and social progress, the Survey says, as high energy and other key commodity prices, especially since Russia’s war of aggression against Ukraine, are slowing Greece’s recovery. Inflation peaked at 12.1% in October 2022 – its highest rates in 25 years – which is weakening demand, delaying investment and setting back recent gains in purchasing power for households. GDP growth is expected to moderate from 5.1% in 2022 to near 1% in 2023 and recover to approach 2% in 2024.

To buffer the inflation shock, the government has expanded energy and fuel price subsidies. This has, however, delayed the return of the primary budget surplus to its medium-term target of 1.5% to 2% of GDP, which weighs on Greece’s ability to access less expensive financing for investment.

While reducing high rates of poverty, the Greek economy still leaves many people behind, the Survey says. The share of youth in work lags other OECD countries, despite recent improvements.  Legal reforms are improving gender equality but, in practice, and despite progress, relatively few women earn an income from work. Greece benefits less than it could from the skills of its foreign-born workforce, even as employers across a growing number of sectors report increasing difficulties recruiting staff.

The government’s ‘Greece 2.0’ reform and investment plan for 2021-26 aims to address many of the economic challenges facing the country through measures to improve the business climate, advance digitalisation, support the green economy transition and improve training and skills. The Survey says realising the full potential of the plan will require concerted effort to improve how the public sector operates and delivers but, if well implemented, it will substantially raise growth prospects and incomes. 

The Survey sets out a number of recommendations to help sustain the recovery, raise incomes, and achieve the transition to a net zero emission economy.

They include keeping debt-to-GDP ratios on a downward path by returning the primary budget balance to surplus from 2023 and to better allocate funding to areas that support economic growth such as  education, infrastructure, and active labour market policies.

Promoting flexible work arrangements and encouraging young fathers to take-up the new paid paternity leave would encourage more women to get jobs, including in areas where skills are in short supply. Engaging more adults in higher-quality retraining programmes can ensure that the workforce has the skills to make the most of the opportunities offered by the digital and green transitions.

Continued efforts to foster banks’ health, by clearing remaining non-performing loans and rebuilding their capital bases, are needed to finance private investment and sustain economic growth. Encouraging firms’ investment and growth are important to ensuring a stronger economy over the longer-term.

With a special focus on achieving the transition to a net zero emission economy, the Survey points out that greenhouse gas emissions remain significant in Greece. Replacing fossil fuels with renewable energy sources will require energy consumers to invest and adapt. Transforming the energy system cost-effectively will be essential given the large investment needs of the transition to net zero. 

The Survey identifies and discusses three key policies that could make substantial cuts to Greece’s greenhouse gas emissions – higher and more consistent prices for CO2 emissions, housing renovations, and making public transport more attractive.