IMF, (2013), Country Report: Greece, N.13/154 June.
In the midst of a sharp and socially painful recession, Greece is making important progress in overcoming deep-seated problems. Progress on fiscal adjustment has been exceptional by any standard, with the cyclically-adjusted primary balance having improved cumulatively by about 15 percent of GDP during 2010–12. Labor market reforms are helping to realign nominal wages and productivity; this internal devaluation has reduced the competitiveness gap by about half since 2010. And financial stability has been preserved, notwithstanding public debt restructuring and the recession. This progress has been facilitated by considerable European and international support. But Greece is adjusting mainly through recession, not through productivity-enhancing reforms. Beyond the labor market, broader structural reforms have fallen well short of the critical mass required to transform the investment climate and boost potential growth. With fiscal adjustment set to weigh on demand for several more years, growth must come from private investment and exports. Thus, restoring growth and reducing unacceptably high unemployment will require full and timely implementation of ambitious reforms that firmly puts to rest uncertainty about the authorities’ willingness to tackle vested interests. The key priorities:
– Undertaking structural reforms to lower barriers to entry would reduce product prices and facilitate re-allocation of resources to more productive activities.
– Reinforcing the governance framework in the financial sector and reversing the rising tide of non-performing loans are key to effective financial intermediation.
– Broadening the tax base and strengthening revenue and public administration would improve the quality of adjustment (the burden has fallen excessively on those earning a salary or pension) and underpin further fiscal effort to reach medium-term targets.
– Ensuring that debt sustainability concerns do not continue to weigh on investment requires timely delivery of Greece’s European partners’ undertakings on debt relief.