By Tasos Dasopoulos
The return of the economy to a smooth upward path at least until 2026 is described in the forecasts of the revised stability program 2023-2026 as “the day after” the end of the period of the informal memorandum, that is, the four years of enhanced supervision .
Both the macroeconomic and fiscal scenarios of the economy show that Greece will accelerate its convergence with the rest of the Eurozone member states over the next four years. A critical stage will be the recovery of investment grade, so that the recovery of the economy is even smoother and convergence even faster.
The development scenario contemplates an average annual economic growth of 2.6% for the four-year period 2023-2026. Although not officially recognized, the scenario is conservative in the custom of financial personnel. Which previously forecast growth of 1.8% for this year, which was officially revised in the PSA to 2.3%. According to forecasts, growth is expected to accelerate to 3% for 2024 and 2025 before falling to 2.1% in 2026, when most of the investments and reforms of the Greece 2.0 program financed by the Fund for Greece will have been completed. Recovery.
According to the PSA 2023-2026, the continuation of the positive growth and the reduction of the debt and the deficit, will contribute to reduce the indebtedness of the State with a de-escalation of the interests of the debt below 3% of the GDP from 2024. At the same time, the expansion of credit to households will increase at average annual levels of 3%-3.5% and wages and pensions, at average levels, at 12.2%.
The Stability Program also announces a permanent return to the positive inflation regime. After about 8 years of negative inflation, but also a deep recession of the economy during the financial crisis, Greece went through a long period of negative inflation but also declining income. Since the end of 2021, along with the V-type recovery of the economy with growth reaching 8.3% but also due to the start of the energy crisis, inflation has moved into positive territory. In the PSA 2023-2026, inflation is forecast to fall to 4.5% this year, from 9.7% in 2022, but it will remain in positive territory until 2026. Specifically, in 2024 it will drop to 2.4% and it will stabilize at 2% in 2025 and 2026.
investment guide
The basis for continued growth, for the first time after 10 years, will be investments. The guarantees for such a thing to come true are that the use of the approximately 32,500 million euros that the Recovery Fund must absorb by 2026, but also the 21,000 million that must proceed without delays or serious failures that will be absorbed during the programming period 2021-2027.
The forecasts that advocate in this direction are positive. By 2023, investments are expected to reach 34,000 million euros, an amount that corresponds to approximately 15% of GDP. Greece’s 15% may seem low compared to the Eurozone average, where investments in 2022 reached 22.4% of the European average GDP. However, we have seen investment in excess of 10% of GDP since the early 2000s, when the country was preparing to host the 2004 Olympic Games.
In addition to investment, growth is expected to be supported by private consumption and, in its own way, by exports.
Private consumption is expected to grow on an annual average of around 1.6% for the entire period. This will be helped by the reduction in unemployment from 11.8%, which is expected to close at the end of 2023, to 9.9%, which will reach the end of 2026. Likewise, the increase in income due to growth and credit will help the expansion to private sector sector.
Due to the rapid increase in investment and the limited productive capacity of the economy, exports, although they will continue to increase throughout the four-year period, will be negative since they will not reach the value of imports.
Reductions in taxes and contributions
The Stability Program does not incorporate the continuation of the tax and contribution reduction program that is being gradually announced at this time in the pre-election speeches of the President of the Government, which amounts to approximately 10,000 million euros for the entire four-year period.
Specifically, for 2023 the Stability Program foresees a primary surplus of 1.1% of GDP, but the target for this year will remain at 0.7% of GDP. This option supposes an amount of 0.4% of GDP (approximately 880 million euros) that will be allocated to positive interventions progressively from the period after the elections until the end of the year. As for the measures it will take, the financial staff are keeping their letters secret. Suffice it to say that it must be established which of these funds come from permanent income, that is, they constitute “fiscal space” that can be used for permanent measures and which are extraordinary and can be used for non-permanent interventions.
In addition to this amount for 2023, measures other than pensions and salary increases for civil servants have been announced, in which the previous result includes additional fiscal measures amounting to 0.1% of GDP (220 million euros) for 2024 and of 0.3% of GDP (700 million euros) for the years 2025 and 2026, such as the increase in tax relief by 1,000 euros for families with children. Specifically, it has been announced the reduction of subsistence allowances by 30%, the increase in the guaranteed minimum income by 8%, the progressive reduction of insurance contributions by an additional 1%, the increase in the maternity allowance for freelancers and farmers from 4 to 9 months at the minimum wage, a new permanent program of 10,000 new jobs for young people and a series of other initiatives. The implementation of the above measures does not disturb the medium-term goal of a primary surplus in the region of 2%.
Primary surpluses -debt
All this taking into account that as of 2024 the comprehensive escape clause activated by the outbreak of the pandemic in 2020, which lifted all fiscal rules, is suspended. In other words, Greece – like the rest of the EU countries – will have, depending on its fiscal situation, the obligation to comply with specific rules.
That is why it has “built” the PSA 2023-2026, aiming to achieve primary surpluses that, on average, will be in the region of 2% given the implementation of the Government’s pre-electoral benefits. Specifically, the PSA forecasts a surplus for this year of 1.1% of GDP, 2.1% of GDP for 2024, 2.3% of GDP for 2025 and 2.5% of GDP for 2026.
A second element of the fiscal scenario is the reduction of 31.6% of GDP, from 2023 to 2026. Specifically, with stable policies, the General Government debt is expected to decrease from 171.3% of GDP in 2022 to 162, 6% of GDP in 2023, 150.8% of GDP in 2024, 142.6% of GDP in 2025 and 135.2% of GDP in 2026.
These two deficit and debt forecasts perhaps more than cover the obligations that the country will assume after the elections, pending the implementation of the new fiscal rules, which are still under discussion at the European level.
The dangers
Of course, these forecasts that constitute a clean corridor for the economy until 2026 are subject to five risks plus one, internal and external, that may threaten their realization.
1. The first internal risk is that the elections do not give a stable government with a 4-year perspective. The impossibility of forming a government even after the second round of elections would erase the positive scenario for the economy and indefinitely postpone the recovery of the investment grade.
2. The second biggest risk in Greece is that the new government will not be able to absorb the EU funds. A failure of the TAA will mean not only the loss of valuable community resources, but also the loss of growth, as investments and reforms financed by the Development Fund will increase growth by an average of 2% per year. Likewise, the reforms that will be implemented through the 2.0 program will be a catalyst for growth until the end of the decade.
3. The third major risk is the shift to expansionary fiscal policy, without taking into account Greece’s obligation to continuously run primary surpluses and debt reduction.
4. From abroad, the double pressure of high inflation combined with the high interest rates of the euro continues. The risk lies in the persistence of inflation, especially structural inflation (which is the ECB’s new target), which will keep interest rates at levels of 3.25%-3.50% for a longer period of time, perhaps until the end of 2024 or later. This fact for Greece will mean an economic slowdown and perhaps a new generation of bad loans, which will come from borrowers, who today join the programs that commercial banks have developed for a year.
5. A potential banking crisis for Europe could also affect Greece, albeit indirectly. Despite guarantees of adequate capital adequacy and strict supervision of their activities, Greek banks have returned after many years to interbank lending with exposure to other EU banks. Depending on the type, scope and duration of the crisis, we can also have unpleasant consequences for Greece.
6. The energy crisis despite the current recession is still present. Without structural changes in the European energy market, the risk of a double-dip is visible.