Greece

   

Economic Policies

#41
Key Findings
Mired in financial crisis, Greece remains the lowest-ranked country (rank 41) in the SGI 2018 with regard to economic policies. Its score on this measure has improved by 1.0 point relative to its 2014 level.

Some recovery has been evident, but economic policy flexibility has remained strongly constrained by agreements with creditors. A third review of Greece’s adjustment programs was delayed by disagreements with creditors over major labor-market reforms. The country has returned to bond markets, but still faces investor skepticism.

Despite significant declines, unemployment rates remain excruciatingly high, with long-term joblessness undermining workers’ skills. With little investment from domestic or foreign sources, economic growth has been stagnant, meaning labor-market advances have been driven largely by lower wages, tourism and worker emigration.

Tax rates have been increased, but tax evasion remains problematic. A surprisingly large primary budget surplus was achieved in 2017, attributable both to higher incomes and a delay in paying the state’s suppliers. Considerable efforts have been made to preserve public investment programs.

Economy

#41

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
4
Greek economic policy is still bound by the Third Economic Adjustment Program (supported by a €86 billion bailout), based on a July 2015 agreement reached by Greece and its creditors and approved by the Greek parliament in August 2015. It is also an economic policy still constrained by the capital controls imposed in July 2015. Capital controls, which are still imposed on Greek citizens and businesses, were put in place to avoid a bank run after the Syriza-ANEL government launched a referendum in July 2015 on one of the drafts of the economic reform proposals, which at the time the government was still negotiating with the European Commission.

The country has started to recover since the shocks of 2015. One of the Third Program’s major goals is to save the Greek banking system, which still faces risks because of un-serviced loans to households and businesses.

The second review of economic policy measures, included in the Third Program, should have been completed in early 2016, but was finally accomplished with considerable delay in the summer of 2017. In the fall of 2017, the third review of Greece’s program started. The review was delayed as Greece’s creditors and the Greek government could not agree on major labor market reforms.

In July 2017, Greece returned to the sovereign debt market for the first time in three years, using incentives to win over hesitant investors to a €3 billion bond sale. However, access to the public capital markets continues to be the largest hurdle facing Athens as it attempts to exit the era of bailouts.

Meanwhile, there has been no progress in managing the growing un-serviced bank loans nor has there been any visible progress with regard to out-of-court conflict resolution processes which, if established, would have helped to spur stalled private investment plans.

During the period under review, the Syriza-ANEL government substantially raised indirect and direct taxes, including private income and property taxes. Such high (and in fact sudden) changes in taxes have contributed to economic stagnation. While raising taxes has already increased government revenue, the key to economic development lies in private investment which is not forthcoming. This is shown in the fact that in 2016 Greece’s real GDP growth rate was zero (0.0%), while the average for the period 2006 – 2016 was -2.7%.

Prospects for economic growth are somewhat better than in 2016, although foreign investors still encounter significant bureaucratic obstacles, if not outright reluctance by government officials, when trying to implement their investment plans. In the period under review, as in 2015 – 2016, this situation was reflected in the long delays involved in the progress of major investments such as gold mining (e.g., Eldorado Gold company in Halkidiki) and urban development (e.g., the consortium of companies that bought land that had belonged to Athens Airport in Hellenicon, Attica).

Given that the Greek public debt remains at forbiddingly high levels (180% of the GDP in 2017), the European Union, the European Central Bank and the IMF may soon need to devise a plan for a large-scale debt restructuring that will entail substantial losses for creditors. The German federal parliament elections in autumn 2017 did not bring about a shift in the stance of Greece’s major lender: Germany remains reluctant to grant Greece major debt relief.

Citations:
Data on GDP growth are available from Eurostat: http://ec.europa.eu/eurostat/statistics-explained/index.php/File:Real_GDP_growth,_2006-2016_(%25_change_compared_with_the_previous_year;_%25_per_annum)_YB17.png

Labor Markets

#41

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
4
In the period under review, unemployment has fallen. Nevertheless, the crisis continued to expose some of the rigidities in the labor market. It has proven to be difficult for a pro-labor government (which has been in power since January 2015) to tackle unemployment within a context of private disinvestment and fiscal crisis.

The unemployment rate fell from 28% in July 2013 to 21% in July 2017 (18% for men, 25% for women in July 2017). As the economy has stagnated, and domestic and foreign investors are still reluctant to invest given Greece’s unpredictable institutional environment, whatever progress has been achieved in tackling unemployment is due to the following reasons: lower wages, a rise in flexible forms of employment, growth in the tourism sector where jobs are available during an almost six-month-long summer season, and an increase in emigration (of both skilled workers and migrants). Some 68,000 of the 150,000 jobs created over the last three years are part-time or rotation jobs.

About 75% of unemployed people have been out of work for more than one year. This phenomenon, which has detrimental effects for economic growth, is called hysteresis: people lose their skills and cannot find new jobs, leading to increasing poverty and social exclusion. Young people have been hit particularly hard by the economic crisis. Yet there has been some progress, as unemployment among 15 to 24 year olds (excluding students and soldiers) fell from 59% in July 2013 to 43% in July 2017. Of course, this is still one of the highest youth unemployment rates among OECD countries.

Unemployment statistics refer to “unemployed employees” only and not to self-employed or free-lancers who saw their businesses collapse during the economic crisis. Indeed, the number of unemployed employees is probably inflated since many employees in the tourism industry do not seek employment in the winter months (around 200,000 do not seek a job). Unemployment allowances are capped at one year over an entire working lifetime and – what is worse – the take up of unemployment allowance has constantly been very low at 10%. The remaining 90% of unemployed people, who receive no unemployment allowance, depend on support from their kin or rely on a recently introduced social safety net called Social Solidarity Allowance (see the section on social inclusion). However, for several years the Greek government, with the agreement of the European Union, has used money from the European Social Fund (ESF) to offer short-term employment opportunities to unemployed people in municipal services.

The primary reason why the labor situation has failed to improve much is the government’s reluctance to implement measures which would facilitate job creation in the private sector. The government continues to give contradictory messages to investors. Throughout 2017, Prime Minister Tsipras and his finance ministers traveled abroad, including to the United States, in order to attract foreign investors, while other government ministers and the governing party Syriza still resist large-scale, industrial or other private investments, which could create job opportunities.

In the meantime, the primary causes of the continuing closure of businesses are the continuing fallout from the lengthy economic crisis, the depletion of private deposits of households and the unstable prospects of the banking system. Many small and very small enterprises have failed, while former entrepreneurs and dismissed workers find it difficult to find new jobs, as many lack advanced skills. Unemployed people in the middle- to old-age groups have found it difficult to re-integrate into the labor market.

The pre-crisis division between insiders and outsiders has remained acute. Public sector employees, most of whom enjoy job security, have more or less successfully adapted to lower living standards. In contrast, private sector employees are faced with the recurring problem of unemployment. Moreover, as in the previous period under review, there has been a rise in part-time and short-term labor contracts over contracts of indefinite time. In brief, the slight improvement in the overall unemployment rate in the period under review is a sign of progress, which however is endangered by a combination of adverse macroeconomic constraints and contradictory signals given by the government.

Citations:
Information on unemployment, female unemployment, long-term employment and youth unemployment is drawn on the Hellenic Statistical Authority’s website, http://www.statistics.gr/

Taxes

#36

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
4
Regarding the redistributive effects of taxes, Greece fares average compared to other OECD countries. Regarding the complexity of the tax system, there has been some progress, as Greek tax payers mostly use an electronic Ministry of Finance platform to file tax declarations and obtain personalized information on their tax-related obligations. The imposition of capital controls in 2015 led to an increase in the use of credit and debit cards. This in turn led to a strong increase in reported private consumption leaving an electronic trail for tax collectors in a country known for rampant tax evasion.

According to Greece’s Third Adjustment Program, raising government revenue should have been affected through a combination of tax increases and privatizations. Boosting budget revenue included measures like ending fuel tax benefits for farmers and ending VAT (sales tax) discounts applied on Greek islands.

Measures to increase taxes are easier announced than implemented. During the tourist season, income raised by small and very small businesses remains undeclared, while throughout the year an unknown share of income for liberal professions also remains undeclared. Thus, engineers, lawyers, medical doctors and dentists as well as craftsmen, plumbers, electricians and computer technicians rarely declare an income above €5,900 per year, which in 2017 was the threshold below which no personal income tax was imposed.

Further, the frequency with which tax laws are amended by the government is astonishing. As long as tax regulations are constantly under revision, the business environment in Greece will remain unstable and progress will not be achieved in improving horizontal or vertical equity.

Moreover, in relation to other OECD countries, Greece receives lower tax revenues from direct taxation. Tax revenue still derives primarily from indirect taxes (57%, which is the highest percentage in Europe), such as taxes on the use of oil products (gasoline, heating oil) and VAT. The VAT rate in restaurants and catering businesses, which are very active in the tourism sector, remain at the prohibitively high level of 24%, while Greek companies have to pay 100% of their estimated annual taxes up front. Such taxation measures and arrears in paying suppliers of goods and services to the public sector (a practice followed by many different governments at least since the start of the economic crisis), have contributed to Greece achieving a primary budget surplus of 0.5% in 2016.

A very serious problem is tax arrears. Independent Authority for Public Revenue data showed that 3.85 million taxpayers and corporations owe the state a total of €98.2 billion, an amount that increases every month and is likely to exceed €100 billion by the end of 2017. The electronic confiscation of bank accounts and assets (700 per day) does not seem to provide a viable solution.

A higher dividend tax will follow in 2018, as the government is bound by Greece’s Economic Adjustment Program, which requires the country to keep a budget surplus, in order not to aggravate an already very high public debt (180% of the GDP in 2016, according to October 2017 data). The government also needs to increase tax revenue, because it strives to sustain its electoral clientele. It periodically recruits governing party supporters to the public sector and distributes additional one-off allowances to select groups. For example, in December 2016, Prime Minister Tsipras handed out a whole additional monthly pension to every pensioner whose pension was lower than €850 per month.

Meanwhile, the tax on landed property (ENFIA) negatively effects the real estate market. ENFIA is important for the state budget since it raises €2.5 billion – 3.0 billion per year. However, ENFIA has also contributed to a fall in house prices and led to disinvestment in the housing industry, an important sector in the Greek economy. In the period under review, households and businesses, including those required to pay installments on loans obtained from Greek banks, refrained from fulfilling their financial obligations to the Greek state on time.

Citations:
Comments on the redistributive effects of Greek taxes and the time spent to file tax declarations and pay taxes are based on the comparative data on OECD countries, available on this SGI platform.

Budgets

#35

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
5
After 2015, a tumultuous year in which government instability and a fruitless national referendum negatively affected public finances, Greece made progress with regard to fiscal sustainability. While the country’s public debt remained at prohibitive levels (180% of the GDP in 2017), the primary surplus reached 1.7% in 2017. This surplus level was three times higher than surplus forecasted in the budget for 2017 which the Ministry of Finance had tabled in parliament in October 2016.

This astonishing success resulted from a double move of the government. On the one hand, in 2016 and 2017 tax laws were changed in order to impose historically high taxes on middle- and high-income groups and companies. On the other hand, the post-2015 government continued the practice initiated by past governments following the onset of the economic crisis to grossly delay payments or to largely refrain from paying private suppliers who had already delivered goods and services to Greek ministries and state agencies. Increased taxation and delays in payments by the state led to the near collapse of some private businesses (in the industrial and commercial sectors outside the thriving tourist sector).

Thus, in late 2017 public funds were available, accumulated through the government’s double move. At that time, the government was considering two measures which could boost its declining popularity: either to distribute a one-off cash allowance to low-income households or repeat its move of December 2016 and distribute the equivalent of an additional monthly pension to low-income pensioners. Both measures diverged from the policy suggestions of the country’s lenders who would have preferred the government to revive the private economy by paying arrears owed to private suppliers who in some cases (e.g., suppliers of school textbooks to state schools) had waited for years to bed compensated for goods or services rendered to the Greek state.

In other words, in 2016 to 2017, the new government followed the guidelines of fiscal policy contained in Greece’s Third Economic Adjustment Program with regard to raising government revenue, but chose its own way with regard to government expenditure.

Citations:
Information on the Greek state budget and public debt levels is drawn on statistical tables available in this SGI website.

Research and Innovation

#32

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
4
In the period under review, Greece continued to rank below the OECD average for public and private expenditure on research. However, despite the economic crisis, remarkable efforts have been made in recent years by both the previous and the current government to preserve and even increase public investment.

Greece lacks large corporate investors in R&D. Links between academia and the private sector are weak reflecting institutional weaknesses and cultural resistance to public-private collaboration. There is little private demand for R&D and innovation, and the corresponding supply from universities and public research institutions is small, as shown by the relatively small number of patents filed by universities.

Over the last six years, universities saw their funding (based on the state budget) decline. Nevertheless, despite economic adversity, there are clear “islands” of excellence at universities in areas such as biology, IT and computer science, economics, engineering, archaeology and history. And the number of international scientific co-publications per million population has increased (from 389 in 2009 to 549 in 2015) showing that the Greek Research & Innovation system is increasingly internationalizing. However, the public R&I system continues to perform below the EU average.

However, Greek researchers, the number of which is disproportionately high compared to the levels of public and private expenditure on research, actively participate in international research consortia. For instance, the National Technical University of Athens actively participates in international projects, as does the Heraklion-based Institute for Technology and Research. Individual researchers from Greece frequently participate in international forums.

A very positive step has been the establishment of the Hellenic Foundation for Research and Innovation (HFRI), a new public body funded by the Greek state and the European Investment Bank (EIB). Law 4429/2016, passed in 2016, provided €240 million for the funding of the HFRI for a three-year period, while the relevant open calls for research proposals have been launched.

Citations:
Data on research spending, number of researchers, intellectual property licences and patent applications are drawn on statistical tables provided by SGI on this platform. Information in English on the Greek HFRI is available from the relevant European Commission’s Research and Innovation Observatory report: https://rio.jrc.ec.europa.eu/en/country-analysis/Greece/country-report

Global Financial System

#41

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
3
Greece, a rather small European economy which is still in the midst of a crisis of its own, is not in a position to take initiatives to monitor the global economic environment. In its capacity as an EU member state, Greece has participated in EU-driven efforts to regulate the global economic environment. Greece has also argued in European forums in favor of a more regulated system of financial markets.
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