Greece

   

Economic Policies

#41
Key Findings
Still struggling to emerge from financial crisis, Greece remains the lowest-ranked country (rank 41) in the SGI 2019 with regard to economic policies. Its score on this measure has improved by 0.9 points relative to its 2014 level.

Though the country has exited its three-year economic adjustment program, access to public capital markets remains difficult. Growth has returned, but remains well below the euro zone’s average at 1.5% in 2017. Public debt levels remain forbiddingly high, with even the IMF calling for further debt relief.

Despite significant declines, unemployment rates remain excruciatingly high, with long-term joblessness undermining workers’ skills. Shifting policies on income and property taxes have kept investment levels low. Labor-market advances have thus been driven largely by lower wages, tourism and worker emigration.

Tax evasion remains problematic. A surprisingly large primary budget surplus was achieved in 2017, in large part by raising taxes on the middle classes. Large pension and defense expenditures remain significant budgetary burdens. A post-crisis brain drain has depleted the country’s R&D capabilities.

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
In the period under review, Greek economic policy remained bound by a three year Economic Adjustment Program (supported by a €86 billion bailout), based on a July 2015 agreement reached by Greece and its creditors. The program officially ended in August 2018, but access to the public capital markets continues to be the largest hurdle facing Athens as it exits the era of bailouts.

The Greek economy is growing again (1.5% in 2017), though at a pace below the euro zone’s average (2.4%). Tourism was the main contributor behind this growth: revenues exceeded €14.6 billion in 2017, showing an increase of 10.8% compared to 2016. Unemployment is slowly falling, though still close to 20%. The government achieved a spectacular 3.5% primary surplus (with a target of 1.75%) in the 2017 budget – mainly by raising taxes. Economic policy remains constrained by the capital controls imposed by the Syriza-ANEL government in July 2015 to avoid a bank run after a referendum on an austerity package under negotiation with the country’s creditors. Capital controls were loosened the end of summer 2018 but will probably not be completely abolished, as the economy remains frail. In particular, there has been little progress in managing non-performing bank loans (more than €90 billion or 48% of all bank loans).

The Syriza-ANEL government continued a policy of imposing high taxes on income and assets, a policy which the government changes almost every year, creating an unstable tax environment. Increased taxation has helped achieve a state budget surplus, but has also acted as a further disincentive to investment and thus contributed to economic stagnation.

Prospects for future economic growth are better, although foreign investors still encounter significant bureaucratic obstacles when trying to implement their investment plans. In the period under review, this situation was reflected in the long delays in the progress of some major investments. With the exception of Chinese involvement in the management of the Port of Piraeus (one of the largest in the Mediterranean) and Fraport’s renovations in the 14 regional airports that it manages, several investments have once more been delayed. For example, the Eldorado Gold company, which had established its business in Halkidiki, filed in September 2018 for approximately €750 million in compensation for damages from the Greek state. Meanwhile, a consortium of companies that had bought land once belonging to the state (the former Hellenikon International Airport) witnessed some progress in its cooperation with Greek authorities and has announced that construction (i.e., office buildings, residences and hotels) will begin in early 2019.

Greek public debt remains at forbiddingly high levels (180% of the GDP in 2017). Almost 70% of it is owed to official European creditors, with some 70% to the European Financial Stability Facility. The IMF, along with most international observers, believe that this debt mountain is unsustainable and demands deep relief. The country’s creditors may soon need to devise a plan for a large-scale debt restructuring that will entail substantial losses for them.

Citations:
Data on GDP growth and public debt are available from Eurostat.
On GDP: https://ec.europa.eu/eurostat/web/products-datasets/-/tec00115&lang=en
On public debt: https://ec.europa.eu/eurostat/web/products-datasets/-/teina230

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 2017, unemployment fell to 20.8% (EU average: 9.1%). Even though the rate remains the highest in the EU, Greece should be credited with making progress, given that in 2013 the unemployment rate stood at 28% and in 2015 at 25%.

There are clear signs of broad-based recovery. The so-called tradeable sector, which brings revenues to Greece from abroad, as well as tourism, industry, professional services, and information and communication services recorded substantial job gains. Some of these gains should be considered with caution, however, as they reflect partially successful efforts by authorities to combat undeclared work.

The recorded progress in tackling unemployment is owed to several factors, including low wages, a rise in part-time jobs, growth in the tourism sector (where jobs are available over the long Greek summer, lasting from April to October), and an increase in emigration (of both skilled workers and migrants).

Meanwhile, the number of unemployed is probably inflated since many employees in the tourism industry do not seek employment in the winter months. Unemployment allowances are capped at one year over an entire working lifetime and – what is worse – the take-up of unemployment allowance has consistently been very low (between 10% and 20%). For several years, the Greek government, with the agreement of the EU, has used money from the European Social Fund (ESF) to offer short-term employment opportunities to unemployed people in municipal and other state-owned organizations. Many 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 also Social Inclusion).

About 75% of unemployed people have been out of work for more than one year. Most of these long-term unemployed people lose their skills and are unable to find new jobs. They are thus driven into poverty and social exclusion or leave the country. Young people have been hit particularly hard by the economic crisis. As usual, youth unemployment remains a blight on the Greek economy, with 45% of 15- to 24-year-olds being out of work.

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 country clearly needs, among other specialties, more technicians, sales assistants, skilled and semi-skilled tourism workers, and computer scientists. Yet, the university system annually produces a very large number of graduates in the humanities, including hundreds of theologians, philologists and social scientists every year. There are also large numbers of physicians who cannot find employment in Greek hospitals nor can they find the financial resources to start their own medical practices. The total number of doctors in Greece (specialized and general practitioners) is approximately 69,000. Among OECD member countries, Greece has the highest ratio of doctors to population (Greece has 6.3 doctors per 1,000 inhabitants while the OECD average is 3.3 doctors per 1,000 inhabitants). As a result, hundreds of Greek physicians, who have been trained for free in respectable Greek state medical schools, emigrate to northern and western European countries, where they practice medicine. The same applies to architects and civil engineers, with engineering schools educating large numbers of students despite an over-abundance of such professionals in Greece. Since 2008, 427,000 young university graduates and professionals have left Greece to seek work in Germany, the United Kingdom and other countries.

The pre-crisis division of 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.

In summary, the slight improvement in the overall unemployment rate in the period under review is a sign of progress. This progress, however, is endangered by a combination of adverse macroeconomic constraints, rise in precarious work, continued brain drain and degradation among the long-term unemployed.

Citations:
Information on unemployment is drawn on Eurostat: http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=une_rt_a&lang=en
Information on brain drain is based on Bank of Greece estimations, reported in https://www.dw.com/en/greece-central-bank-reports-brain-drain-of-427000-young-educated-greeks-since-2008/a-19373527

Taxes

#35

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
In Greece, taxation policy only partially achieves its objectives, though there is some progress. Since January 2017, the Independent Public Revenue Authority has become organizationally and functionally independent vis-à-vis the Ministry of Finance. Also, Greek authorities have passed primary and secondary legislation to combat tax evasion. Total tax revenues slightly increased in 2017. Revenues from direct taxes decreased and those from indirect taxes, notably from value-added taxes, increased. Nevertheless, the level of outstanding debt has increased to €98 billion, though the rate of increase (which began in 2010) slowed down in 2017.

Measures to increase taxes are easier to announce than implement. 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 likewise remains undeclared. Thus, engineers, lawyers, medical doctors, and dentists as well as craftsmen, plumbers, electricians, and computer technicians typically declare an amount of personal income below the threshold at which personal income tax would be imposed. For income earned in 2017 (and taxed in 2018) this threshold was €8,366 per year for a single taxpayer without dependents.

Furthermore, regulations on income and property taxes are altered almost every year. As long as tax regulations are constantly under revision, private investment will not be forthcoming and the business environment will remain unstable; nor will progress will be achieved in improving horizontal and vertical equity.

In contrast to other OECD countries, tax revenue still derives primarily from indirect taxes and VAT. The VAT rate for restaurant and catering businesses, which are very active in the tourism sector, remain at the prohibitively high level of 24%. Such taxation measures and arrears to suppliers of goods and services for the public sector (a practice pursued by various governments since at least the beginning of the economic crisis), have contributed to Greece achieving a primary budget surplus of 0.8% in 2017 (EU average: -1.0%).

The government is bound to maintain a budget surplus in order not to elevate an already very high public debt (180% of GDP in 2017). Given that in late 2018 or early 2019 parliamentary elections will be held, the government is also keeping taxes at relatively high levels so as to be able to distribute revenues to its electoral clientele. These ad hoc state transfers to selected groups have been common among successive governments. During the period under review, cases include recruiting governing coalition supporters to the public sector and the distribution of one-off allowances to select groups. For example, in December 2017, Prime Minister Tsipras distributed, as a one-off benefit, a total of €1.4 billion to households with an annual income up to €18,000 and to large categories of pensioners. However, compared to other OECD countries, the redistribution effect of the Greek taxation system is mediocre; in fact, the redistribution effect declined between 2010 and 2015. Thus, Greek taxation policy is subject to unpredictable shifts and contributes neither to redistribution nor to economic competitiveness.

Citations:
Comments on the redistribution effects of Greek taxes are based on the comparative data on OECD countries, available on this SGI platform. Data on the size of the state budget surplus is drawn on Eurostat, https://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=teina200&plugin=1
European Parliament, Tax Collection in Greece, June 2018 http://www.europarl.europa.eu/RegData/etudes/IDAN/2018/614518/IPOL_IDA(2018)614518_EN.pdf

Budgets

#30

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
6
After 2015, a tumultuous year in which government instability and a fruitless national referendum negatively affected public finances and the budget deficit reached 5.6% of GDP, Greece made progress on fiscal sustainability. A budget surplus was attained for two consecutive years: 0.5% in 2016 and 0.8% in 2017 (2.2% excluding debt repayments). Notwithstanding, the country’s public debt remained at prohibitive levels (180% of GDP in 2017).

Turning from a large deficit to a surplus over a short time span resulted from two government actions. First, in 2016 and 2017 tax laws were changed in order to impose historically high taxes on middle- and high-income individuals and companies. Second, the post-2015 government continued a practice commonly adopted by previous governments: it grossly delayed payments or actually refrained from paying private suppliers who had already delivered goods and services to Greek ministries and state agencies. Increased taxation and delays in state payments nearly collapsed some private businesses (outside the thriving tourist sector; in the industrial and commercial sectors).

The state budget is constrained not only by the continuing economic crisis (Greece remains unable to borrow funds on the international markets), but also by the chronic spiraling of pension expenditures. Greece dedicates 55% of all social protection expenditures to pensions (EU average: 39%, latest data available from 2015). Facing periodic military threats from Turkey, Greece’s budget also must dedicate large funds to defense expenditure. This constitutes 2.4% of Greece’s GDP (among NATO member states, a percentage share surpassed only by the United States).

In the period under review, the government distributed a one-off cash allowance to low-income households in order to appease its electoral clientele. This policy measure was taken against the policy advice of the country’s lenders, who would have preferred that the government revive the private economy by paying arrears owed to private suppliers.

In summary, in the period under review, the government followed the fiscal policy guidelines contained in Greece’s Third Economic Adjustment Program (2015-2018), raising taxes and achieving a spectacular 3.5% primary surplus (versus a target of 1.75%) in the 2017 budget – mainly by raising taxes for the middle classes. However, this came at a heavy price for the economy, which grew just 1.4% against a target of 2.7%.

Citations:
The general government primary balance utilizes a differing methodology for calculating categories of revenue and spending from those outlined in the bailout program.
Information on the Greek state budget is drawn on statistical tables available by https://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=teina200&plugin=1Eurostat
Eurostat is also consulted for public debt and government expenditure data.

Research, Innovation and Infrastructure

#31

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
Greece continues to rank below the EU average for public and private expenditure on research. In 2016 (latest available data), Greece spent 1.007% of GDP on research and innovation (OECD average: 2.337%). Given the economic crisis and that the country had spent just 0.55% of GDP in 2006, this is a notable increase. For the first time, the business sector contributed more for R&D than higher education. Notwithstanding, the main funding came from public money (42.5% of the total).

There is a measurable brain drain, depleting Greece’s human resources for research and innovation. Since 2010, two-thirds of emigrants have been university graduates, while one-fourth of emigrants held post-graduate degrees or were graduates of medical and polytechnic schools.

Spending on research is mainly public. 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. 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.

Nonetheless, 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. Also, a very positive step was taken in 2016 with 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).

Citations:
Data on expenditure on research is drawn on Eurostat, https://ec.europa.eu/eurostat/documents/2995521/8493770/9-01122017-AP-EN.pdf/94cc03d5-693b-4c1d-b5ca-8d32703591e7
Information in English on the Greek research and innovation policy and particularly on brain drain is available from the EU, https://rio.jrc.ec.europa.eu/en/country-analysis/Greece/country-report
National Documentation Centre, Research and Development Expenditure and Personnel in Greece in 2017 – Main Indicators, http://metrics.ekt.gr/en/node/380

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 System
3
Greece, a rather small European economy which remains in the midst of a crisis of its own, is not in a position to take initiatives to monitor the global economic environment. For example, regarding non-performing bank loans, Greece is the worst among all OECD countries. All lending by banks primarily concerns the domestic market rather than international financial markets. Non-performing loans, rising steeply after the crisis hit Greece, remain a major impediment to economic recovery. At the end of 2017, Greek banks carried €96 billion in non-performing loans. This amount was, however, €13 billion smaller than at its peak in March 2016. The banks plan to reduce this burden by €30 billion before the end of 2019.

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 for financial markets.

Citations:
Data on non-performing loans is provided by the SGI data set, available on this platform and The Economist, https://www.economist.com/finance-and-economics/2018/05/31/a-critical-task-for-the-greek-economy-enters-a-new-phase
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