The Greek economy has made significant progress since the previous decade’s large debt crisis, which it entered as a result of reckless fiscal policy and loss of competitiveness. The significant progress and confidence building in economic policy seen today and mainly reflected in the low spreads (spreads) of Greek government bonds, as well as in many other indicators of the real economy, public finances, exports and the financial sector, is the result of several factors.

Mostly, however, this is the result of a tight fiscal adjustment, a radical restructuring of the public debt, extensive and complex reforms of the labor market, product and service markets, the insurance system, the tax system, and extensive restructuring and capital strengthening of the banking sector. These major changes have largely corrected previous policy errors and key macroeconomic imbalances. As a result of the above changes, a real convergence of Greek GDP per capita with the European Union average (now, however, it is based on a healthy basis, and not on giant “double” deficits) has begun again, a very significant decrease – an escalation of the ratio of public debt to GDP , while Greek government bonds are currently only one step behind investment grade, signaling and confirming a return to normal.

The decisive factor first in rescue, then in recovery and, finally, in strengthening the climate of confidence in the Greek economy has been and remains the support of Greece’s partners and especially European institutions. Unprecedented, historically, but also in scope, with very favorable terms, the refinancing and restructuring of almost all public debt, the recapitalization of banks, the possibility of buying Greek government securities from the European Central Bank – despite the lack of investment grade – and the extensive participation of Greece in the European instrument NextGenerationEU (NGEU) recovery are important examples of such support.

Despite improvements in competitiveness, both in terms of unit labor costs and relative final prices, and despite an increase in the Structural Competitiveness rating scale, the Greek economy continues to suffer from chronic structural problems, with the result that it still occupies a relatively low place in the rankings. international indices of structural competitiveness. Examples of such inherent weaknesses are delays in the administration of justice, bureaucracy and inefficiencies that still exist in some areas of public administration, delays in completing the State Land Register (situations that, among other things, create barriers to investment, especially from abroad), lagging behind some basic infrastructures, low representation of women and youth in the labor market coupled with unfavorable demographic development, insufficient fight against tax evasion, shortcomings in the so-called “knowledge triangle” (education-research-innovation), quasi-oligopolistic conditions in markets for specific products and services and distortions in the energy market. The country’s GDP (and GDP per capita) is still well below 2008 levels, public debt remains the highest in the European Union and the second largest in the world, and the current account deficit is currently (2023 forecast) at 7% GDP.

The very high current account deficit recorded in recent years should be a cause for concern. Nobody knows that in 2022 there is a high deficit (9.7% of GDP) on about 40% of increased fuel prices. Neither a zero deficit, nor even a surplus, is required in an economy that seeks to re-align its GDP per capita with that of its partners and, in particular, wants to increase its share of national investment (currently 14% of GDP). GDP) to the average for the European Union (22% of GDP). And which, by the way, spends on its national defense – on equipment – the percentage of GDP is much higher (more than twice) than the average for the European Union. However, a current account deficit of more than 4% of GDP remaining in the medium term is contrary to the European Union’s macroeconomic imbalance procedure, but above all indicates that national spending significantly and over time exceeds domestic production, or equivalently that investment by the private and public sectors far exceeds the corresponding savings.

In this context, they take on special significance:

First, the previously mentioned reforms that raise the growth rate of potential domestic product, thereby increasing the economy’s ability to increase spending (whether investment or consumption) without worsening the external balance.

A current account deficit of more than 4% of GDP persisting over the medium term indicates that national spending significantly and consistently exceeds domestic production.

Secondly, to maximize the primary surpluses of the public sector by creating a special reserve, that is, not distributing emergency state revenues in the current year. The recent example of Ireland, which established a National Investment Fund to support the transition to a green economy and an insurance system against tax windfalls resulting from high inflation, deserves to be emulated.

Third, efforts to further increase exports of goods and services and import substitution, as well as to promote energy conservation and the transition to cleaner technologies to reduce dependence on imported fuels.

Fourth, the maximum possible increase in foreign direct investment (which does not create external debt obligations of either the public or private sector) and in particular productive foreign direct investment (investment in new projects), combined with the optimal use – and therefore the maximum possible inflow of resources from the European Union Structural Funds and from the Recovery and Sustainability Fund.

As challenges to financial stability around the world remain high, the greatest risk to its prospects
the Greek economy would have meant a loss of confidence in the economic policy pursued, which was so difficult to restore.

As financial stability concerns around the world remain high, with successive crises and widespread growing uncertainty, the biggest risk to the Greek economy’s outlook will be a loss of confidence in the current economic policy that has been so difficult to restore. , violation of the obligations assumed and a return to past practice. To sustain the sacrifices made over the past decade and continue the progress made, accountability and commitment from economic policy makers are needed. The next government’s first priority should be (a) a reform program that will improve structural competitiveness, increase the overall productivity of the economy, expand the country’s productive capacity, thereby reducing current account deficit transactions, and (b) return to primary, structural, i.e. cyclical adjusted, fiscal surpluses of the order of 2% of GDP, so that this year the level of investment can be restored, maintained and, in the medium term, surpassed. This will have a favorable multiplier effect in all sectors of the economy and will benefit all citizens.

Mr. Yiannis Sturnaras is the Governor of the Bank of Greece.