Fiscal benefit 2% of GDP for Greece, but stricter rules
New EU fiscal rules promise greater relief but necessitate heightened efforts, says Hungarian economist
New EU fiscal rules are set to bring about greater relief for Greece but will also demand increased efforts, according to Hungarian economist Zsolt Darvas.
In an interview with Kathimerini, Darvas, a senior fellow at the Brussels-based think tank Bruegel, explains that Greece will be spared from additional fiscal adjustments amounting to around 2 percent of GDP over a four-year period, or 0.5 percent of GDP annually. Nonetheless, he emphasizes that within the new framework, the country will be required to formulate a medium-term fiscal structural plan delineating the necessary investments and reforms to address the challenges highlighted within the European Semester – rendering it a more demanding task.
Darvas elaborates on why the defense provision wouldn’t be applicable to Greece, while also sharing his insights on the Greek debt dynamics extending beyond 2032.
What does the new framework of fiscal rules in the eurozone mean for Greece? Firstly, what’s the good news?
The new fiscal framework is explicitly based on a public debt sustainability analysis – a mathematical model which calculates the debt path from the country-specific drivers of debt. In contrast, debt sustainability was incorporated in an ad hoc manner in the previous fiscal framework. This is good news for every EU country, including Greece. Specifically for Greece, the new fiscal rules require almost no additional fiscal adjustment, while the old rules would have required about 2% of GDP extra adjustment for four years – 0.5% per year – quite a difference.
And what’s the bad news? In other words, what are the demands/requirements created for Greece by the new rules?
At least in the first application of the new framework in this year, there will be hardly any fiscal adjustment requirement for Greece – good news. Yet all countries will have to learn how to implement the new framework. For example, every EU country will have to submit a comprehensive medium-term fiscal structural plan, covering all aspects of fiscal and economic policies, including how investment and reforms respond to the main challenges identified within the European Semester. Preparing such a plan will be challenging.
In the meantime, what exactly do the new rules provide for defense spending?
The buildup of defense capabilities, including the Strategic Compass for Security and Defense, is classified as a common priority for the EU. Whenever the budget deficit exceeds 3% of GDP, the Commission will evaluate whether national spending on common EU priorities contributed to this excess – if so, an excessive deficit procedure might not be launched. Beyond this provision, no other part of the new fiscal framework aims to incentivize defense spending. The Commission’s forecast suggests that the Greek budget deficit will be less than 1% of GDP in 2024 and 2025, implying that Greece would not face an excessive deficit procedure in the coming years, so this limited defense provision would not be relevant for Greece.
Greece is meeting the targets for primary surpluses; however, it is lagging behind in the area of public investment. Does the problem arise from its fiscal obligations as such or from the fiscal mix chosen by the Greek government?
In 2022, Greek public investment amounted to 3.6% of GDP, which was above the EU average of 3.2%. For 2025, the European Commission forecasts the Greek public investment ratio at 4.7%, well above the 3.5% average for the EU. Thus, Greece ranks well in terms of public investment, which is greatly supported by the significant amounts from the Recovery and Resilience Facility (RRF). The challenge will be to maintain this high-level investment after the RRF expires in 2026.
How safe is the path the Greek debt is on? Some worry that from 2032, when the eurozone’s moratorium expires, Greece could be in trouble again. What are your thoughts?
The moratorium on some of the interest payments on official loans till 2032 is a help to support the cash-flow position of the Greek state, but this is a liability: It is accumulated on a separate account and the total amount of unpaid interest will be added to public debt in 2032. Thus, the only change 2032 would bring is to make this interest liability visible in the public debt numbers, but it does not alter the fiscal position of the country. Greece will continue to benefit from preferential interest rates for several years to come. Our calculations for Greek debt dynamics suggest continued reduction in the debt/GDP ratio after 2032, so I’m not worried – assuming, of course, that the current responsible fiscal policy will not be replaced with an irresponsible spending program.
