Brussels: Greece is on the right fiscal track but must keep trying

Greece is on the right path for fiscal recovery, but this is fraught with various dangers, the handling of which requires «a serious effort» on the part of the government, the European Commission notes in its report on the Greek stability program which it approved yesterday. «Greece is on the right track to put its public finances on sounder footing, but it should use the good economic times to reduce its debt further and put its pension system on sustainable ground,» said Economic and Monetary Affairs Commissioner Joaquin Almunia. The report, which is a recommendation to the Council of Ministers, notes that Greece’s high growth rates are enabling it to approach the average living standards in the EU, but its economy suffers from high inflation as a result of a combination of fast growth and structural problems in the goods market. Also, inflexibilities in the labor market contribute to relatively high unemployment, while certain sectors are short of workers – indicating that the educational system does not produce the specializations required by the market, the report points out. Further, «a healthy rise in productivity» is undermined by labor costs rising at «a rate faster than in the eurozone,» thus eroding the country’s competitiveness and maintaining its trade deficit at high levels. This deficit is largely accompanied by fiscal imbalances and high debt, which pose further risks, particularly as they does not allow «the channeling of external borrowing into productive investment.» Greece submitted a new update of its stability program on December 18, 2006, covering the period 2006-2009. The program assumes a correction of the excessive deficit in 2006, and sets a medium-term objective of a balanced or surplus position. The budgetary targets project the government deficit and gross debt to fall, respectively, to 1.25 percent and 91.25 percent of GDP by 2009. The report warns that «with a very high debt ratio and significant expected budgetary costs of an aging population, Greece appears to be at high risk with regard to the sustainability of public finances.» It urges for the pace of adjustment to be increased, especially after 2007, in order to fully exploit strong growth prospects and to address the risks of higher-than-expected deficits from 2008. The government is also advised to continue improving control of primary expenditures, as well as that on public pensions and healthcare.