Economic resilience and risks for Greece
The country achieved significant growth amid difficult conditions, says OECD head, calls for ‘broad national consensus’ on reforms
The establishment by the Organization for Economic Cooperation and Development (OECD) of a research center on Crete monopolized Secretary-General Mathias Cormann’s visit to Athens last week. The center will analyze demographic and migration policies, issues related to the diaspora, as well as individual challenges related to the labor market and the population. However, Cormann’s visit included a full agenda of issues on the Greek economy in relation to international developments. In an exclusive interview with Kathimerini, the secretary-general of the OECD speaks ahead of Greece’s general elections about the need for a “broad national consensus” on reforms.
He said that rating agencies now believe Greece to be “one step below the threshold” for investment grade and predicts that tourism will continue to do well in 2023. He considers that the country’s targets for primary surpluses do not hinder growth and recommends “well-targeted” fiscal measures in the future to avoid increasing demand and by extension prices. He explains that the fall in energy prices is not yet reducing core inflation and proposes lump sums and/or non-wage benefits instead of wage increases. Cormann also called on banks to build their capital to boost investment. Discussing the current generic drug shortages faced by many countries, he said they are caused by a global spike in demand not matched by an immediate increase in supply.
A de-escalation in energy costs, to the extent it is sustainable, creates expectations for inflation in the eurozone to take a downward path in 2023. The question is, how soon we will see tangible benefits for consumers and businesses? Will prices fall as easily as they rose?
The euro-area headline annual inflation has indeed peaked, down from 10.6% per year in October to an estimated 9.2% in December. However, core inflation, which excludes volatile items such as energy, food, alcohol and tobacco, and which is a better measure of the underlying trend in inflation, has continued to increase, from 5% per year in October and November to 5.2% in December. As we highlighted in our most recent OECD Economic Outlook in November, inflationary pressures have become more broad-based, with higher costs increasingly passed through into prices of other goods and services. What started as a negative energy price shock, on top of global supply chain disruptions associated with a strong and rapid post-Covid rebound, extended to affect core inflation as well as inflation expectations. The de-escalation of energy costs will continue to lower headline inflation, but a sustainable reduction of core inflation may be more difficult to achieve. It is not yet clear how sticky euro-area core inflation will be. Recent input and labor shortages may mean less economic slack and more underlying inflationary pressures in the euro area than previously thought. The other risks that may slow down the disinflation process are a de-anchoring of inflation expectations or a sharp acceleration in wage growth. The European Central Bank should continue to analyze all the incoming data and stand ready to provide additional monetary policy tightening, including interest rate increases, if and as required.
The other side of the coin – in what we call the cost of living in an inflationary environment – is wages. Consumers are seeking increases in their earnings in order to keep up with the rally in prices. Economists fear the prospect of increases, warning of an upward wage-price spiral resembling the 1970s crisis. What do you think?
There has been little evidence to date that the euro area is entering a wage-price spiral. Furthermore, past periods of high inflation and accelerating nominal wage growth were followed by a stabilization of wage growth. However, risks are indeed rising, as the labor market remains tight and wage growth continues to exert upward pressure on inflation. The euro-area unemployment rate reached an all-time low of 6.5% in October, where it remained in November. Negotiated wage growth has so far remained contained, at 3% in the third quarter. Measures of actual pay are higher and reflect bonus payments on the back of a tight labor market. For instance, year-on-year growth in compensation per employee stood at 3.3% in the third quarter. More timely but less comprehensive data on online job postings shows that growth in the euro area showed wages accelerating to 5.2% year-on-year in October 2022, up from 2.5% in January 2022. Accelerating wage growth fuels underlying price pressures, as reflected in record-high core inflation in December. At the same time, collective agreements (even tripartite ones at national level) can help companies and workers find tailored solutions to fairly share the cost of inflation while avoiding a wage-price spiral. For instance, limiting wage increases in exchange for lump sums and/or non-wage benefits can offer one solution.
How effective has Greece been so far in managing this crisis, and what are your thoughts on the dynamics of the Greek economy in 2023?
On the back of good policies, good management and a commitment to tackle important structural reforms, Greece has recovered quickly and strongly from the Covid crisis. In difficult conditions, Greece achieved significant growth in both 2021 and 2022, which has translated into strong employment growth and a sharp fall in the unemployment rate. At the same time as supporting households and business through two major crises, Greece has also been able to achieve a relatively rapid fiscal consolidation, repaying IMF loans early and taking the budget from a large deficit onto a path to primary surpluses. Like countries all around Europe, Greece is facing headwinds as a result of the surge in energy and other commodity prices, which has slowed this recovery. Rising prices have reduced consumers’ real incomes and the price of investments has surged. We believe though that this slowdown is likely to be shallow. The latest high-frequency data of businesses and consumers’ confidence is already showing improvements. We see growth rising from a little over 1% in 2023 towards 2% in 2024, supported by stabilizing prices and rising investment. That said, there are some important downside risks to the outlook. This winter has, so far, been exceptionally warm in Europe, reducing energy demand and prices. However, there are important risks for energy supply, especially for the next winter. It will be important to ensure that any fiscal measures are well-targeted and encourage continued improvements in energy efficiency, without adding to demand pressures. It will be important for Greece to stay the course when it comes to structural reforms improving its competitiveness and its attractiveness as a destination for foreign investment.
‘Returning the budget balance to modest primary surpluses and using any windfall revenues to reduce debt will continue to support Greece’s increased fiscal credibility’
This is an election year. It is also a year of higher fiscal pressures due to high debt and extended support measures. Do you see any risks for Greece or are we walking the right path?
Greece has made substantial progress over recent years to improve the business environment and to improve the operation of its public sector. We very much welcome the progress made and encourage Greece to keep going. The Greece 2.0 plan sets an ambitious agenda for further reforms. Maintaining a broad national consensus around the reform agenda will help ensure its effective implementation and keep the growth momentum going. Regularly reviewing the reform program, and adjusting it for lessons learnt, can help maintain this consensus and progress. Greece is on track for a modest primary budget surplus in 2023, which is a remarkable turnaround from just a few years ago. If the energy crisis worsens again, targeting any fiscal support measures to vulnerable groups will be key to limit fiscal costs while supporting those in genuine need. Public debt remains high, but servicing costs are shielded from rising global interest rates and risk premia by the public debt stock’s long-term structure and low, fixed interest rates as well as the substantial cash reserves. However, rising global interest rates are affecting borrowing costs for private investors, highlighting the importance for Greece to keep working to achieve an investment grade sovereign debt rating.
Do you see progress in Greece’s investment environment? What are your recommendations for reforms that will further improve the competitiveness of the Greek economy?
This question is very much at the core of Greece’s long-term prospects. Private investment has been low for many years, reflecting scarce finance, the high share of very small firms and the need for greater dynamism. To support greater access to finance for investment, encouraging banks to build their capital bases, including by increasing operating profits and retained earnings and by considering raising capital buffer requirements can help get the banking system into a position where it can better support private investment. Non-bank financing can complement the banking sector. Greece can encourage the growth of alternative sources of finance by regulating to ensure transparency and information sharing about loan portfolios and platforms’ performance. Streamlining complex administrative processes as part of the public sector’s digitalization efforts is helping significantly to improve the business environment. Improving the judicial system’s responsiveness is well recognized as one of the great challenges. Including it in measures to review and simplify all administrative processes can help accelerate progress in this area. Finally, the digital and green transformations of the economy are creating new investment opportunities. Rising foreign direct investment opens avenues for domestic firms to raise their productivity and expand their markets. Expanding the role of medium-sized and larger firms, and deepening management capacity, will help Greece to seize these opportunities. Lowering barriers to entry, prioritizing professional services, and simplifying land-zoning rules can help firms grow.
In your opinion, what is depriving Greece of investment grade?
Greece has come a long way in the past few years. Major ratings agencies now assess Greece to be one step below the threshold for “investment grade.” Passing this threshold will reduce the interest rate spread on debt issued by the Greek government. An investment-grade sovereign rating will expand the amount of funds and reduce their cost for private sector investors. Achieving this is pivotal for Greece’s longer-term aspirations. Maintaining and building further on Greece’s improved fiscal credibility is an important foundation stone. Sticking with the plan to return the budget balance to modest primary surpluses and using any windfall or unexpected revenues to reduce debt rather than to increase spending, will continue to support Greece’s increased fiscal credibility. Greece can maintain these surpluses while supporting growth. One pillar is to improve the spending mix and effectiveness, for example by supporting expenditure on activities which support growth like education and infrastructure.
The other pillar is to maintain public revenues by broadening the tax base and by improving compliance, while making the tax system more growth-friendly with lower taxes on labor and corporate incomes. Ratings agencies also focus on the need to achieve a healthy banking sector. Greece has been able to reduce the overall ratio of nonperforming loans to total loans to below 10%, led by securitization of the nonperforming loans in the major banks. However, more will need to be done. The nonperforming loan ratio remains very high in the smaller banks. The major banks have sufficient capital to meet the regulatory standards, but larger capital buffers would help them increase lending, especially for more innovative investments. And, of course, again, keeping the recent reform momentum going is also going to be key for Greece to achieve investment grade.
What is the OECD forecast for tourism in 2023? Some view the market’s recovery as precarious, in the sense that the performance of 2022 was the result of a sharp thirst for travel after the pandemic, and that this year we will see an impact on the disposable income of travelers. What is your opinion?
Tourism bounced back strongly in 2022, driven by pent-up demand and the lifting of travel restrictions, often exceeding expectations. Greece welcomed more international tourists during the peak summer season in 2022 than in 2019. We expect the recovery to continue into 2023; however, it will be uneven across the world. It will be slower in countries neighboring Russia and Ukraine, and is also lagging in countries in the Asia Pacific region, where tighter travel restrictions have been slower to unwind. The global economic slowdown, cost-of-living pressures and the fallout from Russia’s war of aggression in Ukraine are putting pressure on the recovery. Tourism businesses are being hit by rising costs and tight labor markets while cost-of-living pressures are putting pressure on household incomes and consumer spending.
Greece is currently facing a problem with drug supplies. Does the problem also have an international dimension? Are there shortages in supply chains? What can governments do to deal with the problem?
The pharmaceutical supply issues currently faced in Greece are being faced by many other countries around the world too. Current shortages in generic medicines are caused by a global spike in demand not matched by an immediate increase in supply. The current shortages such as for paracetamol and some antibiotics largely reflect spikes in demand for generic medicines that are not profitable for producers to produce. As prices for medicines are usually fixed by governments, they can be too low in some countries and hence are not attracting enough suppliers. Adding to this is the difficulty forecasting demand. This is also impacted by demand trends in the context of the changes in Covid-19 policy settings in China and the combination of flu, bronchiolitis and Covid-19 across Europe. Governments can respond to these shortages in a number of ways. One is to reassess current procurement practices of some products, to diversify and increase the capacity of medical product production, while maintaining a level playing field between producers and smooth international supply chains. Secondly, greater transparency and real-time information sharing between countries and manufacturers may help anticipate issues along the supply chains. Third, collaborative approaches between the private sector and governments can promote the long-term resilience of medical supply chains. Fourth, stockpiling, while an important first-tier resilience strategy to mitigate spikes in demand, should be planned and coordinated with the private sector and across countries.
