Council opinion

of 21 January 2003

on the updated stability programme of Greece, 2002 to 2006

(2003/C 26/03)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies(1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission, after consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 21 January 2003 the Council examined the 2002 update of the stability programme of Greece, which covers the period 2002 to 2006. The programme conforms with the requirements of the code of conduct on the content and format of the programmes endorsed by the Ecofin Council on 10 July 2001. The programme partly conforms with the recommendations of the BEPGs.

In 2002, real GDP growth decelerated somewhat, as a result of deteriorating external environment, but remained robust, at 3,8 %, as projected in the 2001 stability programme. Inflation pressures under the impact of second round effects from the oil prices hike and other transitory factors, such as bad weather conditions, although easing in recent months, are still persisting with the inflation rate remaining high: the HICP was increasing by an annual rate of 3,9 % in November 2002.

The 2002 update of the stability programme projects annual real GDP growth at around 3,8 % in yearly average for the period 2003 to 2006, and marginally lower rates than the 2001 update for the period until 2004. The Council considers the projected real GDP growth as attainable, particularly until 2004 as economic activity will be underpinned by high private and public investment related to the preparation of the Olympic Games and sustained by the inflow of financial resources from the third Community Support framework. However, for growth to be sustained it is essential that fiscal policy remains tight and wage increases are based on labour productivity changes.

The Council notes that the general government accounts deteriorated in 2000 and 2001, when compared with the estimates of the 2001 update, due to a large extent to the revisions of the government accounts figures, in order to ensure compliance with ESA national accounting rules. As a consequence, the starting point of the budgetary projections changed considerably as compared with the 2001 update: according to the 2002 updated stability programme a general government deficit of 1,1 % of GDP is estimated for 2002 instead of a surplus of 0,8 % of GDP as projected in the 2001 update. Similarly, the government debt ratio is estimated at 105,3 % of GDP in 2002 in the current update, to be compared to 97,3 % of GDP in the previous update.

The Council considers that the budgetary developments as portrayed in the revised data, in particular the slow pace of reduction in the government debt ratio, in a period when the Greek economy has been growing at high rates, is a matter of serious concern.

The Council notes that the 2002 update projects the government balance to turn from a deficit equal to 1,1 % of GDP in 2002 to a surplus of 0,6 % of GDP in 2006; at the same time, the government debt ratio is expected to decline from 107 % of GDP in 2001 to 87,9 % of GDP in 2006; in particular, during the period 2001 to 2004, from a higher initial level, the debt ratio is projected to decline by 10,9 percentage points of GDP instead of 9,6 percentage points as projected in the 2001 update.

The Council notes that the improvement in the government balance in the period from 2002 to 2006 relies both on the reduction in interest payments and on the retrenchment in current primary expenditure. However, the Council considers that, taking into consideration recent experience, fast and continuous reductions in primary current expenditure are difficult to achieve. Up to now, the programme does not include clear binding norms for current primary expenditure. The Council takes note of the initiative of the Greek Government to introduce a code of fiscal stability, in response to the recommendation in the Council opinions on the 2000 stability programme(2) and on the 2001 update(3). The Council urges the Greek authorities to accompany this new law by the introduction of appropriate mechanisms to ensure expenditure control. Setting binding norms for some categories of current public expenditures, such as the public sector wage bill, will contribute to the effective implementation of this code.

The Council considers that further budgetary adjustment effort is needed. Since the budgetary adjustment projected in the 2002 update is back-loaded, a heavy burden falls on later years of the programme. In 2006 there may still be a small cyclically adjusted government deficit. However, the Council considers that the level and recent developments in the government debt ratio require a stronger and more robust medium term budgetary adjustment, by at least 0,5 % of GDP per year in underlying terms. This is also required given the perspective of increasing budgetary costs stemming from the ageing population. The Council urges the Greek Government to take advantage of the current favourable macroeconomic situation to undertake determined effort in order to implement a durable budgetary adjustment leading to an improvement in the underlying budgetary position and a satisfactory pace of debt reduction.

The Council notes that strengthening structural reforms is a key economic policy objective of the updated programme; it considers that although progress has been made in recent years in this area, implementation of structural reforms must continue in the product, services and labour markets in order to ensure the efficiency in the markets and the competitiveness of the economy; the Council encourages the Government to proceed to the necessary reforms rapidly and welcomes the intention of the Government to implement reforms in the area of budgeting and management of expenditure in the public sector.

The Council welcomes the information provided in the updated programme on long-term sustainability of public finances. The Council considers that on the basis of current policies there is a serious risk of budgetary imbalances emerging in the future due to the ageing population. In this context the Council notes the information provided in the updated programme on the "second phase" of the reform of the social security system introduced in 2002 as recommended in its opinion on the 2001 updated stability programme(4). If debt reduction is to make a noticeable contribution towards meeting the budgetary cost of ageing populations, then reaching a balanced budget position by 2006 is essential; this should be part of an ambitious three-pronged strategy to meet the long-term budgetary consequences of ageing and may have to include the running of surpluses. Running sound public finances over the long run will allow to achieve a significant reduction in the debt ratio prior to the budgetary impact of ageing populations taking hold. The Council considers that further reforms are required to the pension system to avoid an unsustainable increase in public spending. Furthermore, the Council encourages the Greek authorities to promote supplementary privately-funded pension schemes and to take measures to raise participation rates and to control the evolution of age related expenditures.

(1) OJ L 209, 2.8.1997.

(2) OJ C 77, 9.3.2001.

(3) OJ C 51, 26.2.2002.

(4) OJ C 51, 26.2.2002.