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Governor's Annual Report 2021

07/04/2022 - Press Releases

The Economy is faced with major global challenges

Europe and Greece are faced with new, big challenges

The Greek economy is showing remarkable resilience, flexibility and dynamism, despite uncertainty due to the recurring waves of the pandemic, but also to the new challenges associated with the Russian invasion of Ukraine.

In 2021, GDP at constant prices grew by 8.3%, marking one of the best performances in the euro area and almost fully offsetting the 2020 contraction of 9%. The high GDP growth rate in 2021 and the expectation of continued growth in 2022, along with the positive long-term economic outlook, have contributed to the recent upgrade of Greece’s credit rating to just one notch short of investment grade.

The Russian invasion of Ukraine on 24 February 2022 has fundamentally changed the international situation, bringing the European Union (EU) and the Western developed world as a whole in front of the greatest challenge since the end of the Cold War. The war has unpredictable consequences not only for the global and the European economies, but also for international geopolitical stability, security, peace and cooperation. Shoring up the European economy against the effects of this new shock and preventing an interruption of the ongoing recovery is a key priority for economic policy. The magnitude and duration of these effects will depend on how the war unfolds, on the impact of the current sanctions and on the response of fiscal and monetary policies.

The war in Ukraine is a new, major exogenous supply-side shock to the global economy that also affects, through various channels, aggregate demand. It occurred at a very critical time, when the economies were rebounding from the health crisis and the severe recession. It exacerbates the already strong inflationary pressures through further rises in energy prices and a new wave of medium-term price increases in metal commodities and basic consumer goods, notably in the food supply chain; it erodes investor and consumer confidence and disrupts global trade and the international financial system. Globalisation is in fact reversing. The result is a slowdown in the European and global economy and rising prices and interest rates.

The main challenge for monetary policy in the euro area is how to prevent a temporary inflation from becoming structural, without undermining the ongoing economic recovery. Furthermore, regarding the broader economic policies of the euro area, the key challenge is further financial integration, as well as progress towards common, accepted policies in the areas of energy, defence and fiscal rules.

Today, fiscal authorities in the euro area are called upon to provide targeted support to vulnerable households and bolster the viability of certain firms that are overly exposed to the energy crisis, without jeopardising fiscal sustainability. This tough problem would be easier to solve by a common response compared with uncoordinated and individual approaches.

The recent lessons from the highly successful fiscal and monetary policies that were pursued during the pandemic in the euro area, preventing its fragmentation, should be a guide for the future, in the management of the current geopolitical crisis as well as any other potential crises.

Expectation of a definitive exit from the health crisis, and continued growth amid international insecurity and heightened uncertainty

The pandemic continued in 2021, causing heavy human losses across the globe, including Greece. The EU responded with courage, unity and economic realism to the effects of the health crisis and the deep recession. These efforts culminated in the agreement on the first-ever common European recovery instrument, the NextGenerationEU, aimed to support the convergence of member countries and increase resilience, especially of the most vulnerable economies. The first visible result has been the strong recovery that started in 2021 and is expected to continue in 2022, albeit at a much slower pace, thereby offsetting the economic losses recorded in 2020.

Uncertainties related to the pandemic have been contained so far, thanks to the high vaccination coverage of the population and the flexibility shown by European economies in adapting to the new circumstances. By contrast, the war in Ukraine poses persistent risks to the path of inflation, fuels inflationary expectations and negatively affects consumer and investment decisions, slowing the growth momentum.

Another risk stems from the large increase in global debt in 2020-21. The unprecedented fiscal support measures have prevented the pandemic crisis from turning into a depression, but have inevitably accumulated large debts. Governments now have to manage a high stock of public debt, whose sharp increase was facilitated by historically low borrowing rates as a result of coordinated action by central banks.

However, as the risk of inflation mounts, central banks are shifting their focus to rising inflation and resurging inflationary expectations. Accordingly, they are adjusting their monetary policy stance by raising interest rates or ending net asset purchases, thereby increasing the cost of money.

The pre-pandemic period was marked by stable, albeit moderate, growth rates, price stability and high yields in asset markets. The pandemic has changed all this. At the same time, it has acted as an accelerator for the transformation of the economy along two main axes: green transition and digitalisation. Meanwhile, economic convergence and tackling income inequality remain key challenges.

The first post-pandemic period is characterised by greater macroeconomic instability worldwide, fuelled mainly by high levels of debt and financial market volatility. Moreover, shifting global geopolitical balances minimise the scope for economic cooperation and intensify a retrenchment behind national borders, with adverse effects on global trade and activity. The geopolitical crisis is, however, a historic opportunity for deeper economic and political union in Europe, with a view to strengthening EU institutions across all areas, including defence, security and energy autonomy. The new economic reality will be characterised by higher public and private spending on health, clean energy, digitalisation and automation, but also on military equipment and cyber security.

The global and the European economy

The roll-out of effective vaccines and adequate immunisation of the population, at least in developed countries, have enabled a reopening of economies; as a result, according to the IMF, the global economy grew by 5.9% in 2021, while a growth rate of 4.4% was projected for 2022. However, following the conflict in Ukraine, this projection is subject to a downward revision.

In the euro area in particular, GDP growth in 2021 reached 5.3%, driven by private consumption on the back of higher savings and rising asset values. A slowdown is projected for 2022, due to the protracted energy crisis, worsening supply chain disruptions, heightened uncertainty, declining confidence and higher inflation persisting for much longer than previously expected. Safe forecasts cannot be made, but only estimates based on scenarios, given that the extent of the effects will depend on the duration of the war and the impact of the sanctions imposed. In any event, however, the economic consequences are significant.

According to the baseline scenario of the ECB staff macroeconomic projections (March 2022), which incorporates a first estimate of the negative impact of the war, growth in the euro area will continue, but at a slower pace. Assuming that the war in Ukraine will end soon and the current disruptions are temporary, euro area GDP growth is projected to average 3.7% in 2022 (revised downwards from 4.2%), 2.8% in 2023 and 1.6% in 2024. Growth will be driven by a strong labour market, the use of accumulated savings to finance consumption, and the stimulus from the Recovery and Resilience Facility resources. Continued fiscal and monetary policy support is another important factor. The ECB has also considered two alternative scenarios assuming a longer duration of the war. In the adverse scenario, growth in 2022 falls to 2.5% and even more significantly, to 2.2%, in the severe scenario.

HICP inflation turned out at 2.6% in 2021 and is projected in the ECB’s baseline scenario to increase further to 5.1% in 2022, before falling back to levels close to the medium-term target of 2% (2.1% in 2023 and 1.9% in 2024), as both inflation expectations and nominal wage growth remain contained so far. In the adverse scenario, associated with a more protracted war in Ukraine, inflation in 2022 would reach 5.9%, and in the severe scenario 7.1%. 

Striking a balance between:

(a) a gradual and cautious normalisation of highly accommodative monetary policy to cope with inflation;

(b) a flexible fiscal policy, combining the withdrawal of pandemic-related emergency support measures with the adoption of temporary targeted measures to support the most vulnerable social groups;

(c) adjustment to changing circumstances through the faster implementation of the envisaged reforms; and

(d) commitment to the principles of fiscal responsibility

is crucial to limiting the risk of stagflation and maintaining a brisk pace of growth, especially in countries with increased fiscal vulnerabilities and inherent weaknesses. Such a strategy would ensure the sustainability of public debt and facilitate the work of central banks in curbing inflation.

The Greek economy is recovering, but is faced with new challenges

The main objectives of economic policy in 2022 should be to maintain the growth momentum, with a view to expanding the productive capacity of the economy, and to continue the efforts to regain investment grade; the latter should become a national goal. After a period of sluggish growth pre-pandemic, the Greek economy needs to follow a growth path towards convergence with the euro area, changing its productive model and focusing on investment and extroversion. The current, big international geopolitical challenges should be seen as an opportunity to accelerate the planned reforms rather than as a problem. Examples include the creation of a large green energy hub in Greece and the digital transformation of the state. A smoothing out of Greek-Turkish relations and its economic impact would also be a significant opportunity.

The driving forces behind growth in 2021 were the better-than-expected performance of tourism, along with positive developments in exports of goods; disposable income; private consumption expenditure financed by excess savings; government consumption; private and public investment; and a strong recovery in the labour market, as reflected in the declining unemployment rate. Notable was also the recovery of industry and construction, whereas the rise in imports of goods had a negative impact on growth.

However, the surge in uncertainty due to high inflation as well as to the war in Ukraine weakens economic agents’ expectations and negatively affects their consumption and investment decisions. Against this background, the Greek economy is expected to keep growing in 2022, but at a slower pace than the initial forecast of 4.8%. GDP growth is limited to 3.8% in the baseline scenario and 2.8% in the adverse scenario, depending on the extent and duration of the shocks in international energy and food prices, as well as the deterioration in confidence and financial market turmoil.

Although the main drivers of growth this year are domestic demand and tourism, there is significant uncertainty: the negative impact of inflation on households’ real disposable income will drag down private consumption expenditure. Higher production costs and lower consumption will weigh on firms’ profitability and, together with widespread uncertainty, could lead to a postponement or cancellation of investment decisions. There is also uncertainty about tourism inflows, mainly from Europe and the United States, due to a decline in the purchasing power of households in the countries of origin, but also to a feeling of insecurity.

On the other hand, there are several countervailing forces at play, which mitigate the negative effects. These include: the lifting of the various pandemic-related restrictions, both domestic and international; the start of investment projects under the National Recovery and Resilience Plan; rising employment; accumulated savings; and continued growth in exports.

As already mentioned, Greece can turn the current energy crisis into a historic opportunity and become an energy hub in Southeastern Europe. By building on its know-how in submarine electricity interconnection projects and by accelerating investment in renewable energy, it can enhance its energy security, speed up the energy transition and become a factor of energy stability in the EU.

In 2021, headline HICP inflation in Greece was 0.6%, mainly driven by rising energy and food prices. It was well below the euro area average. Under the baseline scenario, inflation is expected to accelerate to 5.2% in 2022, while a further increase to 7% is projected under the adverse scenario. A de-escalation of inflation is expected in 2023, provided that supply chains are fully restored and energy prices fall.

Restoring fiscal sustainability is crucial for a further upgrade of the country’s credit rating. The robust performance of tax revenues combined with the gradual withdrawal of the temporary pandemic-related support measures allow a drastic reduction in the primary deficit during 2022, despite the problems caused to the Greek economy by the war in Ukraine.

In the new environment of extreme uncertainty, ensuring fiscal sustainability proves to be a difficult balancing act between two policy objectives. On the one hand, the impact of high energy costs and inflation on household disposable income and corporate profitability needs to be mitigated in order to limit damage to recovery and safeguard financial stability. On the other hand, the support measures in 2022 need to have a small direct budgetary impact, so that a fiscal policy tightening can facilitate a return to fiscal sustainability.

The single monetary policy

Taking into account the progress of economic recovery and the need to control inflation, the Governing Council of the ECB has already embarked on a gradual and cautious normalisation of monetary policy. Net purchases of assets under the Pandemic Emergency Purchase Programme (PEPP) continued in the first quarter of 2022, but at a significantly lower pace, and the programme was terminated at the end of March 2022. The reinvestment horizon for the PEPP was extended until at least the end of 2024. In this way, the single monetary policy, although becoming less accommodative, retains flexibility to cope with potential negative shocks, such as a resurgence of the pandemic, but also the recent geopolitical shock.

It is important to note that monetary policy flexibility includes the ability to purchase Greek government bonds, as part of PEPP reinvestments, over and above rollovers of redemptions, although they still lack investment grade and are therefore ineligible for the Asset Purchase Programme (APP). This inclusion limits the increase in the borrowing costs of the Greek State and facilitates the smooth refinancing of public debt from the markets.

By the decision of 10 March 2022, monthly net purchases under the standard asset purchase programme (APP) continue in the second quarter of 2022, while the volume of purchases for the third quarter will depend on the path of inflation. Reinvestments of the principal payments from maturing securities will continue for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. Meanwhile, the key ECB interest rates have remained unchanged.

According to its decision of 24 March 2022, the ECB Governing Council continues to allow national central banks to accept as eligible collateral in Eurosystem refinancing operations Greek government bonds that do not satisfy the Eurosystem’s minimum credit quality requirements, for at least as long as reinvestments under the PEPP continue. This decision is very important because it gives time to the Greek authorities to make headway with the restoration of fiscal sustainability and the implementation of the necessary structural reforms, both of which are seen as essential prerequisites for a further upgrade of Greece’s credit rating.

Fiscal developments

In 2021, the maintenance of support measures continued to weigh on fiscal aggregates, although to a lesser extent. The measures were more limited in scope and retargeted at the most vulnerable groups of society. For 2021, the primary deficit is expected to have decreased markedly, overachieving the budget target, on account of higher tax revenues and lower non-productive expenditure, while a gradual restoration of fiscal sustainability should start from 2022. According to the Bank of Greece forecasts, in 2021 the primary deficit declined to 6.2% of GDP and government debt to 193% of GDP. However, in the new environment of generalised uncertainty, the scope for fiscal policy intervention is limited. Any new support measures should be of a temporary nature and appropriately targeted.

The low implicit interest rate and strong GDP growth are the most important factors that weaken public debt dynamics, having already put the debt-to-GDP ratio on a downward path since 2021. While short-term risks to debt sustainability are contained, in the long run there are potential risks stemming from lower growth and/or higher borrowing costs.

The banking system

In 2021, bank credit to the private sector continued to increase, underpinned by the accommodative single monetary policy and the programmes of the Hellenic Development Bank (HDB) and the European Investment Bank (EIB). The year-on-year growth rate of bank credit, albeit quite slower compared with 10% in December 2020, stood at 3.7% in December 2021. The funds made available by the HDB and the EIB were lower than in 2020, but their impact was very significant, as they supported one-third of loans to businesses (mainly small and medium-sized enterprises) and self-employed.

Bank deposits by the private sector continued to grow in 2021, by a cumulative EUR 16.2 billion, which was lower than in 2020 (EUR 20.6 billion), but much higher than the levels observed before the pandemic.

The aggregate common equity (CET 1) ratio and the total capital ratio declined as a result of losses from NPL sales and securitisations. The relatively low quality of bank capital, given that deferred tax assets make up the largest part (64%) of total regulatory capital, calls for a qualitative and quantitative strengthening of the capital base and an improvement of core profitability. It is positive that banks have started efforts to strengthen their capital base through share capital increases and bond issuance. Finally, it is worth pointing out a growing bank-sovereign nexus, as total risk exposure to central government stood at 22.5% of total bank assets and 38.7% of GDP at the end of 2021.

In the current environment of changing financial conditions, Greek banks are faced with major challenges, such as new NPLs that may arise after the withdrawal of support measures, but also as a result of high inflation; the obligation to meet the Minimum Requirement for Equity and Eligible Liabilities (MREL); the need to absorb the impact of International Financial Reporting Standard 9; the consequences of climate change; and the adoption of new, digital technologies. It is clear that continued vigilance and stronger actions on the part of banks are needed to further reduce NPLs, strengthen their capital base and more effectively use their increased liquidity.

Non-performing loans

The stock of non-performing loans declined further in 2021, mostly through loan sales of EUR 27.5 billion under the Hellenic Asset Protection Scheme. NPLs stood at EUR 18.4 billion at the end of December 2021, down by EUR 28.8 billion from end-December 2020. This has led to an improvement in bank asset quality, reducing risk costs and widening profit margins.

Nevertheless, the stock of NPLs as a percentage of total loans (12.8%) remains well above the EU average of 2.1%. About 39% of NPLs are subject to forbearance measures. However, a high share of forborne loans fell back into arrears. It is estimated that, due to the pandemic and high inflation, an additional proportion of forborne loans might be classified as NPLs in 2022. As NPL reduction in 2021 was achieved mainly through securitisations and transfers to international investors, the stock of NPLs remains a burden for the real economy and excludes a large number of debtors from bank credit.

Sources of risks and uncertainty

The Greek economy faces a number of risks, both exogenous and endogenous. Exogenous risks relate to geopolitical tensions and their effects on the global and European economy and especially on inflation, as well as to COVID-19 variants and climate change.

Although not yet completely and definitively eradicated, the pandemic poses less of a risk. However, the most significant exogenous risk in the short term arises from inflation persistence, which will chiefly depend on the evolution of the war in Ukraine and the ensuing economic developments. As inflationary pressures appear to be more permanent globally, they are propagated across the economy, negatively affecting disposable income, consumption and investment expenditure, profit margins, asset yields, real wealth, tourism inflows and ultimately growth. At the same time, the rise in inflation will lead to a normalisation of the single monetary policy and a tightening of financing conditions, affecting borrowing costs.

In the medium-to-long term, the most important exogenous risk stems from the non-linearity of the climate crisis, which poses a serious threat to macroeconomic and financial stability. The risks of climate change for banks are significant, including: credit risk related to defaults on loans; market risk, as asset valuations are negatively affected; liquidity risk insofar as the climate crisis affects banks’ funding sources; and operational risk due to infrastructure damage as a result of natural disasters.

Endogenous risks are linked both to chronic and structural weaknesses of the economy and to issues as a legacy from the debt crisis. These risks include:

        i. the possibility of hysteresis as a result of failure to achieve strong growth and accelerate reforms;
        ii. a sharp increase in the already high government debt-to-GDP ratio; 
        iii. the high stock of NPLs; 
        iv. private debt overhang;
        v. low structural competitiveness; 
        vi. the high investment gap; 
        vii. a failure of education to keep pace with international labour market trends, which would further deteriorate the already high youth unemployment rate; 
       viii. a potential failure of public administration to ensure a timely disbursement of EU funds, and potential administrative obstacles to the implementation of investment projects; 
       ix. the long delays in the administration of justice. 

A roadmap for sustainable strong growth

Looking forward, a steady path of growth at an average annual rate of 3% calls for concrete and longer-term economic policy decisions towards:

  • extroverted and competitive markets for goods and services, exploiting technological advances to promote the presence of the Greek economy in global value chains;
  • using available know-how to transform the country into an energy hub;
  • protecting healthy entrepreneurship;
  • creating a more functional public sectorby completing its digital transformation;
  • digitalisation of the judicial system;
  • addressing the problem of private debt overhang;
  • speeding up the privatisation programme;
  • financing from a robust banking system;
  • creating hubs of excellence, innovation and technological progress; and
  • adapting education curricula to the current needs of the labour market.

Moreover, the effectiveness of economic policy hinges crucially not only on the right policy choices, but also on their successful implementation. As the ten-year crisis has shown, delays, missteps or incomplete implementation of policy actions have significantly reduced the effectiveness of stabilisation programmes and prolonged the crisis. 

In the short term, cautious policy steps need to be taken to consolidate the recovery, especially as long as the risk from the health crisis has not been fully eliminated and the risk of stagflation is low, but not negligible. Such policy steps concern: (a) the appropriate withdrawal of all support measures with a view to gradually restoring fiscal sustainability and preserving the recovery; (b) the smooth disbursement of European funds and their use to finance new investment projects in extrovert sectors in order to reduce the current account deficit; (c) a credible commitment to implementing the reforms as described in the National Recovery and Resilience Plan; and (d) a definitive clean-up of bank balance sheets.


It has been more than two years since the COVID-19 pandemic broke out, causing irreparable human losses and social and economic costs that have been unprecedented in peacetime. Despite the successive and multiple crises faced over the past year (health-related, energy, climate and geopolitical), the Greek economy has shown functional adaptability and resilience, so that in only one year almost all economic losses have been recouped. Heightened geopolitical instability and high inflation will slow but not halt the recovery path. 2022 marks the dawn of a new era. The dominant features will be digitalisation and automation, green energy, scientific knowledge and specialisation, repatriation of international production to safer regions, but also the need to strengthen the energy sector through investment in green energy, relevant storage facilities and networks. Greece has a historic opportunity to transform its economy and keep pace with developments. The positive economic momentum carried over from 2021 to 2022, the lessons learnt from the ten-year debt crisis, the important EU funding instruments, the political will to implement reforms, but above all the maturity of society and its ability to understand the new environment and accept structural changes, are factors that help to turn crises into opportunities, enabling the country to overcome once and for all its inherent weaknesses, transform into a modern economy and enhance its adaptability and resilience to a highly uncertain international environment.

Related lilnk:
Governor's Annual Report 2021 (in Greek)

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