Interview of the Bank of Greece Governor Yannis Stournaras with “The National Herald”
29/12/2024 - Articles & Interviews
What are the main challenges for the Greek economy?
The Greek economy has demonstrated remarkable progress in recent years, showing resilience to various external shocks such as the COVID-19 pandemic, the energy crisis, the war in Ukraine, rising inflation, and the cost-of-living crisis. Nevertheless, the recovery from the decade-long debt crisis remains incomplete, while the convergence of real GDP per capita with the European average requires stronger and sustainable growth rates.
Domestic structural weaknesses, such as bureaucracy, delays in the judicial system, high public debt, low savings, limited structural competitiveness, a persistently deficit current account balance, high energy costs, and an aging population, continue to pose obstacles. Additionally, the Greek economy faces global challenges, such as escalating geopolitical tensions, geo-economic fragmentation, the revival of trade protectionism, the climate crisis, the need for energy security, and the rapid evolution of digital technologies.
At the European level, the competitiveness of the European Union (EU) as a whole is a critical issue, emphasizing the need for policies that enhance productivity and promote innovation. As highlighted in Mario Draghi’s recent report, a coherent strategy is needed, including deepening the single market and increasing investments in education, research, and green technologies. Only through such measures can sustainable growth rates be achieved, inequalities within the EU be reduced, and Europe’s competitiveness gap against major international rivals be bridged.
What are the Bank of Greece’s forecasts for inflation and interest rate trends next year?
Although the Eurosystem’s monetary policy remains restrictive, significant steps were taken in 2024 toward easing it. Starting mid-year, there were four interest rate cuts totaling 100 basis points, with the latest 25 basis point cut in December bringing the ECB’s policy rate to 3%. These actions were made possible by the steady decline in inflation.
Inflation in the Eurozone has significantly decreased from its peak of 10.6% in October 2022 and is approaching the target of 2%. According to the latest forecasts, inflation is expected to be 2.1% in 2025 (down from 2.4% in 2024 and 5.4% in 2023). This reduction is attributed to easing labor cost pressures, increased productivity, and diminishing effects of the energy crisis and the pandemic. Similarly, a downward inflation trend is observed in Greece, where inflation is projected at 2.5% in 2025 (down from 3% in 2024 and 4.2% in 2023), reflecting decreases in energy and food prices.
The stabilization of Eurozone inflation near the 2% target is expected by early 2025, allowing room for further monetary easing if conditions permit. However, concerns about the sluggish growth of the European economy remain significant, influenced by geopolitical risks and pressures on international trade. Slower growth could push inflation below the target, creating new challenges for economic stability.
Given the heightened uncertainty, our actions must be cautious, gradual, and steady, always based on available data, to ensure balance between controlling inflation and supporting economic growth.
What are the Bank of Greece’s key concerns about economic uncertainty due to geopolitical crises or global economic challenges?
According to the latest available data, Eurozone growth in 2024 is expected to remain sluggish, with marginal improvement compared to 2023, while inflation is on a downward trend. However, risks and uncertainties in the European and global economy remain high, including rising real interest rates, low productivity growth, geo-economic fragmentation, geopolitical and trade tensions, climate change, and technological challenges.
The escalation of geopolitical and trade tensions could again increase international energy prices and the cost of basic commodities and goods, burdening overall supply. Meanwhile, the adoption of inward-looking policies by some countries may reinforce protectionism, with potentially negative long-term consequences.
Additionally, a slower decline in core inflation, either due to supply disruptions or tight labor market conditions, could revise current expectations about interest rate trends and increase borrowing costs.
The implementation of new European fiscal rules also limits the ability to use revenues exceeding set targets for financing new expenditures, creating additional constraints on fiscal policy.
Thus, adapting to global challenges requires constant vigilance and coordinated action at both national and European levels.
What are your projections for the financing and sustainability of Greek public debt in the future?
Greece is expected to record in 2024 the fastest public debt reduction in recent history among developed economies, achieving a reduction of over 50 percentage points of GDP in just four years. This performance strongly demonstrates responsible fiscal management in recent years, as recognized by successive upgrades of the Greek economy by international rating agencies amidst an environment of increased global uncertainty.
The sustainability of Greek public debt is ensured, as confirmed by analyses of all international organizations, with its downward trajectory maintained even under adverse scenarios. This is attributed to the favorable characteristics of the debt portfolio, which consists mainly of long-term official sector loans with fixed and low-interest rates, and to the overall strategy of the Public Debt Management Agency (PDMA), which has effectively secured financing needs at controlled costs. Additionally, Greece’s favorable structural fiscal position, the result of drastic adjustments in the previous decade, provides a strong foundation for maintaining economic stability.
However, in the long term, the gradual refinancing of debt on market terms will increase the Greek government’s exposure to risks, such as interest rate volatility and market conditions. For this reason, prudent fiscal management, growth-enhancing reforms, and the effective utilization of European funds remain critical.
What trends do you observe in the deposits and loans sector in Greece, and how does the Bank of Greece expect them to develop in the future?
In recent years, economic recovery and increased confidence in the banking system have led to a steady rise in household and business deposits. According to the most recent data, private deposits amounted to €196 billion in October 2024, up from approximately €140 billion at the end of 2019. During the first ten months of 2024, deposits increased compared to the end of 2023, despite a shift of savings—mainly from time deposits—towards government treasury bills and other higher-yield investment instruments. The outlook for the coming period remains favorable, with continued economic growth, sustained financial stability, and the anticipated decline in inflation boosting savings incentives.
In the loans sector, there has been a moderate increase in credit expansion. Although loans to households and businesses are recovering, the pace is restrained due to high borrowing costs and the cautious credit policies of banks. Demand for mortgage loans is limited due to rising interest rates, while consumer credit shows an upward trend, aligning with increased private consumption. In the business loans sector, financing focuses on strategic areas such as the green transition, infrastructure, and digital upgrading, supported by the Recovery and Resilience Facility (RRF).
The prospects for credit expansion remain positive, supported by the expected GDP growth and the participation of banks in co-financing investments through the RRF, provided that investment implementation accelerates. Meanwhile, significant progress in reducing non-performing loans has strengthened the stability of the banking system, creating conditions for further credit activity despite challenges posed by high-interest rates.
What are your forecasts for the growth of the Greek economy in the coming years? What measures should be taken to ensure sustainable development?
According to the latest estimates by the Bank of Greece, the Greek economy is expected to grow at an average rate of approximately 2.3% over the next three years, surpassing the Eurozone’s corresponding rate (1.3%). This development contributes to the convergence of Greece’s real GDP per capita toward the EU average after the disruption caused by the debt crisis.
Given the challenges faced by the Greek economy, the main goals of economic policy in the medium term should focus on maintaining fiscal credibility, strengthening the economy’s resilience, addressing the investment gap, and further upgrading the credit rating of government bonds. Actions that enhance overall productivity are also needed, such as improving education and training in new technologies and creating an innovation ecosystem through collaborations between businesses, research institutions, and universities.
At the same time, reducing entry barriers in goods and services markets, addressing the shortage of skilled labor, and eliminating financing constraints that mainly affect smaller and start-up businesses are essential.
Transforming the productive model of the Greek economy requires strengthening the production of internationally tradable goods and services to increase exports and substitute imports. This strategy is critical for reducing the current account deficit and boosting the country’s structural competitiveness.
Finally, enhancing the economy’s outward orientation by facilitating businesses’ access to international markets and boosting their international competitiveness can accelerate growth rates and improve the overall efficiency and sustainability of the economy.