Press Releases

The Annual Report of the Governor presented to the Annual General Meeting of Shareholders

15/04/2009 - Press Releases

In today's annual general meeting of the stockholders of the Bank of Greece, Governor George A. Provopoulos presented his Annual Report on the Greek economy. A summary of the Report follows:

THE STATE AND PROSPECTS OF THE GREEK ECONOMY AND ECONOMIC POLICY CHALLENGES

ΤHE INTERNATIONAL AND THE EUROPEAN ECONOMIC ENVIRONMENT – A FALL IN WORLD GDP AND A LARGE DECREASE IN THE VOLUME OF WORLD TRADE ARE EXPECTED IN 2009

 The global economy is undergoing its most severe financial and economic crisis since the 1930s. In recent months, the outlook for output, employment and external trade has deteriorated markedly in all regions of the world. The severity of the crisis is being exacerbated by a negative feedback loop between developments in the financial and the real sectors of the economy. Specifically, the dysfunctioning of financial markets is reducing economic activity, while the weakening of activity is, in turn, impacting on the capital position of the financial sector and, thus, its ability to provide credit to enterprises and households. Recovery from this crisis will not be easy and may not occur quickly.

 After registering a strong growth performance for several years, the International Monetary Fund is projecting that global GDP will fall by 0.5% to 1% this year. Moreover, according to the OECD, the decrease in the volume of world trade is projected to be much larger (13.2%). International organisations expect a gradual recovery of the global economy in 2010, based on the assumption that certain conditions, such as the successful implementation of measures to support financial stability and improve credit conditions, sufficient fiscal stimulus and low oil prices, are fullfilled.

INTERVENTIONS IN THE FINANCIAL SYSTEM AND MACROECONOMIC POLICY MEASURES AT THE INTERNATIONAL AND EURO AREA LEVELS – THE INTERNATIONAL COMMUNITY HAS TAKEN COORDINATED, BOLD AND UNPRECEDENTED ACTION

 In the light of the severity of the global crisis, governments, central banks and international financial organisations have taken unprecedented, bold and coordinated actions, aimed at both injecting liquidity into the economy and directly supporting aggregate demand, in order to end to the crisis. At the same time, comprehensive discussions are taking place with the aim of a reform of the international financial system to ensure financial stability in the future.

 The stability of the financial sector is crucial to the effectiveness of measures to alleviate the crisis, especially in the European Union, where banks are the dominant source of financing to the private sector. Financial-sector measures have primarily aimed at providing liquidity, guarantees and capital to banks. Thus far, these measures have made an important contribution, preventing a credit crunch and helping to restore the confidence of depositors and creditors. In addition, the decisions taken at the G-20 meeting on 2 April in London have helped push forward the implementation of the important proposals made by the IMF and the Financial Stability Forum for a new financial architecture. At the European level, the recommendations included in the Report of the "High-Level Expert Group on EU Financial Supervision", chaired by Jacques de Larosière, are especially noteworthy. The main elements of the proposed reform are: (i) the enhancement of the transparency, and expansion of the scope, of the regulatory and supervisory frameworks to encompass the entire financial sector, (ii) the strengthening of macro-prudential supervision, with a view to the prevention of systemic risks; (iii) the reduction of the pro-cyclicality of the credit system and the regulatory and supervisory framework; and (iv) the reinforcement of cooperation among supervisors at the international and the European levels.

The measures to support demand that have been implemented world-wide include unprecedented cuts in key interest rates to historically-low levels, and, effectively, the unlimited provision of liquidity by some major central banks. The interest rate cuts, however, have not been completely passed through to lower interest rates for households and businesses, as banks have tightened credit standards. In addition to the foregoing actions to support demand, several central banks have taken "non-standard" measures, including interventions in non-bank credit markets and the direct financing of enterprises. In the euro area, since October 2008 the Governing Council of the ECB has lowered its key interest rate on six occasions (by a cumulative amount of 300 basis points). The monetary policy of the ECB and the Eurosystem’s generous supply of liquidity have played a crucial role in containing the downside risks to price stability, supporting economic activity and helping to stabilize the financial system.

In those countries that start from low levels of government deficits and debt and thus have room for fiscal relaxation, demand-support packages also include expansionary fiscal policy measures. At the same time, most governments have recognised the existence of risks to the sustainability of their fiscal positions and are already preparing for reductions of deficits in the context of their medium-term planning.

MACROECONOMIC DEVELOPMENTS IN GREECE IN 2008 AND THE OUTLOOK FOR 2009 – THE GLOBAL CRISIS IS NEGATIVELY AFFECTING THE GREEK ECONOMY – THE FACTORS THAT SUPPORTED GROWTH HAVE LOST THEIR MOMENTUM

The global crisis has exerted a toll on the Greek economy. The crisis has contributed to a loss of momentum of the favourable factors that had supported economic growth for a number of years. During the period of robust growth, domestic demand expanded faster than domestic supply, inflation remained persistently above the euro area average, the current-account deficit continued to widen, and the external debt of both the private and the public sectors kept growing. The size and the persistence of these imbalances suggest that the structural reforms implemented have not been sufficient. Moreover, relatively high growth rates and euro area participation (which provided stability and low interest rates) encouraged complacency. The global financial and economic crisis has brought the macroeconomic imbalances and structural weaknesses of the Greek economy to the forefront; in addition, the crisis has had a direct impact on key macroeconomic aggregates.

ECONOMIC ACTIVITY – ZERO GDP GROWTH IS PROJECTED FOR 2009

Annual GDP growth rate in Greece slowed from 4.0% in 2007 to 2.9% in 2008 (last quarter of 2008: 2.4%), largely because of a sharp contraction of investment. In 2009, according to estimates of the Bank of Greece, economic activity will be stagnant; If the global economic conditions weaken more than presently expected (leading to a larger-than-expected drop in Greek exports), economic activity could be even slower than the Bank of Greece presently expects The latest data are quite suggestive. Year-on-year, in January 2009 the retail sales volume fell by 5.8% and the volume of private construction activity (as measured by building permits) by 33.5%; in the first two months of the year manufacturing output shrank by 10.0% and the value of goods exports (excluding fuels and ships) fell by about 20%; in the first quarter new passenger car registrations fell by 38.7%.

The financial crisis has had two main effects on economic activity in Greece. First, banks have tightened their credit standards for lending to enterprises and households in anticipation of an increase in non-performing loans. The tightening of credit standards exerts a contractionary impact on the supply of credit. Second, business confidence and household confidence have declined significantly, leading to a leveling-off of consumption (particularly of consumer durables), lower residential investment and a drop in business investment, reflecting increased risk aversion on the part of enterprises. As a result, the demand for credit by households has already declined and the demand by businesses is expected to decline as well.

Moreover, the global economic crisis has a direct impact on the Greek economy. The fall in global economic activity and world trade are affecting Greek exports of goods, mainly exports to EU countries and non-EU Balkan countries. Travel receipts are expected to fall, and transport (shipping) receipts are projected to decrease substantially, reflecting lower freight rates and the declining volume of trade. The decrease in exports of goods and services at constant prices is projected to be of the order of 12%.

There are, however, some factors that may mitigate the adverse effects of the crisis. Among other things, the decline in oil prices implies a substantial drop in inflation, helping to raise real disposable incomes. Also, the expected rise in average real earnings of employees could – even after taking into account the observed reduction in average working time and the expected decline in employment – support an increase (of about 1%) in private consumption. Moreover, the implementation of the liquidity support plan is expected to help raise the rate of credit expansion to households and enterprises above the growth rate of nominal GDP (which, nevertheless, will be low). Clearly, the final outturn of the credit expansion rate will depend not only on the supply of, but also, on the demand for loans, the latter of which has weakened amid heightened uncertainty resulting from depressed business and household confidence.

THE BANK EXPECTS A RELATIVELY LIMITED DECLINE IN EMPLOYMENT AND POSSIBLY A SMALL INCREASE IN THE UNEMPLOYMENT RATE, BUT A CONSIDERABLE INCREASE IN AVERAGE HOURS WORKED

 Employment rose by 1.1% in 2008, but projections for this year imply a small decline in the number of employed persons, while the fall in average working time will be larger than the decline in the number of employed persons, reflecting both a cut-back of overtime work and a reduction in regular working hours in some firms. The decline in the total number of employed persons is projected to be between 0.5% and 0.8%, while the drop in the number of wage and salary earners will be somewhat greater, at about 1%. For the self-employed, the weakening of activity typically implies a fall in working time, i.e. underemployment, and lower income, but not unemployment.

In the current situation, the most vulnerable groups of workers are the unskilled and those with low educational qualifications, those with temporary employment, and immigrants. The most affected enterprises are construction firms, export-oriented manufacturing firms, import trade enterprises (mostly importers of capital goods and consumer durables), and enterprises in the tourism and financial sectors. Despite the severity of the crisis, the rate of unemployment, which averaged 7.6% in 2008, might not rise much, if the annual growth rate of the labour force turns out to be close to zero (given that weak economic activity may discourage a growing number of persons from searching for jobs and encourage people to withdraw from the labour force). According to provisional figures, in January 2009 total employment fell by 0.6% year-on-year, whereas the unemployment rate rose to 9.4% (from 8.9% in December and 8.0% in January 2008).

HEADLINE INFLATION IS FORECAST TO DROP SHARPLY, BUT THERE WILL BE A SMALL FALL IN CORE INFLATION

The decline in international oil and food prices since mid-2008 led to a substantial fall in inflation in the last half of 2008, which continued into the first quarter of 2009. The annual rate of inflation (based on the Harmonised Index of Consumer Prices) moderated to 1.5% in March and is likely to decelerate to about 1%, or lower, around mid-2009. It is, then, projected to accelerate, reflecting mainly the expected year-on-year evolution of international oil prices. It is estimated that, in 2009, the average annual rate of inflation could fall to 1.5% or less (to 1.1-1.2%), from 4.2% in 2008. Core inflation is projected to remain relatively elevated at about 2.9%, only slightly lower than the 3.4% registered in 2008; it will, thus, remain higher than the average of the euro area. This situation implies a further erosion of the international price competitiveness of the Greek economy. However, the absence of excess demand in the Greek economy indicates that there might be a faster reduction in core inflation. Contributing to the expected disinflation, profit margins are forecast to continue to fall, and unit labour cost growth is forecast to slow appreciably. Still, the existence of imperfect competition in some sectors of the Greek economy means that core inflation is likely to decline less than would be the case if the economy were more competitive.

THE CURRENT ACCOUNT DEFICIT SOARED IN 2008, BUT WILL DECLINE IN 2009 AGAINST THE BACKDROP OF WEAKENING ECONOMIC ACTIVITY

The current account deficit remains very high; it reached 14.4% of GDP in 2008. This development stemmed largely from increases in the net oil import bill and in payments for interest, dividends and profits. Interest payments rose because of the increased volume of public debt is held by non-residents. In 2009, reflecting the weakening of the international and domestic environment, the current account deficit is expected to fall to 12.5-13.0% of GDP, mainly as a result of a larger decline in imports than in exports (in absolute terms). Despite this narrowing, the deficit will remain high and will tend to rise when the economic recovery commences. Thus, external trade will act as a drag on growth. This fact highlights the urgent need of medium-term policies aimed at addressing the underlying causes of the persistently high levels of the current account deficit. These very-high levels, partly attributable to a loss in international competitiveness, reflect the considerable shortfall of national saving relative to domestic investment. It is, therefore, necessary, among other things, to improve the international competitiveness of the Greek economy and, at the same time, correct macroeconomic imbalances, mainly through fiscal consolidation.

THE GENERAL-GOVERNMENT DEFICIT EXCEEDED 3% IN 2007 AND 2008, THUS TRIGGERING THE EXCESSIVE DEFICIT PROCEDURE FOR GREECE – PUBLIC DEBT STOOD AT A VERY HIGH LEVEL

 In 2008, the general government deficit (on a national accounts basis) exceeded the Maastricht Treaty reference value of 3% of GDP for the second consecutive year, triggering the initiation of the Excessive Deficit Procedure against Greece. Moreover, the consolidated debt of general government exceeded 95% of GDP in 2008. If the general government deficit remains at high levels in 2009, international markets will take the view that progress with fiscal consolidation has been delayed and will react accordingly. Since September 2008, there has been a very large widening of the yield spread between Greek and German government bonds. In the first quarter of 2009, the spread widened; more recently, the spread narrowed slightly, but still remained wide. This development reflects market concerns about Greece’s very high public debt-to-GDP ratio (the second highest in the EU), its failure to control fiscal deficits and achieve a sustainable fiscal position, the country's chronically large external deficit, and the delays in the implementation of the structural reforms required to improve competitiveness.

THE ANNUAL RATE OF CREDIT EXPANSION TO ENTERPRISES AND HOUSEHOLDS SLOWED DOWN IN 2008 AND WILL CONTINUE TO DECELERATE IN 2009

 Since November 2008, the annual rate of credit expansion to businesses decelerated markedly, falling to 17.2% in January and 15.3% in February 2009. The slowdown in credit expansion to businesses, attributable to a tightening of credit institutions' credit standards, occurred at a time during which corporate demand for loans remained essentially unchanged.

The annual rate of credit expansion to households showed a strong downward tendency in 2008, a tendency that has continued into the first two months of 2009; it stood at 10.3% in February. On the demand side of the market, this slowdown is attributable to, among other things, a weakening of demand for bank loans as a result of a decrease in expenditure for house purchases or repairs, and to increased cautiousness of consumers, resulting from uncertainty about the outlook of their incomes

. The decline in the rate of increase in the outstanding balance of MFI loans to the private sector is projected to continue. With regard to the supply of loans, the tightening of credit standards by banks, which aim to avert an increase in non-performing loans and maintain a high degree of liquidity, is projected to be a constraining factor. By contrast, the participation of Greek banks in the government’s liquidity support plan has been, thus far, satisfactory and is expected to have a positive effect on economic activity. Also, domestic MFIs are continuing to increase their liquidity through the Eurosystem. With regard to demand, it is expected that households’ uncertainty about their future income and the economic downturn will continue to negatively affect the willingness of non-financial corporations and households to take on more debt. However, the rate of credit expansion to the private sector in 2009 is expected to remain higher than nominal GDP growth and will thus continue to support domestic economic activity.

BANK LENDING AND DEPOSIT RATES HAVE BEEN DECLINING IN RECENT MONTHS – THE INTEREST RATE MARGIN IS ALSO NARROWING

In 2008, interest rates on deposits by households with a maturity of up to one year rose substantially and remained essentially stable on overnight deposits. Developments in deposit rates in the course of 2008 are associated with the fact that Greek banks offered high interest rates for deposits with longer maturities in order to strengthen their deposit base. By contrast, in the first two months of 2009 the interest rates on both categories of deposits declined, as financing conditions for banks improved. The larger rise in the interest rate on time deposits in 2008, compared with those on other categories of deposits contributed to a shift from more liquid deposits to (less liquid) time deposits.

Developments in interest rates on bank loans to the private sector in Greece were not uniform in 2008. Interest rates on new loans declined across almost all loan categories in the last two months of 2008 and fell substantially in the first two months of 2009. Nevertheless, interest rates on new loans to households were higher in December 2008 than in December 2007, whereas interest rates on loans to non-financial firms were lower. The overall decline in interest rates of loans to businesses in 2008, which fell short of the decline in interbank market rates, was offset by an increase in interest rates in all categories of loans to households. Thus, the average interest rate on total new loans in the aggregate rose marginally in 2008.

 The above developments mainly reflected the fact that banks, facing difficulties in funding themselves in the interbank market, sought to obtain liquidity elsewhere. They, therefore, offered high interest rates on time deposits, which forced them to keep their lending rates high. Also, the financing conditions of Greek banks were negatively affected by an increase in the yield spread of Greek government bonds against German bonds. The cuts in the key ECB rates and the fall in interbank market rates did not significantly affect interest rates on new loans, as those cuts were partly offset by an increase in the risk premia required by Greek banks because of the increase in non-performing loans.

 The interest rate margin, i.e. the difference between the weighted average interest rate of new bank loans and the corresponding rate on new deposits in Greece, narrowed by 70 basis points in 2008 (December 2007-January 2009: 75 basis points), because of a larger increase in the deposit rate than in the lending rate. The corresponding margin contracted by 45 basis points in 2008 in the euro area. The interest rate margin in Greece, despite falling more than the average figure for the euro area, remains at a higher level than the euro-area average. This situation is attributable to some inherent characteristics of the domestic banking system and the different composition of both deposits and loans between Greece and other euro-area countries.

THE FUNDAMENTALS OF THE GREEK BANKING SYSTEM REMAIN BASICALLY SOUND

The dysfunctioning of international money and capital markets has negatively impacted on the factors that underlie the stability of the Greek banking system. Indicators of bank profitability and capital adequacy were lower at the end of 2008 than their corresponding levels at the end of 2007. Nevertheless, these indicators remain above those of banks in the EU as a whole. In addition, there was a small decline in the quality of banks’ portfolios and their liquidity ratios during 2008. However, the relevant indicators remain at satisfactory levels; they are above the minimum required levels. Additionally, the tightening of credit standards and supervisory controls by the Bank of Greece have helped maintain the soundness of the fundamentals of the Greek banking system.

 Specifically:

 -- After-tax profits of banking groups dropped substantially in 2008 (by 42.8%); excluding the non-recurrent profits recorded in 2007, the decline in profits was 34.6%. Underlying this drop in profits were the more than doubling of provisions for credit risk, the increased cost of funding, and lower profits from financial operations and the investment portfolios.

-- The capital-adequacy ratio fell to 9.5% in 2008, from 11.2% in 2007, while the Tier I ratio fell to 7.9%, from 9.2%. Nevertheless, capital adequacy remains at a level higher than the supervisory minimum and is expected to strengthen, mainly through the issuance of preferred shares under the liquidity support plan, and through capital injections to subsidiaries of foreign banks in Greece by their parent banks.

 -- Despite recording an increase, the leverage ratio of Greek banking groups remained relatively low, at 17.6 in 2008, compared with 13.2 in 2007.

 -- Regarding the quality of the loan portfolio in Greece, the ratio of non-performing loans (NPL) rose to 5.0% at end-2008, from 4.5% at end-2007. This development was entirely accounted for by loans to households, where an increase in the NPL ratio was registered for both housing and consumer loans. A small improvement was seen in the NPL ratio for loans to businesses. A rise in the NPL ratio occurred in the countries of Southeastern Europe (including Turkey), especially in the second half of 2008. At the same time, the coverage ratio (cumulated provisions to non-performing loans) in Greece fell to 48.9% in 2008, compared with 53.4% in December 2007; the coverage ratio was unchanged, at about 100%, for Greek banks’ branches and subsidiaries abroad.

The above coverage ratios and the maintenance of capital adequacy at levels above the supervisory minimum are expected to largely offset the impact on the quality of Greek banks’ portfolios of the deterioration of the macroeconomic environment in the domestic and foreign markets where Greek banks are operating.

THE PLAN FOR ENHANCING LIQUIDITY IN THE ECONOMY IS BEING IMPLEMENTED GRADUALLY

 The Greek plan of action for enhancing liquidity in the economy is gradually being implemented. This plan is expected to further strengthen the liquidity and capital adequacy of banks. The full implementation of the plan's provisions is expected to mitigate the impact of the financial crisis on the real economy. The pace of utilisation of the provisions of the plan is similar to the one observed for other plans in the rest of the euro area.

 In view of the increased risks under prevailing conditions, the Bank of Greece continues to request banks to implement the policies necessary for safeguarding financial stability. In this respect, the Bank urges banks to make use of the government plan for enhancing liquidity in the economy; observance of this policy guidance will help prevent a credit squeeze and will strengthen banks' capital base. At the same time, in view of the deteriorating economic conditions in the countries of Southeastern Europe (including Turkey), the Bank of Greece has recommended that Greek banks operating there should carefully assess local economic conditions and the possibility of finding themselves exposed to both credit risk and exchange rate risk. However, with the cooperation and coordination of international institutions such as the International Monetary Fund and the European Bank for Reconstruction and Development, the international community is providing support to the countries of Southeastern Europe; thus, there is reasonable hope that these economies will soon regain their growth momentum. Finally, the Bank of Greece, early on, asked banks to increase their provisions against non-performing loans and to limit bonuses to senior officers.

IN THE CURRENT CIRCUMSTANCES OF GREECE, A PRIMA FACIE RESTRICTIVE FISCAL POLICY CAN HAVE AN EXPANSIONARY EFFECT – THERE ARE WAYS TO SUPPORT ECONOMIC ACTIVITY WITHOUT FISCAL RELAXATION

 As is clear from the above picture, there remains an urgent need of a medium-to-long-term economic policy strategy that includes measures to be implemented immediately, as repeatedly empasised by the Bank of Greece. The primary objective of this strategy should be to deal effectively with the key macroeconomic imbalances and chronic structural weaknesses, which fuel the high and continuously expanding domestic and external deficits. Aggregate domestic saving must be raised to levels sufficient to finance the investment needs of the economy. Extensive institutional and organisational changes across all sectors and markets of the economy must be promoted in order to enhance productivity and competitiveness of Greek products (goods and services).

 Fiscal policy needs to carry a major share of the effort required to remedy chronic rigidities and past failures. Unfortunately, a fiscal stimulus is not an option for Greece. Mainly because of past choices, there is no room for a fiscal stimulus in present circumstances of a sharp slowdown. Instead, a disciplined fiscal policy is warranted, not only to meet the requirements of the Stability and Growth Pact but also to reduce the cost of foreign borrowing.

 Nevertheless, in the current adverse circumstances, it is possible to support economic activity by reallocating government spending and by enhancing its efficiency, in order to make possible interventions targeted to support the more vulnerable groups of society and support public investment, which, as a rule, has a positive effect on growth. In this respect, it is possible to boost public investment without any significant budgetary effects if Greece uses advance payments of Community funds for the financing of infrastructure projects.

By increasing the efficiency of government expenditure and by implementing policies conducive to a gradual elimination of fiscal imbalances, Greece can gain the confidence of markets. Thus, a prima facie restrictive fiscal policy could, in fact, have an expansionary effect. Conversely, in the current circumstances, a prima facie expansionary fiscal policy would ultimately turn out to be restrictive as it would entail multiple fiscal costs. This circumstance must be understood by those who believe that large fiscal deficits can be a growth-inducing factor. In fact, there has never been a country that achieved sustainable growth based on chronic fiscal deficits. On the contrary, there are numerous examples of countries in which high deficits and debt levels have hampered economic growth. Moreover, in those countries that are currently implementing policies of strong fiscal stimulus – because, unlike Greece, they have the room to do so – the purpose is clearly counter-cyclical. Those countries are already undertaking plans to reduce their deficits once a recovery commences. In current circumstances, however, any widening of Greece’s fiscal deficit would not even have a counter-cyclical effect since it would lead to an outright increase in the costs of borrowing for both the public and the private sectors, thereby undermining the recovery.

 The recovery of the economy (and, subsequently, growth) could also be boosted by speedily implementing other reforms that do not entail budgetary costs but contribute directly to the improvement of productivity. Notable examples are reducing red tape and strengthening competition.

 To sum-up, the following measures can help mitigate the impact of the crisis and speed-up recovery: fiscal consolidation, which will contribute to bolstering confidence in the prospects of the economy and to reducing the cost of government borrowing; the freeing-up of resources (through reallocation) that can be used to support the more vulnerable social groups and productive public investment; and structural reforms that have a quick effect and zero budgetary cost, and can ensure an improvement of productivity. For this reason, these measures are key priorities in the context of the multi-annual strategy.

KEY ECONOMIC POLICY ORIENTATIONS: FAST AND DECISIVE CORRECTION OF THE FISCAL DEFICIT -- STRUCTURAL REFORMS TO REDUCE PUBLIC DEBT, IMPROVE PRODUCTIVITY AND COMPETITIVENESS, AND RAISE THE EMPLOYMENT RATE

The multi-annual economic policy strategy should involve the following main policy guidelines:

-- A fast and decisive reduction of the fiscal deficit, so that it can be eliminated by 2012. This reduction is feasible if a substantial portion of tax evasion is captured and, most importantly, if the waste in government spending is sharply reduced and the efficiency of public expenditure is raised.

-- Implementation of a comprehensive set of reforms in the broader public sector to help rein in public debt. Sizeable primary surpluses (of about 4.5-5% of GDP) will be required in order to achieve an effective reduction in the debt-to-GDP ratio to below the reference rate of the Maastricht Treaty (60%) within a reasonable period of time (the next decade). This achievement is necessary to cope with the future budgetary implications of population ageing. The establishment of numerical fiscal rules for expenditure, enhanced transparency in public finances, curbing tax evasion (starting with a streamlining of tax administration) and tackling social security contribution evasion (among other things, through better aligning pension contributions and benefits) would all help eliminate fiscal deficits. With regard to the latter issue, the measures taken in 2008 focused on the unification of the numerous pension funds and were an important step towards a reform of the system. Clearly, the expected ageing of the population necessitates a comprehensive reform of the social security system, in order to ensure expenditure control and medium-term fiscal sustainability, on the one hand, and to secure adequate pensions and health benefits in the future for an ever-growing part of the population, on the other. At the same time, the reform should contribute to supporting economic growth and increasing the size of labour force.

 -- Far-reaching structural reforms, aimed at achieving a sound and more efficient public sector, strengthening the productive base through investment, raising the employment rate and continuously upgrading human capital, as well as strengthening competition in all markets, should contribute to improving productivity and competitiveness and raising the rate of employment.

CHANGE IN THE CURRENT PATTERN OF ENERGY PRODUCTION AND CONSUMPTION

 Moreover, reforms should aim to modernise the patterns of energy production and consumption, since the Greek economy is a high energy-consuming economy with high oil dependence. The implementation of the necessary reforms will require proper planning and appropriate incentives. Such reforms would help attract large-scale investments and contribute to strengthening competition in the energy sector, creating new businesses and jobs, and reducing the country's energy dependence. Therefore, these reforms would also help reduce the current account deficit. The present situation should not be viewed as an obstacle to such developments. Investment in energy and so-called “green” investment could give an important boost to the recovery of the economy.

 The Report includes specific proposals on many of the above issues.

THERE EXIST POLICIES THAT CAN SUPPORT NOT ONLY A FAST EXIT OF THE ECONOMY FROM THE CRISIS, BUT ALSO A RETURN TO GROWTH RATES THAT WILL BE SUSTAINABLE

The analysis contained in the Report indicates some key policy guideposts for the implementation of a credible medium-term plan. These guideposts can help provide an exit from the crisis as soon as possible and a return to higher, but sustainable, rates of growth. At the same time, it is clear that an appropriate policy mix will be required in order to restore the confidence of foreign investors and domestic enterprises and households in the future of the Greek economy. The plan of action should aim to put firmly in place conditions for setting in motion a far-reaching, more outward-looking, dynamic growth process -- one that will respect and protect the environment. At the same time, such an approach can secure additional resources to be used for strengthening social cohesion. It will be all the more effective if it is supported by a strong social consensus. Consensus-building will require a public dialogue on the equitable distribution of burdens, i.e., of the sacrifices that will be needed in the short term, and the broadest possible diffusion of benefits so that the whole of society is the winner.

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