Governor's Annual Report 2024

08/04/2025 - Press Releases

THE GREEK ECONOMY ON A CONVERGENCE PATH-FISCAL CREDIBILITY, REFORMS AND TRUST IN INSTITUTIONS ARE PILLARS OF ECONOMIC STABILITY

Speech by Bank of Greece Governor Yannis Stournaras at the Annual General Meeting of Shareholders

Changes in the economic environment

The world economy is currently in a transitional phase, where the constants underpinning the post-war international economic environment are undergoing a significant change, with the United States overturning the global trade status quo by adopting policies to drastically reduce imports through tariffs. This development is expected to lead to a slowdown in global trade and economic activity, particularly affecting export-dependent countries, including the US itself.

The risk of a full-blown trade war and the decline in global demand are expected to negatively affect exports. The heightened uncertainty also weighs on the investment climate, making it increasingly challenging to attract foreign investment.

The new US administration’s announcement of high tariffs on goods imported from Mexico, Canada, China, the EU and other countries marks a clear policy shift towards increased trade protectionism. The tariffs of 25% on imports from Mexico and Canada, 20% on imports from China and Europe and 25% on automobiles represent the highest level of restrictive trade measures since the 1940s.

The consequences of such a trade war will be negative across all the economies involved, including the United States, as already confirmed by the latest data on the US economy and markets.

Trade protectionism tends to trigger chain reactions, with the affected countries retaliating through countermeasures. This could lead to an escalation of the crisis and a slowdown in global trade, with severe implications for economic activity and growth.

Moreover, the production, manufacturing and distribution of goods rely on global value chains, which have increased the interdependence of national economies. As a result, the imposition of tariffs on imports by one country will also affect the other countries participating in global value chains, even without any retaliatory measures. Ultimately, indirect effects will amplify the initial shock, with far-reaching consequences on the global economy as a whole and not just the countries directly targeted by the tariffs.

Europe, as an economy that is highly open to trade, is particularly vulnerable to such developments. Although Greece has low trade dependence on the United States and is therefore expected to have limited direct effects from the increase in tariffs, it may still be affected indirectly, as a broader slowdown in global trade could reduce demand for Greek goods and services and weaken its growth outlook. Finally, heightened uncertainty in markets discourages investment, as firms are reluctant to take risks in an unstable environment.

Against this backdrop, governments will need to adjust their strategies, so as to strengthen the resilience of their economies to the new conditions. For Greece, the response to these challenges lies in maintaining a credible fiscal policy, attracting investment and implementing reforms to boost productivity, promote innovation and shift towards a more sustainable growth model based on the diversification of the productive base and the development of new high-value-added sectors.

The exact impact of a trade war is very difficult to quantify, as it depends on factors such as the duration and intensity of the measures and countermeasures, the countries involved and the ability of economies to adapt to the new conditions.

Euro area economy

The growth dynamics of the euro area economy picked up moderately in 2024. Still, the growth rate remained subdued, reaching just 0.9%. Growth was mainly driven by rising consumption and the gradual easing of financial conditions, while the strengthening of global trade also made a positive contribution. At the same time, persisting uncertainty due to global geopolitical developments, as well as to political shifts in certain Member States, had a dampening effect. This environment led to recession in Germany and a decline in investment in the euro area as a whole.

Turning to price developments, both headline and core inflation in the euro area declined significantly. In particular, headline inflation dropped to 2.4% in 2024 (from 5.4% in 2023), driven down by three main factors: lower energy and food prices; the still restrictive monetary policy stance; and the economic slowdown in certain economies – or even recession as in the case of Germany – which held back aggregate demand. Core inflation also declined, to 2.8% (from 4.9% in 2023), primarily due to sluggish economic activity and slower unit labour cost growth.

The single monetary policy

Monetary policy proved effective in reducing inflationary pressures. The restrictive monetary policy stance of recent years played a decisive role in anchoring inflation expectations and gradually bringing down inflation, without significant adverse effects on the labour market. In the course of 2024, monetary policy started to become less restrictive, reflecting a marked easing of inflationary pressures.

Thus, in 2024 the process of monetary policy normalisation began, with successive cuts in key interest rates and a shift towards a more neutral monetary environment. Generally, the interest rate policy of the Eurosystem was based on a dynamic assessment of economic conditions, according to a data-dependent and meeting-by-meeting approach. Between June 2024 and March 2025, the Governing Council of the ECB lowered its policy rates on six occasions, by 25 basis points each time, in line with its growing confidence that inflation was steadily converging towards the 2% medium-term target within 2025. By the end of March 2025, the deposit facility rate had been reduced to 2.5%, down by a cumulative 150 basis points from 4% in September 2023. As a result, financing conditions are gradually easing, as key interest rate cuts have started to translate into lower borrowing costs for firms and households. However, overall monetary conditions remain restrictive, while the cost of servicing existing loans is still elevated, reflecting the lagged effects of past interest rate hikes.

As part of the monetary policy normalisation process, the gradual reduction of the Eurosystem’s balance sheet is also underway. In this context, during the second half of 2024, the ECB started to phase out reinvestments under the pandemic emergency purchase programme (PEPP), with a view to terminating them by the end of the year.

The Greek economy

The Greek economy continues to demonstrate strong resilience and record positive performance. In 2024, GDP grew by 2.3%, at the same rate as in 2023 and well above the European average. The main drivers of economic activity were private consumption, investment and exports of services.

Particularly noteworthy is investment, which has shown a strong momentum in recent years. Since 2019, investment has been steadily increasing, covering part of the large investment gap that emerged during the debt crisis. Its contribution to annual GDP growth has averaged 1.6 percentage post-pandemic, considerably higher than the euro area average of just 0.3 percentage points in the same period. What stands out is not only the volume of investment, but also its qualitative improvement in its composition: Before the debt crisis, almost half of private investment was directed towards residential construction, while productive investment remained insufficient, weighing on the long-term growth prospects. Today, however, this trend has been reversed: about four-fifths of private investment is channelled into productive capital and the remaining one-fifth is in housing. If this continues and is accompanied by a further increase in the total investment volume, it could act as a catalyst in restructuring the country’s productive model.

Headline inflation declined further in 2024, reaching 3%. Nevertheless, it remained above the euro area average, mainly on account of persistently high services inflation, which hindered a faster decline. Core inflation started to decrease for the first time in two years, as inflation of non-energy industrial goods (NEIG) slowed markedly.

The labour market remained robust in 2024, with unemployment falling further to 10.1% and labour force participation increasing. Despite these improvements, the labour market has tightened compared with the recent past. Many firms are facing growing difficulties in meeting their staffing needs – even after the strong wage growth in 2024.

Notably, wage growth in 2024 was significantly higher than in 2023, substantially boosting households’ disposable income. Specifically, total compensation of employees increased by 7.4%, whereas compensation per employee grew by around 6%. This development was driven by three key factors: the rise in public sector salaries; the reinstatement of seniority-based benefits for private sector employees; and the further increase in the minimum wage.

Following the progress of recent years, the international competitiveness of the Greek economy deteriorated slightly in 2024. This deterioration is related to the appreciation of the euro, which harmed price competitiveness. Meanwhile, unit labour cost competitiveness was adversely affected by two factors: lower wage growth in the rest of the euro area; and higher labour productivity growth in most European economies relative to Greece. In terms of structural competitiveness, the country’s ranking in the relevant composite indicators remained broadly unchanged. Shortfalls in critical areas – such as digitalisation, innovation and productive investment – continue to hinder an improvement in Greece’s ranking on global competitiveness indicators.

The current account balance also deteriorated, with its deficit widening to 6.4% of GDP.

On the other hand, foreign direct investment (FDI) rose markedly in 2024, coming to about EUR 6 billion (or 2.5% of GDP), which is the second highest level in the past 20 years. Overall, the rise in FDI reflects the improved business environment after the recent credit rating upgrades of the Greek economy, as well as the completion of privatisation projects.

Fiscal developments

With regard to fiscal developments, which are key to bolstering market confidence and overall economic stability, the achievements have been remarkable. The prudent fiscal policy pursued over the past years, coupled with intensive efforts to combat tax evasion, is now yielding tangible and measurable results. Tax revenues are increasing in a sustained manner, on the back of a broadening of the tax base, and high primary surpluses are steadily achieved without a need for restrictive measures. Revenue overperformance relative to budget targets has enabled the financing of additional public expenditure on investment and on support to vulnerable social groups.

According to Bank of Greece estimates, the primary surplus for 2024 is expected to reach 3.5% of GDP, considerably higher than the projections of both the Medium-Term Fiscal-Structural Plan and the Budget. The size of the primary surplus is expected to exceed interest payments, making Greece one of the few European countries with a general government budget surplus. A surplus budget contributes to strengthening national saving, with beneficial effects on the current account balance. It is worth highlighting that, with the exception of the pandemic period, Greece has maintained primary surpluses for seven years – above 2% of GDP in six of those years – while consistently overachieving its fiscal targets for nine consecutive years. This performance is clear evidence of the country’s responsible fiscal policy and restored credibility; it reflects the outcomes of the structural adjustment achieved over the past decade as well as of the reforms in public financial management, effectively belying earlier concerns about a potential fiscal fatigue.

The public debt-to-GDP ratio continues to decline rapidly, outperforming most euro area Member States. In 2024, public debt declined markedly not only as a percentage of GDP, but also in absolute terms. According to Bank of Greece estimates, general government debt is expected to have declined by 10 percentage points of GDP compared with 2023, reaching 153.8% of GDP, its lowest level since 2010. On a cumulative basis since 2020, Greece has recorded the fastest public debt reduction among advanced economies, of over 50 percentage points of GDP in just four years.

Regarding the absorption of RRF funds – which provide significant fiscal stimulus to the economy – Greece continues to rank among the frontrunners in the EU. Greece has so far received 51% of its total allocation (around EUR 18 billion), having fulfilled 28% of the agreed milestones and targets in its national recovery and resilience plan. With the disbursement of the next instalment, which is due shortly, the amount received will reach to EUR 21.3 billion – about 60% of total allocated funds – with the share of milestone/target fulfilment standing at 35%. Concerning the RRF loan component, there has been substantial progress in the signing of loan agreements; in the grant component, disbursements to final beneficiaries have accelerated significantly. These developments increase the contribution of public investment to economic growth.

Banking sector

Bank lending rates declined across most loan categories, in line with the cuts in monetary policy rates. The cost of bank borrowing for firms dropped by 32 basis points, as most business loans carry floating rates and are directly linked to a benchmark rate. For household loans, interest rate reductions were overall more limited: while rates on consumer loans fell by 50 basis points, mortgage rates remained broadly unchanged. This was mainly due to the fact that interest rates on most loans in this category are fixed, determined according to banks’ pricing policies.

Deposit interest rates also trended downwards during the year, although they remained, on average, at higher levels than in 2023. Interest rates on time deposits for firms followed the cuts in key interest rates. In contrast, the adjustment in the respective interest rates for households was slower and more limited. This relative stickiness is attributed to banks’ intention to maintain a strong deposit base – particularly after the repayment of their liabilities vis-à-vis the ECB – also given the shift of many depositors towards alternative instruments, such as Greek Treasury bills.

The annual growth rate of bank credit to the private sector as a whole accelerated significantly in 2024. This reflects the increased provision of credit to both firms – with a special focus on supporting small and medium-sized enterprises (SMEs) – and to households.

Bank deposits by the private sector continued their upward trend in 2024, growing at a faster pace than in the previous year. Overall, deposits increased by EUR 8.6 billion in 2024, reaching EUR 204 billion – the highest level since early 2011. This increase was driven primarily from firms, reflecting both stronger business credit expansion and higher turnovers. The rise in household deposits was more moderate, amid a shift towards alternative investment options.

With regard to banking institutions, their fundamentals improved further in 2024. This progress allowed– for the first time in 15 years – the distribution of dividends by systemic banks, a development of great symbolic significance for the restoration of confidence. Profitability strengthened further, supported by a continued increase in net interest and fee income. Liquidity ratios remained broadly unchanged relative to 2023, but continued to stand well above regulatory requirements and the respective euro area averages – despite the full repayment of the Eurosystem’s TLTROs. Capital adequacy ratios increased significantly, converging towards European levels. The aggregate loan portfolio quality also showed a marked improvement on an annual basis, moving closer to the euro area average. It should be noted that the non-performing loan (NPL) ratio has declined to its lowest level since Greece’s entry into the euro area. Lastly, the restructuring of less significant institutions greatly contributed to strengthening financial stability. The creation of the so-called “fifth pillar” – through capital increases in smaller institutions and, above all, the merger of Pancreta Bank with Attica Bank – has boosted competition in the banking sector and expanded the financing possibilities for SMEs. The favourable developments in banks’ fundamentals, coupled with improvements in the regulatory framework, were reflected, among other things, in successive credit rating upgrades of Greek banks by international rating agencies, further bolstering confidence in the country’s financial sector.

Projections

According to the latest Bank of Greece projections, the growth rate of the Greek economy is set to remain at 2.3% in 2025 – well above the euro area average. Private consumption and investment will continue to be the key drivers of growth, while the contribution of net trade is expected to be neutral. The ongoing recovery of economic activity will be accompanied by a slight further decline in unemployment to 9.9%.

Headline inflation is projected to decline slightly to 2.9% in 2025, while core inflation is projected to remain stable. Upward pressures on prices will mainly stem from energy inflation returning to positive territory, as well as from an expected rise in services inflation. In contrast, food inflation and NEIG inflation are projected to decline.

The current account deficit as a percentage to GDP is projected to improve, still remaining elevated.

Fiscal aggregates are expected to remain robust in 2025. The Bank of Greece expects the primary surplus to be 2.6% of GDP in 2025. Public debt is projected to continue its downward trajectory, falling to 144.4% of GDP in 2025.

Monetary policy is expected to become gradually less restrictive in 2025, as policy rates continue to decline. Inflation at the euro area level is now much closer to the 2% target, and the ECB’s projections suggest that this trend is sustainable and consistent with price stability. In any case, the ECB remains cautious, underscoring that its decisions will continue to be based on the available incoming data and on the inflation outlook, ensuring a smooth adjustment of the euro area economy to the new monetary reality.

Sources of risk and uncertainty

Risks to the global economy in 2025 remain significant, adding to uncertainty about the outlook for growth and inflation. Rising trade protectionism – led by the US tariff policies and the announced countermeasures by major trading partners – are the main sources of uncertainty. The recent escalation of the trade war by the United States, with the announcement of tariffs on a wide range of countries, is expected to further disrupt supply chains. These developments threaten the resilience of economies, weighing on global trade and worsening global financial conditions and investment, while they increase the risk of renewed inflationary pressures and are likely to slow down economic growth.

In the euro area economy, downside risks remain significant. These risks include: the prolonged geopolitical tensions, which affect supply chains and create volatility in energy prices; the lagged impact of past monetary policy tightening, which could further constrain consumption and investment; fiscal consolidation in some Member States, which could dent demand; the US tariff policies and their potential adverse impact on European exports, particularly in critical industrial sectors; and long-standing structural weaknesses, such as low productivity, weak competitiveness and demographic challenges.

Diverging inflation and growth prospects across major economies add to the uncertainty and make the conduct of monetary policy more complex. A resurgence in inflation or inflation expectations could slow down or halt the process of monetary policy normalisation, thereby worsening financial conditions and weakening growth dynamics. On the other hand, a prolonged restrictive monetary policy stance exerts pressure on vulnerable sectors of the economy. At the same time, geopolitical tensions, market volatility and rising euro area bond yields lead to even tighter financing conditions. Moreover, a potential further decoupling of in monetary policies among major economies could cause turbulence in exchange rates and international capital flows. Against this background, global monetary policy cycles are expected to be less synchronised, as central banks need to balance inflation targets with the impact on energy costs and import prices from trade tensions and the imposition of new tariffs. In this increasingly complex environment, monetary policy needs to remain credible, which requires flexibility and readiness to adjust its stance in a timely manner, so as to ease uncertainty and safeguard macroeconomic stability.

For the Greek economy, maintaining strong growth rates and accelerating real convergence towards the EU average remain the key challenges. In addition to global and European risks, further sources of uncertainty relate to: potential delays in the absorption and effective use of RRF funds; the increasing frequency and severity of climate-related natural disasters; and growing tightness in the labour market and rising wage pressures.

Policy recommendations

Effectively addressing all the above challenges calls for a coherent economic policy strategy, focused on continued reforms, fiscal stability and the reinforcement of productive capacity.

The continuation of reforms, particularly in areas with long-standing weaknesses (such as the delivery of justice), is essential for enhancing investor confidence and attracting new capital. Policy measures geared towards cutting red tape, accelerating digital transformation and promoting competition can substantially improve the business environment. At the same time, it is crucial to accelerate the absorption and ensure the effective use of RRF funds, with a view to narrowing the investment gap, enhancing potential output and structural competitiveness and, overall, improving the economy’s resilience. Investment in research, innovation and human capital is key to reversing the long-term decline in productivity. Finally, further strengthening the economy’s extroversion – by increasing the production of tradable goods and services – will contribute to the gradual correction of structural imbalances in the current account.

The observed labour market tightness calls for initiatives to ensure that the growth dynamics of the economy is not undermined. Priority should be given to increasing labour force participation, especially of youth and women, strengthening vocational training and continuous upskilling. At the same time, there is a need for active labour market policies for the long-term unemployed, as well as for incentives to integrate and attract skilled immigrants. Policies to better align skills with labour market needs, reverse the brain drain, as well as re-integrate and retain more workers in the labour market are also of paramount importance.

The ReArm Europe plan offers Greece a strategic opportunity to strengthen its domestic defence industry and productive base. The country can greatly benefit from joint EU funding, provided that it actively participates in international co-production partnerships. This would support both greater self-sufficiency and an increase in defence-related exports. At the same time, higher defence spending should be channelled into well-designed, growth-enhancing investment projects – in infrastructure, energy, research and innovation – with positive spillovers to other sectors of the economy. In this way, the effective use of defence-related funds could act as a catalyst for a stronger and more resilient productive base.

The experience of recent crises has highlighted the need for more resilient public finances and prudent countercyclical fiscal policies. For Greece, maintaining fiscal credibility and complying with the new EU framework is of critical importance. Key priorities remain the achievement of primary surpluses and the build-up of adequate fiscal buffers. At the same time, a further broadening of the tax base is required – through intensified efforts to combat tax evasion, in order to enhance tax fairness.

Last but not least, the outlook for the Greek economy hinges on a strengthening of the euro area’s resilience, which in turn requires faster progress towards deeper European integration and more effective policy coordination. The current global upheavals, while posing a threat, also serve as a wake-up call for Europe. Completing the Banking Union, establishing a fully functional Capital Markets Union – as part of the broader strategy for a Savings and Investment Union – as well as developing a strategy for a Fiscal Union are critical priorities. This necessity is underlined by both the Draghi report on the EU’s competitiveness and the Letta report on the deepening of the Single Market. In the same direction, the European Commission’s Competitiveness Compass provides a concrete roadmap of actions, such as simplifying the regulatory framework, boosting innovation, increasing financing and supporting the green and digital transitions. Such initiatives are essential for enhancing competitiveness, ensuring cohesion and strengthening Europe’s strategic autonomy in a highly demanding global environment.

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The positive performance of the Greek economy in recent years is reflected not only in macroeconomic indicators. Equally important is the progress in terms of institutions, which has been an additional driver of the economy’s credit rating upgrades. Enhanced political stability, a more effective public administration, improvements in the quality of the regulatory environment, democratic institutions and the rule of law, as well as progress in the fight against corruption, have underpinned market confidence in the country’s ability to implement credible policies and attract investment.

Nevertheless, Greece’s ranking relative to other European countries remains low, particularly in areas such as the rule of law, the speed in the delivery of justice and the predictability of law enforcement. This highlights a need for pressing ahead with the reforms, in order to further strengthen trust in institutions – a critical factor for economic stability and resilience in the face of future crises.

In an international environment where new uncertainties are piling up, the implementation of the necessary reforms and trust in institutions are essential prerequisites for increasing social prosperity. Greece has a historic opportunity to complete the transformation of its economy and continue the convergence of its GDP per capita towards the EU average. The benefits of reforms are already visible in the economy, with measurable and undisputable results. Maintaining the political will to implement credible reform policies is key to turning crises into opportunities, so that the country can definitively overcome its long-standing weaknesses and transform into a modern, sustainable, extrovert and competitive economy.

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