ISSN 2443-8014 (online)

In-Depth
Review
2024

Greece

INSTITUTIONAL PAPER 281 | APRIL 2024

EUROPEAN ECONOMY

Economic and
Financial Affairs
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European Commission
Directorate-General for Economic and Financial Affairs

In-Depth Review 2024

Greece

EUROPEAN ECONOMY Institutional Paper 281

Greece

In-Depth Review 2024

This in-depth review presents the main findings of the Commission’s staff
assessment of macroeconomic vulnerabilities for Greece for the purposes of
Regulation (EU) No 1176/2011 on the prevention and correction of
macroeconomic imbalances. It provides technical input to the Commission for the
Communication “European Semester – 2024 Spring Package” that will set out the
Commission’s assessment as to the existence of imbalances or excessive
imbalances in Greece. That Communication will be published in June 2024. The
current version has been presented and discussed with the Member States in the
Economic Policy Committee of the Council.
This publication reproduces staff working document SWD(2024) 102 final, that
was discussed with Member States in the Economic Policy Committee of the
Council on 18 April 2024.
CONTENTS

1. Introduction...................................................................................................................................... 1

2. Assessment of macroeconomic vulnerabilities .................................................................. 2

Assessment of the gravity, evolution and prospects of macroeconomic vulnerabilities......... 2
Assessment of MIP-relevant policies .................................................................................................................13

Conclusion ............................................................................................................................................ 16

3. Thematic chapter: External sustainability and investment ......................................... 21

1. INTRODUCTION

This in-depth review (IDR) analyses the evolution of Greece’s vulnerabilities related to
high government and external debt, a high ratio of non-performing loans in the context
of low potential growth and a high unemployment rate, and possibly newly emerging
risks. This year’s IDR, which follows the 2024 Alert Mechanism Report (AMR) published in
November 2023, assesses the persistence or unwinding of the vulnerabilities identified last year,
potential emerging risks, and relevant policy progress and policy options that could be considered
for the future ( 1).

The vulnerabilities in Greece are analysed in a macroeconomic context characterised by

solid economic growth and heightened uncertainties related to geopolitical risks ( 2). GDP
growth moderated in 2023 amid the waning impact of the post-COVID recovery, weakening global
demand and tightening financial conditions. GDP growth slowed to 2% in 2023, compared to 5.6%
in 2022, but remained well above the EU average (0.4%). The Commission’s Winter 2024 Interim
Forecast projects GDP growth at 2.3% in both 2024 and 2025. This growth trajectory reflects a
consumption growth stabilising at its 2023 level and a pick-up in gross fixed capital formation, as
the implementation of the recovery and resilience plan (RRP) shifts from enacting reforms towards
delivering investments. However, investments are likely to induce higher import demand, which is
projected to reduce the positive contribution of net exports in 2024-2025. Overall, growth is
forecast to remain well above the EU average over the forecast period, serving as a driver for
continuing fiscal consolidation. After peaking in 2022, HICP inflation started to moderate and
declined from 9.3% in 2022 to 4.2% in 2023, 1.2 pps below the euro area average (5.4%). Still,
inflation remained relatively high in February 2024, at 3.1% year-on-year, 0.5 pps above the euro
area inflation rate. Underlying price pressures declined, as pass-through from previous energy and
food price shocks have been fading and HICP inflation excluding energy and food reached 3.0% in
February 2024, 0.1 pps below the euro area. In 2024, inflation is expected to continue declining but
remain elevated at 2.7%, in line with the euro area inflation. Rising employment has been
associated with tighter labour market conditions in the service and construction sectors. In this
context, nominal compensation of employees is expected to grow by about 5% in 2024, close to
the 2023 pace. The main risk factors for the economic outlook include the deepening of geopolitical
tensions, protracted trade disruptions due to the Red Sea crisis, and a potential increase in energy
prices.

High integration with the German, Italian and some non-EU economies make Greece
prone to spillovers resulting from economic developments in these economies (3). Greece

(1) European Commission (2023), Alert Mechanism Report 2024, COM (2023) 902 final; and European Commission (2023),
Alert Mechanism Report 2024, SWD(2023) 901 final.
(2) Figures for GDP growth and inflation come from the Commission Winter 2024 Interim Forecast (European Economy,
Institutional Paper 268). All other forecast data used in the IDR come from the Commission Autumn 2023 Forecast
(European Economy, Institutional Paper 258), unless stated otherwise, and all calculations are carried out using these data
to ensure the coherence of their various components. The cut-off date for the data for the preparation of this IDR was 19
March 2024. Actual outturn data that have become available after the Autumn and Winter Interim forecasts, and before
the cut-off date for the IDR, are used and supersede figures from those forecasts.
(3) In the context of the multiple disrupting shocks that affected the world economy and the EU in the past few years,
Commission Services have run an exercise to estimate the spillovers and the degree of exposures of Member States’
economies to various partners and industries, in terms of nominal trade, value-added trade, inflation and financial assets.
See European Commission Institutional Paper 2024 (forthcoming) – ‘Economic spillovers and exposures in the EU’.

1
is particularly dependent on German and Italian goods and services, while Germany and Italy are
major destinations for Greece’s exports ( 4). The largest share of Greek value added satisfies
demand in the US and Germany, while Greek demand is mostly dependent on value added
generated in Germany and China. Locational banking statistics show that large shares of claims of
Greek financial institutions are located in Ireland. As Greece’s links with non-EU partners like China
and Russia are moderate to high, geopolitical fragmentation appears to pose a non-negligeable risk
its economy.

2. ASSESSMENT OF MACROECONOMIC VULNERABILITIES

For many years, Greece has been marked by high government and external debt in the
context of low potential growth and high unemployment rate. Nevertheless, many indicators
have improved in recent years. The public debt ratio has been declining after 2020 but remains the
highest in the EU, with short- and long-term risks assessed as low and medium-term risks high. The
net international investment position (NIIP) also improved over the same period but remains the
lowest in the EU. Although a large share of public debt is held by official creditors and its maturity
structure and interest rate are shielding it from market volatility, the still-high liability stocks could
expose the economy to vulnerabilities that could lead to economic shocks. In addition, the
persistently large current account deficits are not conducive to sustained improvement in the NIIP.
The non-performing loan (NPL) portfolio held by servicers continues to weigh on the economy,
although it has largely been cleaned up from bank balance sheets. The unemployment rate has
declined but remains among the highest in the EU.

Assessment of the gravity, evolution and prospects of macroeconomic

vulnerabilities

Government debt
The Greek public debt-to-GDP ratio is on a declining path, with a strong reduction over
the last year, but remains the highest in the EU. Public debt is expected to have declined from
172.6% of GDP in 2022 to 160.9% of GDP at the end of 2023, 45 pps below the peak of 207% of
GDP in 2020 (Graph 2.1 a). The decline was driven by an increase in nominal GDP and a declining
headline deficit. Looking ahead, the Commission’s 2023 Autumn Forecast expects the public debt-
to-GDP ratio to decline further to around 152% in 2024 and to 148% in 2025. However, given that
a substantial part of Greece’s public debt is held by official EU creditors at concessional rates,
liquidity and rollover risks to public debt remain limited. Government gross financing needs for the
period 2024 to 2025 are low, due to projected significant primary surpluses and moderate debt
amortisation.

Risks to fiscal sustainability are overall low in the short term, high in the medium term,
and low in the long term according to the Commission’s debt sustainability

(4) German and Italian exports account for 8.1% and 7.4% of Greece’s imports, while Germany and Italy are the importers of
8.3% and 6.8% of Greek exports respectively.

2
framework (5). The Commission’s early-detection indicator (S0) does not point to major short-
term fiscal risks. Government gross financing needs in 2024 and 2025 are expected to average
some 8% of GDP per year. After more than a decade, Greece’s credit rating returned to investment
grade by the end of 2023 at three of the four major rating agencies. The debt sustainability
analysis for Greece shows that under the baseline scenario, the government debt-to-GDP ratio is
expected to decline over the medium term but remain high, around 131% in 2029 and 116% in
2034 (see Box 1 for more on the medium-term risks to fiscal sustainability). In the long term, the
Commission’s fiscal gap indicators (S1 and S2) show that the low risk assessment is driven by the
favourable initial budgetary position and the projected decline in ageing costs.

The general government deficit is expected to have remained broadly unchanged at

2.3% in 2023 and to decline thereafter. Underlying the unchanged headline balance is an
improved primary surplus from 0.1% of GDP in 2022 to 1.1% in 2023, which is offset by an
increase in interest expenditure. The significantly reduced cost of the energy measures and a
marked increase in current revenues are driving improvement in the primary surplus, despite one-
off spending related to recent natural disasters ( 6). The Commission 2023 Autumn Forecast expects
the headline deficit to decrease further to 0.9% of GDP in 2024, associated with a primary surplus
of 2.5% of GDP. The forecast factors in fiscal measures announced in 2023 and the estimated
impact of the public sector’s wage grid reform on the wage bill. In 2025, the headline deficit is
expected to reach 0.8% of GDP, with a primary surplus of 2.6% (Graph 2.1 b). This is due to muted
expenditure growth, which is only partially offset by two medium-term tax cuts set to commence in
2025 (taxation of the self-employed and social contributions).

Graph 2.1: Government gross debt and budget balance as % of GDP, Greece

Source: Eurostat, European Commission calculations.

(5) The results presented here are based on the debt sustainability analysis published in the Debt Sustainability Monitor 2023
(European Commission, Institutional Paper 271), which is based on the Commission 2023 autumn forecast. The Debt
Sustainability Monitor also includes information on the methodology of the Commission’s fiscal sustainability risk
framework.
(6) The total amount of government spending in 2023 and 2024 in relation to the natural disasters is estimated at 1.5% of
GDP.

3
External balances
After a significant deterioration following the outbreak of the COVID-19 pandemic and
the energy price shock, the external position improved markedly in 2023. The current
account deficit, which peaked at 10.3% of GDP in 2022, narrowed by almost 4 pps to 6.4% of GDP
in 2023 (Graph 2.5 a) ( 7). The cyclically adjusted current account deficit is estimated to have
declined faster, by about 5.3 pps, reaching 6.8% of GDP in 2023 (Graph 2.5 b). The improvement in
the current account balance has been driven by declining energy prices, and an increase in the
inflow of current transfers. Growing tourism revenues offset the deterioration in the transport
service balance that was partly triggered by the disruptions to Red Sea trade. Despite the
unfavourable external environment curbing export demand, the non-energy trade deficit also
declined by 1% of GDP, predominantly due to the changes in export and import prices ( 8). At the
same time, moderation in domestic demand and slowing consumption growth have also
contributed to this improvement via lower import demand, although the real consumption-to-GDP
ratio is still above its pre-pandemic level. By contrast, the balance of primary income deteriorated
by 1.8% of GDP in 2023. This can be attributed to the rising cost of intercompany financing on the
back of the tightening global financial conditions ( 9). At the same time, the level of net interest
payments associated with external debt remained unchanged at a low level compared to the stock
of net external debt. This was thanks to the concessional nature of a significant part of external
debt (Graph 2.2 b).
Despite the improvement in 2023, the current account deficit remains at 6.4%, much
larger than before the pandemic, at about 5 pps above the 2019 level. It is also well below
the country-specific current account norm estimated at -0.9%. Close to 1.5 pps of this difference
with the pre-pandemic level is explained by deterioration of the investment income balance due to
increasing interest rates. Another 1.8 pps is driven by the lower surplus of transportation services.
Finally, the widening deficit of the goods deficit, which is largely related to higher import demand
stemming from the increase in investments and consumption, explains another 2.3 pp deterioration.

Greece’s external borrowing needs declined thanks to a reduction in the private sector’s
net borrowing but remain sizeable, while the government remained in a net borrowing
position. The net external borrowing needs (i.e. the sum of the current and capital account
balance) narrowed by 3.6 pps to 5.2% in 2023 ( 10). Both the household and corporate sectors
contributed to this improvement (Graph 3.3 a). A sizeable increase in the gross operating surplus
supported the increase in corporate savings. Investment has gained speed since 2019, although
from a very low level, as capacity utilisation increased and reached levels recorded preceding the
global financial crisis. Households’ net savings are also estimated to have increased in 2023, as
real income increased at a solid pace and consumption growth moderated, while investment in
dwellings continued to increase, albeit from a very low base. Household consumption grew by 1.8%
in real terms in 2023 compared to a growth rate of 7.4% in 2022, signalling that pent-up demand
has been waning. Still, the consumption-to-GDP ratio is the highest in the EU, above its pre-
pandemic average in real terms (see the thematic chapter on reasons behind a high consumption

(7) Based on the provisional data published by the Bank of Greece on 20 February 2024.
(8) Export and import price dynamics had a sizeable role in net export developments over the 2020-2024 period in Greece.
After a deterioration in 2020 and 2021, the terms of trade improved in both 2022 and 2023, while the parallel decline in
export and import prices helped reduce the deficit in the goods balance in 2020 and 2023.
(9) Multinational companies’ net interest payments related to intercompany loans are recorded under the investment income.
(10) Based on the provisional data published by the Bank of Greece on 20 February 2024.

4
ratio), and households’ net saving ratio remained negative ( 11). Between 2022 and 2023, the
government’s net lending position remained broadly unchanged, according to the Commission’s
Autumn 2023 Forecast. While the net lending position is forecast to improve markedly in 2024, the
government is set to remain a net borrower.
The structure of external financing was less favourable than in preceding years, with a
higher share of debt financing in 2023. After the substantial inflows in foreign direct
investment inflows (FDI) recorded in 2021-2022, FDI financing declined in 2023, covering only
11% of the external financing needs (compared to 28% in 2022). The FDI inflow into the real
estate sector has been picking up since 2017 and accounted for more than 40% of total FDI
inflows, increasing by almost 30% in the first three quarters of 2023 compared to the same period
in 2022. Thanks to improving investor sentiment, portfolio inflows increased markedly, covering
about one fourth of external financing needs. Still, almost half of the financing was in the form of
other investments, accounting for 2.4% of GDP ( 12). This amount incorporates the financing
provided by the EU at very favourable terms for RRP loans, accounting for 1.7% of GDP. While the
Target2 liabilities had been an important source of external financing in 2020-2022, the balances
peaked in the second quarter of 2023 and started to decline afterwards, being overall neutral in
2023.

Graph 2.2: Decomposition of rate of change of NIIP, structure of the external debt as % of GDP,
Greece

Source: Eurostat, European Commission calculations.

The net international investment position improved marginally further in 2023 after a
strong increase in 2022, but still remains far below the prudential NIIP level. Following a

(11) Sectoral income and savings data in Greece must be considered with certain caveats. This is because the transactions of
micro firms (‘self-employed’) and small companies can often be reported under the household sector and because micro
and small companies have a significant role in the economy.
(12) Uncertainties around the data on the Greek economy’s external position remained substantial, as also indicated by the
persistently high and increasing level of ‘net errors and omissions’ (NEOs) in the balance of payments statistics published
by the Bank of Greece. NEOs increased to 1.2% of GDP in 2023. This indicates that the external financing need calculated
from the financing side of the balance of payments has been continuously lower than the one calculated using the data on
trade, income and transfer flows since 2020. Consequently, the increase in NIIP has been lower than suggested by the sum
of the current and capital account balances.

5
significant (close to 30% of GDP) increase in 2022, largely owing to strong nominal GDP growth
and favourable valuation effects, the Greek NIIP is estimated to have improved by about 4% of
GDP, to –140% of GDP in 2023 ( 13). This improvement was driven by nominal GDP growth, while
valuation effects had only a marginal positive impact in 2023 (Graph 2.2 a). The Greek NIIP
remains well below the fundamental and prudential country-specific NIIP benchmarks (-42.5% and
-48.9% respectively in 2023) and is the worst in the EU. Nevertheless, the risks associated with
external indebtedness are mitigated by the fact that a large part of external debt is held by official
EU creditors and had been provided with very long maturities and interest rates fixed at low levels
(Graph 2.2 b). However, the substantial current account deficit projected means that the NIIP is
likely to deteriorate in the medium term, according to a baseline scenario (see Box 1).

The current account deficit is projected to continue narrowing slowly in 2024-2025 but
remain over 5% of GDP until 2025. The trade balance is forecast to improve further on the
back of the gradual recovery in the euro area and helped by cost competitiveness gains Greece has
accrued over the last decade. Terms-of-trade effects are also likely to have a slightly positive
impact on external balances. This is thanks to a faster increase in prices for tourism and other
services and the large weight of services in the trade balance ( 14). However, demand for imported
goods is likely to remain elevated, supported by the projected robust growth in investment, which is
expected to increase the investment-to-GDP ratio by 3 pps to above 16% by 2025, largely
associated with RRP implementation. This in turn may limit the improvement in the trade balance.
The balances of the primary and secondary incomes are projected to improve as global financing
conditions are set to ease and the current transfers under the RRP rise. Overall, the current account
deficit is expected to narrow further but still stand at 5.3% in 2025.

Net external borrowing is set to decline faster than the current account deficit, thanks
to the increase in EU capital transfers, including the recovery and resilience fund grants.
External borrowing stood at 5.2% of GDP in 2023 and is expected to decline to close to 3% of GDP
by 2025, as capital transfers from the EU increase. Past and ongoing measures to improve the
business environment and reduce legal and regulatory uncertainties, accompanied by Greece
regaining its sovereign investment grade status, are expected to have a positive impact on FDI
inflows.

An increase in household savings and continued improvement in government balances

are set to be the drivers of limited external rebalancing in 2024-2025. From a savings-
investment perspective, the ongoing moderation of private consumption growth amid steady wage
growth is set to increase households’ net savings. In addition, tight fiscal policies are expected to
improve budget balances. Overall, in 2024-2025, the projected net external borrowing will allow for
a slow improvement in the NIIP ratio. Still, continued adjustment is needed to support convergence
of the Greek NIIP with prudent levels and with those of its peers (see Box 1). In this context, policies
improving the business environment, increasing savings in the economy, accelerating corporate
investments and increasing labour participation can play an essential role in further improving
competitiveness and bringing domestic consumption in balance with the income level (see thematic
chapter).

(13) Estimation updated on the bases of the provisional 2023 BoP data and the NIIP data available for the third quarter of
2023.
(14) Greece enjoyed sizeable gains in terms of trade in 2022 and 2023, thanks to the high share of goods (food, refined oil) and
services (tourism) exports, which witnessed a relative price increase in these periods.

6
Greece gained significant price competitiveness over the last decade and has also
managed to expand its export market share since 2017. Price competitiveness has improved
significantly due to favourable inflation differentials and substantially lower wage increases than
those of trade partners. Consequently, unit labour costs (ULCs) declined by 0.5% on average
between 2013 and 2023 and the ULC-based real effective exchange rate (REER) depreciated by
about 17% in cumulative terms in the same period (Graph 2.5 c). This was despite the nominal
effective exchange rate (NEER) having appreciated by almost 2% per year on average. Similarly,
the HICP-based REER depreciated by 1.1% per year in the same period. Export market shares have
also evolved favourably since 2017 (Graph 2.5 d), primarily driven by services exports. After a
significant contraction in tourism and transportation amid the COVID-19 pandemic in 2020, export
market shares recovered fast in 2022 and 2023, supported by solid tourism growth. Looking
ahead, wages are expected to exhibit steady growth on the back of tighter labour market
conditions. Hence, unit labour costs are projected to increase, albeit still at a pace comparable to
that expected for the trading partners.

Despite significant improvements thanks to recently implemented structural measures,

non-cost competitiveness and low productivity remain a challenge. Based on the World
Competitiveness Ranking 2023, Greece’s overall ranking has improved since 2019, although it
remained broadly unchanged after 2020 ( 15). The improvement was driven by better performance
in the government and business efficiency subindices, reflecting the economy’s ongoing digital
transformation and efforts to reduce the administrative burden on enterprises under the RRP. Still,
further work is needed – both by implementing measures under the RRP and carrying out additional
reforms, to address: (i) remaining bottlenecks in the relatively heavy and frequently changing
regulatory and administrative framework; and (ii) a legal system not considered efficient enough
and protective of property rights ( 16). Furthermore, consumer price control mechanisms that were
imposed during COVID-19, prolonged further and broadened in scope may negatively affect
competition and market entry ( 17). In 2023, Greece had the highest OECD Services Trade
Restrictiveness Index in the European Union and well above the OECD average ( 18). Restrictions on
foreign entry, barriers to competition and a lack of regulatory transparency are the most significant
impediments to trade in services, especially in maritime transport, construction, insurance and legal
services.

(15) Greece had a ranking of 49 (out of 64 countries) in 2023 (see https://www.imd.org/centers/wcc/world-competitiveness-

center/rankings/world-competitiveness-ranking/).
(16) Greek companies are less confident than the EU average that the law and courts are protective of their investments (32%,
against EU average of 53%).
(17) Since 2020, Greece has capped gross profit margins on certain food products and ordered supermarkets to reduce prices
for certain ‘basic’ products.
(18) The OECD Services Trade Restrictiveness Index (STRI) is an evidence-based tool that provides information on regulations
affecting trade in services in 22 sectors across all OECD member countries. See OECD Services Trade Restrictiveness Index:
Policy Trends up to 2024 | OECD iLibrary (oecd-ilibrary.org).

7
Graph 2.3: Investment dynamics in international comparison

Source: Eurostat, Ameco, European Commission calculations.

The persistently low level of productive capital accumulation has been a major
impediment for productivity growth, causing economic divergence vis-à-vis the EU. The
sovereign debt crisis was followed by a substantial decline in real gross fixed capital accumulation
in Greece. Investment in real terms was almost 50 pps lower in 2022 than in 2008. The
investment-to-GDP ratio, which fluctuated around 24% prior to 2008 (i.e. a level comparable to the
euro area average), collapsed during the crisis and averaged 11.9% in 2010-2020 (Graph 2.3).
Despite strong investment growth in 2021 and 2022, at 19.3% and 11.7% respectively, in 2022
the investment ratio remained well below the EU and euro area averages of 22.9% and 22.7%
respectively (see thematic chapter). Greek firms reported that in 2023 the most significant factors
behind low investment were uncertainty about the future, high energy costs, unavailability of
skilled staff and business regulations ( 19). In this context, productivity growth has been strong since
2020, but the level remains one of the lowest in EU, while GDP in purchasing power standards per
hour worked stood at 57.4% of the EU average in 2023. While potential growth is estimated to
have been increasing, it remains low, estimated at 0.7% in 2023. Looking ahead, the investment-
to-GDP ratio is set to increase by 3 pps by 2025, supported by the implementation of the RRP.

Banking sector
After a significant improvement in banks’ portfolio quality over the previous years, the
non-performing loan (NPL) ratio on banks’ balance sheets declined a touch more in 2023.
The securitisation of banks’ NPL portfolios under the Hellenic Asset Protection Scheme (‘Hercules’)
that ended in late 2022 helped significantly reduce banks’ NPL ratio from 46.3% in 2016 to 6.2%
by end-2022 ( 20). The ratio declined further in the first three quarters of 2023 to 5.7% but remains
the highest in the EU. The government has relaunched the Hercules scheme, which is expected to

(19) See EIB Investment Survey Country Overview 2023: Greece.

(20) Non-performing loans as a share of total gross loans and advances on a consolidated basis (i.e., including cash balances at
central banks and other demand deposits in the denominator) as reported by the European Central Bank. This figure is
different from the one reported under enhanced surveillance, which follows non-performing loans as a share of total gross
customer loans on a solo basis, as reported by the Bank of Greece.

8
further support inorganic NPL reduction, but organic measures such as loan restructuring and
internal loan workouts, are likely to be a more important driver of NPL reduction in the banking
sector in the future. The inflow of NPLs was modest, and Stage 2 loans-to-total-loans did not
increase materially in 2023, but the ratio remained above the euro area average of around 9.3% in
the first three quarters of 2023 ( 21). However, the freeze in the interest rate of floating rate
mortgages introduced by banks in March 2023 has been cushioning the impact of interest rate
increase on individual debtors and there is a risk of faster NPL build-up after this measure expires
( 22).

The workout of non-performing loans outside the banking sector remains slow, and as a
result, legacy NPLs continue to weigh on the economy. Risks related to NPLs were largely
shifted from the banking to non-banking financial sector and the State. The stock of non-
performing loans held by servicers amounted to EUR 69.5 bn (32% of GDP) in December 2023. The
delay in the workout compared to original plans is mainly the result of low recoveries from
collateral liquidations owing to the suspension of enforcement proceedings during the COVID-19
pandemic. However, the process is also being slowed down by delays in court procedures, a high
ratio of unsuccessful auctions and the illiquid secondary market for NPLs.

Banks’ fundamentals continued to improve on the back of a substantial widening of the

interest rate margin. Banks’ core profitability increased further owing to the fast repricing of
loans with adjustable interest rates, accompanied by very low deposit rates, with the return on
equity at 12.5%, well above the euro area average. Low deposit rates can be explained by banks’
favourable liquidity position, high concentration in the banking sector and relatively passive
depositor behaviour ( 23). The slow adjustment in deposit rates helps banks’ profitability but partly
undermines the monetary policy effort to stem inflation through curbing demand and increasing
savings. The average Common Equity Tier 1 and Total Capital ratios compared to their risk-
weighted assets increased over the previous year. At end-September 2023, they stood at 14.3%
and 17.6% respectively but remained below the EU averages ( 24). Also, the ratio of forborne loans
remained above the EU average. Therefore, further improvements are required, given that the
capital position of banks remains among the lowest in the EU, and concerns persist about its
quality due to the high, albeit decreasing, proportion of deferred tax credits.

Longer-term profitability remains a concern. Banks’ profitability might deteriorate in the

future when monetary policy switches to an easing cycle and banks’ funding costs rise as they
repay targeted longer-term refinancing operations (TLTRO) loans and continue issuing debt to meet
the minimum requirement for own funds and eligible liabilities (MREL). Corporate credit growth has
slowed since late 2022 due to tightening financial conditions and weakening economic activity.
Still, credit growth remained positive (the four-quarter cumulative net credit flow was 0.9% of GDP
by the third quarter of 2023) and performed well in euro area comparison, supported by strong
loan take-up under the RRP Loan Facility. At the same time, household credit growth has remained
negative since 2010, with the four-quarter cumulative net credit flow reaching -0.5% of GDP by the
third quarter of 2023. Low private-sector credit growth represents a risk for banks’ future
profitability. The loan-to-deposit ratio declined to 60%, one of the lowest levels in the EU. In

(21) ‘Stage 2 assets’ are financial instruments that have deteriorated significantly in credit quality since initial status but where
there is no objective evidence of a credit loss event.
(22) The freeze was originally introduced for 1 year but was extended for another 12 months.
(23) Depositors typically do not ‘chase interest rates’, i.e., transfer their savings to those banks providing higher deposit rates.
(24) On a consolidated basis.

9
parallel, banks’ domestic sovereign bond holdings increased further, to levels well above the EU
average. The EIB and ECB survey results suggest that beside other factors, access to financing
remains a significant impediment to corporate investment, especially for small and medium-sized
enterprises (SMEs).

Private-sector debt
Private-sector debt declined markedly in 2022 owing to a decline in both household and
non-financial corporate debt ratios. The household debt-to-GDP ratio is moderate and
continued to decline, after a temporary uptick in 2020, to 41% in 2023. Net credit flows have been
negative for several years and the cost of borrowing has remained relatively high compared to the
euro area average, hovering around 3% for the last decade. The cost of new loans for house
purchases started to increase by the end of 2022, peaking around 4.5% by the end of 2023: a
considerably milder increase than in other Member States. Under a broad set of alternative
scenarios, household debt will continue to decline over the next decade (see Box 1). The non-
financial corporate debt-to-GDP ratio decreased to 56% of GDP in 2022 and declined slightly in the
first half of 2023. Corporate indebtedness is flanked by high corporate liquidity buffers, which
mitigate risks.

Housing market
The Greek housing market has recorded a strong growth in recent years, with prices and
demand on the rise. Following several years of decline, property prices have picked up since
2018. Nominal house prices grew by 11.1% in 2022, with growth increasing to 12.9% year-on-year
in the third quarter of 2023. Even in real terms, the increase remains substantial, at 7.6% in the
third quarter of 2023. However, latest data point to some easing in growth. Urban areas
experienced larger increases compared to rural areas. The sharp drop in construction activity after
the outbreak of the sovereign debt crisis turned into limited supply for a protracted period of time.
At the same time, the fall in prices was also considerable. Key factors behind the recent uptick in
prices have been the recovery in domestic and particularly strong foreign demand following the
pandemic amid undervalued house prices, and the energy crisis. Foreign buyers from the EU, as
well as third-country nationals partly incentivised by the golden visa programme, have shown
renewed and strong interest in the Greek real estate market with substantial FDI inflows. Even
though house prices are still below the levels observed before the sovereign debt crisis, in nominal
terms and relative to household income as measured by the price-to-income ratio they are
estimated to be overvalued by around 10% in 2023.

While financial stability risk in the housing market appears limited, other challenges are
emerging with regard to affordability. As credit growth to households remains negative, the
financial risk from a potential downward correction of property prices is being contained. The
European Systemic Risk Board assesses housing vulnerabilities in Greece as low from a financial
stability perspective and macroprudential policies as appropriate and sufficient ( 25). Housing supply
has also recorded strong growth since 2020, albeit from a very low base, with residential
construction investment reaching 33.7% year-on-year growth in 2022 and 20.7% in 2023.
Increased housing supply is set to help slow price growth in the coming years. While financial
stability risks remain limited, social consequences of recent increases in house prices are becoming
pressing. Recent increases in house prices considerably above those in incomes pose potential

(25) ESRB (2024), Follow-up report on residential real estate sector vulnerabilities, 1 February 2024.

10
challenges to affordability that contribute to low labour mobility, notably in high-demand areas
with labour concentration such as Attica.

Labour market
The labour market remains resilient, with increasing employment and declining
unemployment; however, significant challenges remain. The employment rate increased to
61.8% (15 to 64 years old) on average in 2023, the highest since the global financial crisis but still
below the EU average of 70.5% in 2023 (Graph 2.5 e). Total employment growth picked up in 2023
on the back of higher labour demand in the agriculture, construction and service sectors. Following
a steady decline in 2023, the seasonally adjusted unemployment rate reached 10.4% in December
2023 and remained stable in January 2024, down from 11.9% in December 2022 (Graph 2.5 f). At
the same time, key sectors of the Greek economy, notably tourism, construction, and agriculture,
have started reporting labour shortages. Skills mismatches and low participation rates are
preventing the utilisation of an apparent labour reserve. Despite the recent improvements, women
and young people continue to be disproportionately affected by joblessness, with unemployment
rates of 13.2% and 22.9% respectively in January 2024. Both population groups also experience
low participation rates, at 61.4% for women and 23.4% for young people in 2022 (aged 15 to 24),
the second lowest and lowest in the EU respectively. Subdued female and youth employment rates
remain a key challenge in maximising the domestic labour supply. The Commission’s Autumn 2023
Forecast projects that employment growth will continue, albeit at a decelerating pace of 1.1% in
2024 and 1% in 2025. The yearly unemployment rate is expected to continue its decline over the
forecast horizon.

Box 1: Greece – Medium term external, private and government debt projections

This Box summarises external and internal debt-to-GDP projections for Greece over the next decade, based
on scenario analysis conducted by the Commission. It covers scenarios to take into account different underlying
assumptions for external, corporate and household debt stocks, as well as the outcomes of the latest government debt
sustainability analysis conducted by the Commission.

Greece’s net international investment position (NIIP) is projected to increase somewhat before falling in the
medium term. In the baseline projections, which take the autumn 2023 forecasts until 2025 as a starting point, the NIIP
falls to around -150% of GDP by 2033 from its current level of around -140%. This is mainly owing to a deteriorating
primary income balance and a large trade balance deficit. As a considerable share of Greece’s external debt is largely
insensitive to changes in market interest rate, Scenario 1 deviates from the baseline by applying concessionary interest
rates on the appropriate share of external debt. The somewhat lower interest burden in this scenario does not materially
change the path for the NIIP in the next decade. Stronger economic growth, a markedly improved trade balance and a
lower spread between liabilities and assets, as in Scenario 2, deliver a gradual improvement, but the NIIP stays below -
100% of GDP in 2033. Should the baseline assumptions turn overly optimistic, owing to, for example, a lower-than-
expected impact of reforms, Greece’s NIIP may deteriorate at a significantly faster pace compared to the baseline (see
Scenario 3). Despite the significant size of Greek external debt, risks to its sustainability are partly mitigated by the fact
that a substantial share is held by official creditors.

The corporate debt-to-GDP ratio is projected to increase under the baseline scenario by 3 percentage points
until 2033, reaching 55%. Taking the 2023 forecasts as a starting point, the baseline scenario foresees average real
GDP growth of 1% over the 10-year period, and credit flows of 2% of GDP until 2033 (Graph 2.4 b). In this scenario, credit
flows would be above the credit-to-GDP ratio that would stabilise NFC debt over the projection horizon, at 1.7%. Under an
adverse scenario of credit flows being 0.9% of GDP higher – corresponding to half the intertercile range of the annualised
quarterly credit flow to GDP ratio over 2018-2023 – the NFC debt-to-GDP ratio would be 8 percentage points higher. A
permanent negative 1% GDP growth shock would increase the NFC debt-to-GDP ratio by another 5 percentage points.

The household debt-to-GDP ratio is projected to decrease slightly over the next decade under the baseline
scenario. The baseline scenario takes the 2023 forecast of 42% as a starting point and assumes as determining
parameters an average real GDP growth rate of 0.9% and credit flows of -1.0% of GDP (solidly below the debt-stabilising

11
credit-to-GDP ratio of 1.4%) for the period 2024-2033. It projects that the household debt ratio will continue to decline to
reach 21% by 2033 (Graph 2.4 c). Depending on how interest rates and other economic conditions evolve, credit flows
could also behave differently. Graph 2.4 c considers alternative scenarios on credit flows. These account for observed
country-specific variability in credit flows since 2018, and permanent GDP shocks of 1 pp above or below the baseline
scenario. Under the most adverse scenario (high credit flows and low GDP growth), the debt ratio would still decrease to
26% by 2033.

In Greece, medium-term risks to fiscal sustainability are high overall ( 26). The debt sustainability analysis for
Greece shows that under the baseline scenario the government debt-to-GDP ratio is expected to decline over the medium
term to reach around 131% in 2029 and 116% in 2034 (Graph 2.4 d). That projection assumes that with unchanged
policies the structural primary balance (excluding changes in the cost of ageing) remains at a surplus of 2% of GDP
between 2024 and 2034. The debt reduction benefits until 2030 from a still favourable (although declining) snowball
effect. Real GDP is expected to grow by 0.9% on average over 2025-2034. Government gross financing needs are
expected to be around 11% of GDP per year over the projection period. The baseline projections are stress-tested against
four alternative deterministic scenarios to assess the impact of changes in key assumptions. All but one of those scenarios
would lead to a slower decrease in debt relative to the baseline, with the adverse interest rate-growth differential scenario
having the largest impact on debt dynamics. Stochastic projections point to some degree of uncertainty.

Graph 2.4: External, private and government debt projections, based on scenario analysis for Greece
a) NIIP projections (1) b) Non-financial corporate debt projections (2)

(26) The results presented here are based on the debt sustainability analysis published in the Debt Sustainability Monitor 2023
(European Commission, Institutional Paper 271), based on the Commission 2023 Autumn Forecast. See notes to Graph 2.4
for more details on the four scenarios used.

12
 c) Household debt projections (2) d) Deterministic government debt projections (3)

(1) The baseline NIIP projections are based on the Commission’s medium-term forecasts for GDP growth and interest rates. Additionally, assumptions are made about the drawdown
of NGEU and MFF funds, and the median value of the last 3 years is used for non-investment income. In Scenario 1, interest rates are an average of concessional and market rates,
taking into account the size of the debt held by official creditors. The remaining assumptions coincide with those of the baseline. Scenario 2 assumes a higher GDP growth (+2 pp)
and the trade balance (+1 pp) and a lower interest spread (-0.3 pp) than in the baseline in each forecast year. Compared to the baseline scenario, Scenario 3 assumes lower GDP
growth (-1 pp) and a lower net lending position (-1 pp), while the interest spread between liabilities and assets is higher by 0.3 pp in each year after 2023.
(2) Both for the NFC and HH debt projections, the baseline refers to the country-specific median annual credit flow to GDP ratio over 2018-2023. The high/low credit scenario
assumes a higher/lower credit flow to GDP ratio, with the difference to the baseline calculated as half the intertercile range of the annualised quarterly credit flow to GDP ratio over
Q1-2018 to Q3-2023. The latter is based on the moving sum of quarterly GDP. The high (low) GDP shock scenario reflects a permanent 1 pp. increase (decrease) in GDP growth.
(3) The baseline projection is stress-tested against four alternative scenarios to assess the impact of changes in key assumptions: ‘historical SPB scenario’: the structural primary
balance (SPB) gradually converges to its historical 15-year average; ‘adverse ‘r-g’ scenario’: the differential is 1 pp. higher than in the baseline; ‘lower SPB scenario’: SPB level
permanently lower than in the baseline as from 2024; ‘financial stress scenario’: temporarily increase in market interest rates by 2.4 pps. in 2024.
Source: Eurostat, Ameco, Commission calculations.

Assessment of MIP-relevant policies

Prudent fiscal policy is expected to continue supporting the rebalancing of the Greek
economy. The budget balance is set to improve further in 2024-2025 on the back of increasing
primary surpluses thanks to the consolidation measures and favourable economic developments.
The Greek authorities have been implementing measures to enhance transparency and fight tax
evasion. The reform of the interconnection of cash registers and points of sale (POS) terminals with
the tax authorities is progressing, although with some delays due to capacity constraints on the
part of the suppliers of the online cash registers and POS terminals. Nevertheless, the system is
planned to be operational in 2024. Furthermore, in December 2023 the Greek government limited
the use of cash in real estate transactions and raised fines for purchases more than EUR 500 in
cash. In the same vein, Greece has taken measures to fight tax avoidance by the self-employed by
introducing a temporary system that provides for indirect calculation of a deemed minimum tax
base. This system is expected to be phased out once the obligatory reporting requirements for the
self-employed to the tax administration have become fully operational and effective. The
government plans further ambitious measures in this area in 2024, primarily by incentivising the
use of electronic payments. The aim is to reduce the VAT compliance gap below 2-digit levels for
the first time and to narrow the scope of underreporting revenues. Overall, once fully implemented,
these measures can reduce the informal economy and can have a sizeable positive impact on tax
revenues. Limited progress has been made to introduce an advance tax ruling system, which would
facilitate more foreign investments.

Measures to improve the business environment and support productivity growth, as

planned under the RRP, are crucial to ensure the structural rebalancing of the economy.

13
As a part of the reform agenda under the RRP, the authorities have been introducing measures to:
(i) lift excessive administrative burdens to businesses; (ii) create a simpler and more predictable
regulatory and licensing framework (accompanied by measures under the inspections reform); (iii)
address the inefficiencies in the public administration; and (iv) improve the level of judicial
effectiveness and efficiency. Investments to digitalise the public administration and the judicial
sector are also being rolled out. In addition, the authorities adopted a multi-level governance
reform that is expected to improve the coordination, responsibilities and accountability of various
levels of government services. In the judicial sector, progress was achieved by redistributing the
territorial competences of the administrative courts ( 27). The completion of cadastral mapping and
the establishment of the Hellenic Cadastre Agency have now been incorporated into the RRP and
are expected to be completed by mid-2025. Once completed, this reform is expected to accelerate
the registration of property rights, provide legal certainty and promote private investments. Looking
forward, to improve the business environment, Greece will need to keep government interventions
targeted by introducing subsidies to those in need, remove obstacles to competition and market
entry, and refrain from introducing distorting price signals.
Improving access to financing and strengthening capital markets are essential to narrow
the investment gap. The Loan Facility under the RRP, designed to provide financing for the
corporate sector at reasonable costs, has had a substantial role in increasing the supply of
financing since 2022. Thanks to their favourable terms compared to market alternatives, the take-
up of loans has been strong, bringing the total amount of investments financed via the Loan
Facility by the end of 2023 to EUR 10.2 billion (4.6% of GDP) ( 28). However, further measures could
be envisaged to improve access to financing, especially for SMEs. The government’s plan to re-
establish the developed status of the Athens Stock Exchange and to build competitive and deep
capital markets in Greece together with the ongoing reduction of the corporate and SME NPL ratios
can have an important role in improving the availability of financing for the corporate sector. In
addition, measures to reduce the shadow economy and incentivise micro and small enterprises to
scale up their operations can improve the bankability of SMEs, thereby improving their access to
bank lending.

Widening and diversifying the export base and addressing high energy dependency, as
planned under the RRP, are crucial to increase growth and improve resilience to energy
price shocks. The envisaged measures aim to facilitate trade, including by improving services
offered to exporters and implementing new technologies to facilitate trade in agricultural products
( 29)( 30). Greece depends heavily on energy imports to satisfy energy needs. To reduce energy
dependency, the implementation of measures under the RRP, including those in the recently added
REPowerEU chapter, should also help reduce energy demand, increase the production and the use
of renewable energy and facilitate decarbonisation.

(27)2023 saw the adoption of legislation to revise the administrative judicial map. This will be followed by similar legislation
revising the civil and criminal judicial map.
(28) Loans issued in the context of the Loan Facility (i.e. RRP loans and co-financing loans) have accounted for more than one
fifth (21.7%) of new corporate lending since mid-2022. Nearly half of the loan contracts (44%) have been signed with
SMEs. In terms of volume, the ratio of RRP lending to SMEs versus the total was 18%, i.e. close to the ratio observed for
bank lending in the year before the Loan Facility’s launch.
(29) E.g. through guidance from Greece’s trade and investment promotion agency and the establishment of an Ombudsman
service to help exporters to overcome obstacles.
(30) Via the issuing of export certificates, the setting-up of a trade data system and a portal for the promotion of agricultural
products.

14
Ongoing and planned reforms and investments are set to enhance the functioning of the
labour market. The authorities have taken several measures since 2021 to address deficiencies in
the labour market. These include modernising labour legislation and labour market institutions,
expanding employment and training programmes offered to jobseekers, and incentivising labour
market participation ( 31). In 2023, the authorities reduced the administrative burden on employers
and broadened employment protection rules by allowing for flexible employment contracts, a six-
day working week with an increased daily wage, increased fines for undeclared work and
streamlined administrative procedures for businesses implementing the digital work card. They also
launched a digital job-finding platform. From January 2024, the 30% pension cut for pensioners
who continue to work has been abolished to increase incentives for pensioners to work.

Recent financial sector reforms support the resolution and restructuring of NPLs. The
government relaunched the Hercules scheme, which will help continue cleaning up banks’ balance
sheets. In future, facilitating debt restructuring and resolution processes will be essential both for
servicers and banks’ future in-house (organic) workouts. The organic elimination of NPLs requires:
(i) effective functioning of the various workout platforms under the Insolvency Code; (ii) the
establishment of a permanent scheme to protect vulnerable households, one that allows them to
restructure their loans; (iii) effective e-auctions enabling the sale of collateral; and (iv) smooth
enforcement proceedings. Restructuring under the out-of-court workout (OCW) platform gained
pace in 2023, while interest in the other tools of the new Insolvency Code (rehabilitation, second
chance, early warning mechanism) remained limited. There was slow progress on establishing the
permanent scheme to protect vulnerable households ( 32). The number of e-auctions rose, but the
share of barren auctions remains high, due to low third-party interest that may be associated with
a lack of sufficient information on the properties and slow transfer of possession. The Supreme
Court decision of 16 February 2023 dispelled the legal uncertainty that overshadowed enforcement
proceedings, but progress in these proceedings remained slow due to judicial inefficiencies and a
lack of digitalisation. On the positive side, the backlog of household insolvency cases (Katseli law)
has almost been cleared. Still, further measures are necessary to increase third-party demand for
collateral and to speed up the post-auction process and thus also the debt workout.

The implementation of existing commitments in the RRP, and where necessary additional
steps, would support the reduction of long-standing vulnerabilities. Fiscal and external
sustainability could be improved by further advancements in tax collection and payment discipline,
and by introducing a wider advance tax ruling system. These measures would contribute to creating
a more favourable environment for foreign investment. Ensuring the effective absorption of RRF
and other EU funds remains essential to support productivity growth and to foster the green and
digital transitions. A reduction in energy demand could bolster the economy’s resilience and aid
external sustainability. Further reinforcement could stem from initiatives to strengthen the business
environment by removing obstacles to competition and market entry, and from improved access to
finance, particularly for SMEs. With the emerging signs of labour market tightness, the economy’s
competitiveness and productivity could benefit from fully implementing individual skilling accounts

(31) These include: (i) modernising individual labour legislation and the collective labour and the trade union laws; (ii)
strengthening labour inspection mechanisms; (iii) improving work-life balance by expanding flexibility in working
arrangements for parents; (iv) reorganising the public employment service (PES) and revising the mutual obligations
framework to incentivise unemployed people to get a job; and (v) reforming the national lifelong framework to address
mismatches in the labour market and increase employment.
(32) There is growing interest in the acquisition of vulnerable debtor status. However, the process of setting up the sale-and-
lease back organisation (SLBO), which would buy the residences of vulnerable debtors and then lease them back, is behind
schedule, which delays debt restructuring. SLBO is expected to start operating in the second half of 2024.

15
and linking them to real upskilling needs of the unemployed. A contribution could also come from
further measures to increase the participation rate and eliminate the gender employment gap by
promoting flexible working arrangements and childcare. The burden of legacy NPLs can be
alleviated by: (i) lifting the territorial exclusivity of notaries where needed to tackle bottlenecks in
the debt enforcement process; and (ii) improving the e-auction processes by further expanding the
information available on auctioned properties.

Table 2.1: MIP-relevant policy progress in Greece

Vulnerability Policies enacted since January 2023 Policies in progress since January 2023
Fiscal Improved framework for the fight against Incentivising the use of electronic payments
sustainability, smuggling for products subject to excise
fight against duties Digitalisation of the national tax and customs authorities
shadow
economy Entry into force of the legal framework for
the interconnection of cash registers and
POS systems

Limiting the use of cash on real estate

transactions and raising fines for
purchases more than EUR 500 in cash
External Revision of the administrative judicial map Revision of the civil and criminal judicial map and
sustainability, digitalisation of the justice system
competitivene
ss and Preparation of urban plans to address weaknesses and
productivity gaps in zoning and land use

Reform of the Hellenic Cadastre

Digitalisation of public administration and economic

diplomacy agencies and training for exporters
Labour market Training programmes for unemployed and Digitalisation of the public employment and social
employed people, including on green, security services
digital and financial literacy skills (2023-
2025) Provision of vocational training to refugees in Greece to
promote their integration into the labour market
Legislation to provide more flexible
employment contracts, simpler Comprehensive skills forecasting system
administrative procedures for employers
and strengthened employment protection Redesign and strengthening of active labour market
policies
Non- Improvements in debt enforcement
performing
loans Relaunch of the Hercules Asset Protection
Scheme

Conclusion
Greece’s long-standing vulnerabilities relating to high public debt and a high stock of
non-performing loans, a weak external position and high unemployment receded on all
fronts in 2023 but warrant further adjustment and close monitoring. The public debt ratio
has continued to decline; while it remains the highest within the EU, risks to debt sustainability in
the short term appear low. The expected further improvement in fiscal balances is set to ensure
that the public debt continues to decline. The current account deficit, which had widened
significantly over 2020-2022, narrowed by one third in 2023, supported mainly by favourable price

16
developments in exports and imports, but remained well above its pre-crisis level. Thanks to solid
nominal GDP growth, the NIIP ratio also improved in 2023, although it remains the lowest in the
EU. Real consumption growth decelerated in 2023, but the consumption-to-GDP ratio returned only
slowly to pre-pandemic levels and remains the highest in the EU. The projected robust growth in
investments is likely to keep demand for imports elevated during the RRP implementation period.
Employment increased further and the unemployment rate declined, but remains among the
highest in the EU. The stock of NPLs continued to decline in the first three quarters of 2023.
However, no significant progress was achieved on the workout of the NPL portfolio held by
servicers, which continues to weigh on private-sector balance sheets and detract from private
creditworthiness.
Maintaining the prudent fiscal stance and continued timely implementation of the
reforms under the RRP remain crucial to ensure the structural rebalancing of the
economy. Greece continued to implement under the RRP the ambitious structural reform agenda it
initiated over the last decade to address the major structural weaknesses of the economy. Progress
was achieved in 2023 across a vast array of areas, including in improving tax compliance, training
programmes to reskill and upskill employees and the unemployed and labour market activation
policies. Measures were also taken in the public administration and judicial sector to increase
judicial effectiveness and efficiency. Ongoing and planned financial sector reforms enhancing the
resolution and restructuring of NPLs are crucial to improve the workout of NPLs. Eliminating legal
uncertainty that overshadowed enforcement proceedings was an important achievement in 2023,
and further measures are planned under the RRP to help debt restructuring and improve the
efficiency of debt enforcement. Maintaining reform momentum across the areas specified above,
sustaining implementation of the RRP and achieving the targeted primary budget surplus of above
2% of GDP are instrumental to ensure the structural rebalancing of the economy. In addition,
narrowing the investment gap depends on improving the business environment and access to
financing, and on strengthening the financial sector and the capital markets.

17
Graph 2.5: Selected graphs, Greece

Source: Eurostat, Ameco, ECB and European Commission calculations.

18
Table 2.2: Selected economic and financial indicators (Part 1), Greece
forecast
all variables y-o-y % change, unless otherwise stated 2003-07 2008-12 2013-19 2020 2021 2022 2023 2024 2025
Real GDP 4.1 -5.5 0.3 -9.3 8.4 5.6 2.0 2.3 2.2
p.m.: Real GDP (Winter 2024 interim Forecast) 2.2 2.3 2.3
Contribution to GDP growth:
Domestic demand 5.1 -7.0 -0.2 -4.3 6.8 7.1 2.1 1.9 2.1
Inventories 0.0 -0.7 0.3 0.6 0.9 -0.6 -0.7 0.0 0.0
Net exports -1.1 2.1 0.2 -5.6 0.6 -1.0 0.6 0.3 0.1
Output gap (1) 1.3 -8.5 -12.7 -14.1 -6.5 -1.3 0.3 1.0 1.7
Unemployment rate 9.8 14.7 23.2 17.6 14.7 12.5 11.4 10.7 9.9
Harmonised index of consumer prices (HICP) 3.3 2.9 -0.1 -1.3 0.6 9.3 4.2 2.8 2.1
p.m.: HICP (Winter 2024 interim Forecast) 2.7 2.0
HICP excluding energy and unprocessed food (y-o-y) 3.2 2.0 -0.1 -1.0 -0.7 5.7 6.2 3.0 2.3
GDP deflator 3.1 1.5 -1.5 -0.8 1.5 7.8 4.5 2.7 2.1

External position
Current account balance (% of GDP), balance of payments -10.3 -10.0 -1.6 -6.6 -6.8 -10.3 -6.4 -5.8 -5.3
Trade balance (% of GDP), balance of payments -9.0 -7.2 -1.3 -6.8 -7.6 -9.8 -4.8 . .
Primary income balance (% of GDP) -1.5 -2.3 -0.3 -0.2 0.2 -0.4 -2.2 . .
Secondary income balance (% of GDP) 0.2 -0.5 0.0 0.3 0.7 -0.1 0.6 . .
Current account explained by fundamentals (CA norm, % of GDP) (2) -2.2 -1.7 -1.3 -1.0 -1.1 -0.9 -0.6 -0.6 -0.5
Required current account to stabilise NIIP above -35% of GDP over 20Y (% of GDP) (3) 0.7 2.9 -0.8 -2.8 -1.9 -1.0 -0.6 -0.3 0.0
Capital account balance (% of GDP) 1.2 1.2 0.8 1.7 2.2 1.5 . . .
Net international investment position (% of GDP) -75.7 -94.2 -140.8 -174.3 -173.0 -143.5 . . .
NENDI - NIIP excluding non-defaultable instruments (% of GDP) (4) . -96.2 -130.6 -155.4 -151.1 -119.8 . . .
Net FDI flows (% of GDP) 0.0 -0.1 -1.3 -1.4 -2.4 -2.4 . . .

Competitiveness
Unit labour costs (ULC, whole economy) 3.1 2.8 -3.6 7.0 -3.1 -0.2 4.5 2.8 1.1
Nominal compensation per employee 5.6 -0.9 -2.8 -0.4 3.8 2.8 5.5 4.1 2.4
Labour productivity (real, hours worked) 2.3 -3.5 -0.5 2.8 0.0 1.6 0.0 0.9 1.2
Real effective exchange rate (ULC) 1.3 0.6 -5.9 2.8 -3.2 -3.9 -2.3 -1.5 -1.6
Real effective exchange rate (HICP) 1.7 0.2 -1.5 -0.3 -1.3 -0.3 -0.5 . .
Export performance vs. advanced countries (% change over 5 years) . -10.4 -8.2 -10.6 13.2 16.9 . . .

Private sector debt

Private sector debt, consolidated (% of GDP) 84.7 125.6 124.5 125.6 122.0 100.8 94.9 . .
Household debt, consolidated (% of GDP) 35.3 59.2 60.9 59.6 55.6 45.2 41.7 . .
Household debt, fundamental benchmark (% of GDP) (5) 9.8 14.2 20.3 24.8 27.2 30.2 33.4 . .
Household debt, prudential threshold (% of GDP) (5) 31.7 33.3 34.3 33.0 32.1 27.3 26.3 . .
Non-financial corporate debt, consolidated (% of GDP) 49.4 66.5 63.6 66.0 66.4 55.6 53.2 . .
Corporate debt, fundamental benchmark (% of GDP) (5) 23.1 29.1 35.7 42.1 46.9 53.4 60.4 . .
Corporate debt, prudential threshold (% of GDP) (5) 52.4 56.4 58.5 57.5 56.9 48.4 45.9 . .
Private credit flow, consolidated (% of GDP) 13.6 1.8 -2.2 5.5 0.8 1.1 1.6(e) . .
Household credit flow, consolidated (% of credit stock) 21.1 0.9 -2.8 -3.2 -1.8 -2.2 . . .
Non-financial corporate credit flow, consolidated (% of credit stock) 63.8 13.1 -2.9 29.7 6.7 7.1 . . .
Net savings rate of households (% of net disposable income) -0.4 -6.8 -13.2 -5.1 -3.2 . . . .

(e) Estimate based on ECB quarterly data

(1) Deviation of actual output from potential output as % of potential GDP.

(2) Current accounts in line with fundamentals (‘current account norms’) are derived from reduced-form regressions
capturing the main determinants of the saving-investment balance, including fundamental determinants, policy factors
and global financial conditions. See L. Coutinho et al. (2018), ‘Methodologies for the assessment of current account
benchmarks’, European Economy, Discussion Paper 86/2018, for details.
(3) This benchmark is defined as the average current account required to reach and stabilise the NIIP at -35% of GDP
over the next 20 years. Calculations make use of the Commission’s T+10 projections.
(4) NENDI is a subset of the NIIP that abstracts from its pure equity-related components, i.e. foreign direct investment
(FDI) equity and equity shares, and from intracompany cross-border FDI debt, and represents the NIIP excluding
instruments that cannot be subject to default.
(5) Fundamental benchmarks are derived from regressions capturing the main determinants of credit growth and taking
into account a given initial stock of debt. Prudential thresholds identify a threshold above which banking crises become
more likely. The fundamentals-based and the prudential benchmarks are calculated following Bricongne, J. C., Coutinho,
L., Turrini, A., Zeugner, S. (2019), “Is Private Debt Excessive?”, Open Economies Review, 1- 42.

Source: Eurostat and ECB as of 19.3.2024, where available; European Commission for forecast figures (2023 Autumn
Forecast).

19
Table 2.2: Selected economic and financial indicators (Part 2), Greece
forecast
all variables y-o-y % change, unless otherwise stated 2003-07 2008-12 2013-19 2020 2021 2022 2023 2024 2025
Housing market
House price index, nominal 7.5 -4.9 -1.1 4.5 7.6 11.1 . . .
House price index, deflated 4.2 -6.5 -0.5 5.7 6.5 4.4 . . .
Overvaluation gap (%) (6) 9.0 11.9 -7.1 -0.3 3.2 9.6 18.7 . .
Price-to-income overvaluation gap (%) (7) 9.0 10.5 -4.8 2.0 1.5 4.8 9.2 . .
Residential investment (% of GDP) 9.7 5.6 1.0 1.1 1.3 1.6 1.9 . .

Government debt
General government balance (% of GDP) -7.1 -11.3 -2.9 -9.7 -7.0 -2.4 -2.3 -0.9 -0.8
General government gross debt (% of GDP) 103.7 144.2 180.3 207.0 195.0 172.6 160.9 151.9 147.9

Banking sector
Return on equity (%) . 6.0 -7.2 -7.9 -20.1 12.7 . . .
Common Equity Tier 1 ratio . 9.6 15.5 15.0 14.0 14.9 . . .
Gross non-performing debt (% of total debt instruments and total loans and advances) (8) . 9.1 35.0 22.2 7.1 5.0 . . .
Gross non-performing loans (% of gross loans) (8) . . 42.5 26.5 8.6 6.2 5.7 . .
Cost of borrowing for corporations (%) 5.8 6.1 4.7 3.1 3.0 4.7 6.0 . .
Cost of borrowing for households for house purchase (%) 4.4 4.0 3.0 2.7 2.5 3.7 4.4 . .

(6) Unweighted average of price-to-income, price-to-rent and model valuation gaps. The model valuation gap is
estimated in a cointegration framework using a system of five fundamental variables; total population, real housing
stock, real disposable income per capita, real long-term interest rate, and price deflator of final consumption expenditure,
based on Philiponnet, N., Turrini, A. (2017), ‘Assessing House Price Developments in the EU,’ European Economy -
Discussion Papers 2015 - 048, Directorate-General Economic and Financial Affairs (DG ECFIN), European Commission.
Price-to-income and price-to-rent gaps are measured as the deviation from the long-term average (from 1995 to the
latest available year).
(7) Price-to-income overvaluation gap measured as the deviation from the long-term average (from 1995 to the latest
available year).
(8) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU
foreign-controlled branches.

Source: Eurostat and ECB as of 19.3.2024, where available; European Commission for forecast figures (2023 Autumn
Forecast).

20
3. THEMATIC CHAPTER: EXTERNAL SUSTAINABILITY AND INVESTMENT

Greece’s external position deteriorated after 2019 and remains substantially weaker
than in the pre-pandemic period. After a long adjustment period, accompanied by almost a
decade of economic recession and substantial decline in external financing needs (Graph 3.2 a), the
Greek economy started to recover and post positive growth from 2017. The recovery phase had
been characterised by modest real growth in domestic demand and a current account deficit of
2.2% of GDP on average, around the level necessary to ensure steady improvement in the NIIP
ratio. This period was interrupted by the COVID-19 pandemic, and the situation was further
exacerbated by Russia’s war of aggression against Ukraine. In 2020, the current account deficit
widened as a result of the drop in exports, especially tourism and transportation, while domestic
demand remained relatively robust. From a saving-investment perspective, the worsening situation
was accompanied by a sharp deterioration in government budget balances, triggered by the drop in
tax revenues and policy measures introduced to mitigate the impact of the crises. In the meantime,
households’ net savings increased and turned positive in 2020, as real consumption dropped
significantly, while household revenues (disposable income and net capital transfers) declined only
modestly, supported by government subsidies (Graph 3.2 b). Precautionary motives on the back of
heightened uncertainties also played a role. By contrast, the net saving position of corporations did
not change materially. A strong rebound in consumption and investments led to an increase in
import demand in 2021-2022. A surge in domestic demand-driven imports together with the
worsening in the energy balance more than offset the positive terms-of-trade dynamics and the
recovery in tourism, leading to a deterioration in the trade balance in 2022. From the savings
perspective, the government budget deficit started to decline as of 2021, but the pent-up demand
fuelled consumption and a pick-up in investments triggered a decline in private savings. As a result
the net external borrowing increased further, reaching 8.8% of GDP in 2022. In 2023, favourable
price dynamics and a moderation of domestic demand growth supported a decline in the current
account deficit, which narrowed from 10.3% in 2022 to 6.4% but remained well above its pre-
pandemic level.
Changes in export and import prices were the main drivers of the partial narrowing of
the current account deficit in 2023. Besides the positive terms--of--trade effect, a parallel
decline in export and import prices supported the narrowing of the trade deficit, while in real terms
the improvement was modest in 2023. The terms of trade have been improving since 2022, thanks
to the high share of goods (food, refined oil) and services, in particular tourism exports, which
experienced a relative price increase in these periods. In 2022, the parallel increases in export and
import prices deteriorated the trade balance to a significant extent and the improvement in terms
of trade had a negligible positive effect on the balance. By contrast, in 2023 both the parallel
decline in prices and the terms of trade had a material positive impact on the net export.
Furthermore, as pent-up demand gradually subsided, private real consumption growth slowed
significantly from 7.4% in 2022 to 1.8% in 2023. With investment growth also having decelerated
in 2023, real growth in domestic demand returned to pre-crisis levels and muted demand for
imports. Overall, price dynamics and the adjustment in domestic demand triggered a sizeable
correction of the external balances, bringing the current account deficit down by almost 4 pps
compared to 2022.

Looking ahead, changes in household and government net saving positions are expected
to be the main drivers of external rebalancing in 2024-2025. Households’ real consumption
growth is expected to remain at around its 2023 level, below the expected real growth in household

21
income. Households’ investment is expected to continue its recovery, albeit at a slower pace than in
2021-2023. Overall, the net savings of households are expected to improve, while remaining in
negative territory in 2024-2025. Corporate investments are expected to surge on the back of
increasing capacity utilisation, supported by the improving business environment, a better economic
outlook and the expected fall in financing costs. Capital transfers in the context of the RRP will
increase the funds available for firms, and corporate net savings are expected to remain broadly
unchanged in 2024-2025. The government budget balance is set to improve further, to -0.8% of
GDP by 2025, on the back of fiscal consolidation and tax revenue increases amid the cyclical
upheaval of the economy.

In the short run, the implementation of the recovery and resilience plan is set to slow
the narrowing of the current account deficit, but in the longer run it is expected to
increase productivity. Given the high import content of investment, RRP investments are
expected to have a negative impact on the trade balance. However, the accompanying sizeable RRF
grant financing provided by the EU reduces the net effect on the external financing needs.
Furthermore, successful implementation of the structural reforms under the RRP together with the
investments under the plan are expected to improve productivity and broaden Greek export
capacity in the medium run.

Addressing the structural vulnerabilities associated with low private savings is essential
to support external rebalancing and investment growth, and hence to ensure a balanced
economic growth path in the longer run. Household net savings averaged -2.7% of GDP in
2017-2022, well below the average ratios recorded in the euro area (3.6%) and in the EU (2.9%) in
the same period. Household and corporate statistics might be distorted by measurement issues
over the dominance of micro companies and self-employment (these economic entities might
report their corporate activity as household activity) and by the relatively large size of the shadow
economy, estimated at 20.9% of GDP by the Bank of Greece( 33). Nevertheless, the total private-
sector net savings (corporate and household) have been low, averaging -0.5% of GDP compared to
5.8% and 3.6% in the euro area and the EU respectively.
The low household savings rate has been associated with a persistently high
consumption-to-GDP ratio. The consumption-to-GDP ratio has been the highest in the EU
continuously since 2007. In 2017-2023, it stood on average at 16.1 pps and 16.3 pps of GDP
above the euro area and EU averages respectively (Graph 3.1) and 8.6 pps above the level in
Greece’s peer countries, namely Italy, Portugal and Spain. In the face of the massive shocks of the
last 4 years, consumption has remained considerably robust, causing the real consumption-to-GDP
ratio to increase above pre-pandemic levels. In 2023, the ratio declined slightly, owing to a
slowdown in consumption growth and continued strong investment growth.

(33) Financial account data published by the Bank of Greece indicate that household net financial savings have been positive
since 2019.

22
Graph 3.1: Consumption-to-GDP ratio in EU comparison as % of GDP

Source: Eurostat and European Commission calculations.

The Greek sovereign debt crisis triggered a protracted recession and a substantial
deterioration of investment dynamics. Household investment endured the largest collapse in
the aftermath of the sovereign debt crisis, but the corporate investment ratio also declined,
hindering productivity growth (Graph 3.2 d). The housing market collapsed in 2009. Residential
construction dropped from a peak of 10.8% of GDP in 2007 to 1.6% of GDP in 2022, while
property prices fell by 38.6% from 2009 to 2018, when they started rising again. The public
investment ratio also dropped markedly, albeit to a smaller extent, before recovering in 2012. The
corporate investment ratio declined to 4.5% of GDP in 2013, down from around 7.3% of GDP prior
to the crisis, and reached its pre-crisis level by 2022 (Graph 3.2 c). Nevertheless, this ratio is well
below the euro area and EU average and the level recorded in peer countries (Italy, Portugal and
Spain). Further, the breakdown of total investment by type of investment over 2013-2019 shows
Greek investment underperforming relative to its euro area peers in all categories except ICT
equipment (Graph 3.2 d). Since early 2022, the tightening of monetary conditions along with
heightened uncertainty due to geopolitical tensions have triggered a slowdown in corporate lending
across the euro area. However, the four-quarter cumulated net credit flow averaged -0.8% of GDP
in peer countries (Italy, Spain and Portugal) but was positive and averaged 1.3% in Greece in the
first three quarters of 2023. With RRP loans having accounted for almost one fifth of the total
corporate credit flow since the launch of the Loan Facility, they made a sizeable contribution to the
relative recent improvement of credit dynamics in Greece.

Several factors of varying nature explain the low corporate investment ratio. On the
demand side, Greece’s economy is characterised by the prevalence of the low-tech service sector,
which is typically less capital-intensive, implying lower investment needs. In addition, the Greek
corporate sector is dominated by micro and small enterprises, which tend to be risk averse and
more reluctant to scale up their operations. Moreover, low profitability since the onset of the
sovereign debt crisis has constrained companies from investing, with the gross return on capital of
non-financial corporations collapsing from 34% in 2008 to a historic low of 13.7% in 2019, 10 pps
below the euro area average. Greek corporates also continue to face one of the highest debt-to-
income ratios in the euro area, as the workout of legacy non-performing loans remains slow (for
the reasons discussed Section 2). Along with these limitations, the supply side appears to be
constrained by another set of factors. From the banks’ perspective, the absence of external ratings
often increases the difficulty faced when assessing the risk associated with financing small and

23
micro businesses. Despite the significant reduction of non-performing exposures on banks’ balance
sheets since 2019, the still relatively high NPL ratio in comparison to the euro area average
continues to dampen the expansion of credit supply. Further, a large share of Greek companies are
still deleveraging from legacy NPLs and are thus less attractive as borrowers. Meanwhile, the
decade following the sovereign financial crisis was characterised by insufficient domestic savings
that limited the financial resources available to be channelled into corporate investment. In the
context of high sovereign financing costs since 2009 and constrained supply, the cost of available
credit offered by banks to Greek companies has been consistently higher than in the rest of the
euro area (Graph 3.2 a).

The European Investment Bank’s investment surveys confirm the aforementioned

limitations. The ratio of Greek companies reporting that their investment had been below the
optimal level in the year preceding the survey was relatively stable and averaged 19.5% over 2016
to 2022. When asked to give reasons for underinvesting, Greek companies reported business
regulations and uncertainty in a substantially larger share than their EU counterparts. However, the
largest difference is observed in access-to-financing issues, with over 25% more corporates in
Greece than in the EU reporting these as an impediment (Graph 3.2 f). Survey-based information
also confirms that SMEs, which make up the majority of the Greek economy’s value added and
employment, are financially constrained to a larger extent than large firms.
The Loan Facility of the Greek RRP aims to improve access to financing for the corporate
sector and help close the investment gap. The Loan Facility constitutes an attractive financing
source, with favourable terms compared to market-based alternatives (long-term fixed rate loans
with an interest rate well below the market level), including for SMEs. Moreover, as loans under the
Loan Facility that are provided by the State do not enter banks’ balance sheets, the facility is
expected to contribute to increasing credit supply. The facility provides a temporary solution while
the underlying structural problems (high NPL in the economy, high risk aversion) are being
addressed or are phased out.

24
Graph 3.2: Selected graphs, Greece

Notes:
(b) * Changes in inventories together with acquisition less disposal of valuables. **Disposable income including net
capital transfers of households
(c) Nominal gross fixed asset accumulation in per cent of GDP
(d) Nominal gross fixed asset accumulation in per cent of GDP by type, average of 2013-2019
(e) Interest rate of new corporate loans.
(f) Ratio of companies reporting the given factor constrained their investment activity in the preceding year, average of
2016-2022.
Source: Eurostat, Ameco, EIB investment surveys and European Commission calculations.

25
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