Greece Needs Deeper Reforms to Overcome Crisis

Greece receives €2.2 billion following approval of program review

Program is in a difficult phase, with reforms proceeding slowly

Discussions on private sector involvement to ease debt burden continue

The economy is projected to shrink by about 6 percent in 2011, and unemployment has reached 16½ percent of the work force. And while competitiveness is slowly improving, the country has yet to build up a critical mass of structural reforms to reenergize growth.

“The economy is continuing to trend downwards, reflecting that the hoped for improvement in market sentiment and in the investment climate is not materializing,” IMF mission chief for Greece, Poul Thomsen, told reporters in a briefing tied to the release of the IMF’s latest report on the economy.

On December 5, the IMF’s Executive Board approved the fifth review of Greece’s economic program and released a tranche of €2.2 billion under the country’s 3-year Stand-By Arrangement. The IMF-supported program, approved in May 2010, is part of a joint package of financing with euro area member states amounting to €110 billion.

Political backing

The appointment of Lucas Papademos as new prime minister and the public endorsement of the program objectives by all the major political parties has raised expectations that Greece will now be able to make headway on important reforms. “One problem with the program has clearly been the lack of broad political support,” Thomsen said. “Now that the fifth review has been signed off by the new government, and by the three partners that are supporting this government, we are hopeful that this will help strengthen the program and the ability to implement reforms.”

No room for further tax hikes

During 2010, the Greek government managed to reduce the fiscal deficit by 5 percentage points, despite a contraction in GDP of almost 4 percent. But further progress in reducing the deficit is going to be hard without underlying structural fiscal reforms. The fiscal deficit is now expected to be 9 percent this year, against the program target of 7½ percent.

“One of the things we have seen in 2011 is that we have reached the limit of what can be achieved through increasing taxes,” Thomsen said. “Any further measures, if needed, should be on the expenditure side, and on the revenue side we have to rely on improving tax administration.”

Prospects for debt sustainability

Greece and its European partners agreed October 26 on a debt write-down by private...