Greek Program Broadly on Track But Structural Reforms Remain
“Our overall assessment of the program is that it is broadly on track,” said Servaas Deroose, a senior European Commission official. He added that Greece was making a strong effort to narrow its fiscal deficit to a targeted 7.5 percent of GDP by the end of 2011, despite a contracting economy.
The teams were in Athens to conduct the second review of Greece’s economic reform program, which is being supported by a €80 billion loan from euro area countries and a €30 billion Stand-By Arrangement with the IMF.
“The program is off to an impressive start, but it is now at a crossroads, where further progress will depend on difficult structural reforms,” said Poul Thomsen, head of the IMF’s team.
The teams pointed to significant progress, particularly in reducing the deficit. The economy is expected to begin turning around in 2011. Wage and price inflation is beginning to moderate, setting the stage for an improvement in competitiveness.
“The strength of the program so far has not only been its ambitious and front loaded adjustment effort, but above all the government’s determination―this is clearly the government’s program―and the socially well-balanced nature of the adjustment,” Thomsen said.
Fiscal adjustment on track
The ambitious fiscal adjustment is well underway, Thomsen told journalists at a November 23 press conference in Athens. The deficit is falling from 15½ percent to 9½ percent of GDP in 2010, and the government remains committed to reducing the deficit to below 3 percent of GDP by 2014.
Because of recent data revisions for 2009 and weaker-than-projected revenue collection, the government will need to make an extra effort to meet the agreed deficit target for next year.
New measures have been agreed to broaden tax bases and eliminate wasteful spending, particularly in the areas of:
• Health spending—which is inefficient relative to other euro zone countries;
• State enterprises—which are a heavy burden on the economy with perennial losses for Greek taxpayers; and
• Tax administration—which has instruments now coming into place to strengthen compliance.
“Meeting the ambitious targets for this year speaks for itself. But we have to recognize that there are serious underlying pressure points. The targets have been met because the government has underspent at the state level in order to compensate for...
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