Greek Economy at a Crossroads

Program broadly on track, signs of improving competitiveness

More reforms needed to boost potential growth

Economy projected to turn around in latter part of 2011

The Greek government has made good progress on its reform agenda. After six months of intense reform efforts, there are signs that competiveness is improving, helped by a slowdown in underlying inflation and wage growth. Budget measures implemented since the start of the program have reduced the deficit by an estimated 6 percent of GDP in 2010 alone. On top of that, the pension reform approved in July implies large long-term fiscal benefits and improved labor supply.

But market sentiment toward Greece remains volatile. The economy is still adjusting, and unemployment is rising. A key test will be the implementation of additional structural reforms to boost growth and create new jobs.

In an interview, Poul Thomsen, head of the IMF’s team, discusses the challenges involved in restoring the overall health and competitiveness of the Greek economy.

IMF Survey online: What does Greece need to do in the months ahead?

Thomsen: Greece has made a good deal of progress, completing a first wave of fiscal adjustment and reforms, including a landmark pension reform. The economic program is now at a crossroads. Increasing tax rates and cutting expenditures was necessary, but these steps cannot be intensified further to secure the full fiscal adjustment that is needed. That’s why reforms to strengthen control over government spending are needed—improving, in particular, revenue administration, state enterprises, and the way the health sector is run.

In addition, a second set of reforms aimed at promoting growth and opening up the economy is now being prepared. When these reforms are implemented, they will begin to deliver dividends.

IMF Survey online: Why are these reforms such priorities in the near future?

Thomsen: Structural reforms can help Greece become more competitive, which is key to restoring growth, creating new jobs, and improving incomes. At the same time, reforms that reduce fiscal imbalances will also bring down interest rates and reduce the pressure on public services and tax rates. Let me elaborate a little.

A near term priority is opening up professions in the highly regulated service sector. These reforms will focus in particular on lawyers, notaries, engineers, architects, auditors, and pharmacists―professions that play an important role in the economy. More...