The Second Economic Adjustment Programme for Greece – First

283 Pages·2013·3.06 MB·English

ISSN 1725-3209
EUROPEAN
ECONOMY
Occasional Papers 123 | December 2012
The Second Economic Adjustment
Programme for Greece
First Review - December 2012
Economic and
Financial Affairs
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KC-AH-12-123-EN-N
ISBN 978-92-79-22928-2
doi: 10.2765/25398

© European Union, 2012
Reproduction is authorised provided the source is acknowledged.
European Commission
Directorate-General for Economic and Financial Affairs

The Second Economic Adjustment
Programme for Greece
First Review December 2012

EUROPEAN ECONOMY Occasional Papers 123

OUTLINE OF THE REPORT

EXECUTIVE SUMMARY 1
1. INTRODUCTION 7
2. MACROECONOMIC AND FINANCIAL DEVELOPMENTS 9
2.1 Macroeconomic Developments 9
2.2 Financial Market Developments 17
3. PROGRAMME IMPLEMENTATION 20
3.1. Fiscal Policy performance 20
3.1.1 Fiscal performance under the programme 20
3.1.2.Fiscal performance in 2012 21
3.1.3. Fiscal outlook in 2013 and subsequent years 22
3.2. Fiscal strategy 2013-2016 23
3.3. Structural reforms with budgetary relevance 33
3.3.1. Privatising to boost efficiency in the economy and reduce public debt 33
3.3.2. Tax policy reform 36
3.3.3. Revenue administration reforms 37
3.3.4. Public Financial Management Reform 38
3.3.5. Making the public administration more efficient and effective 39
3.3.6. Completing the pension reform to secure sustainability 40
3.3.7. Modernising the healthcare system 42
3.3.8. Upgrading the education system 43
3.4. Stabilising the financial system 43
3.5. Strengthen labour market institutions and promoting employment 44
3.6. Creating favourable conditions for economic activity 46
3.6.1. Promoting an efficient and competitive business environment 46
3.6.2. Reforming the judicial system to support economic activity 47
3.7. Efficient Network Industries and Services 48
3.7.1. Energy policy 48
3.7.2. Electronic communications 49
3.7.3. Transport 49
3.7.4. The Retail Sector 50
3.7.5. Regulated professions and professional qualifications 50
3.8. Increasing the impact of structural and cohesion funds 51
3.9. Technical Assistance and Monitoring 51
4. DEBT SUSTAINABILITY ANALYSIS AND PROGRAMME FINANCING 52
4.1. Debt sustainability analysis 52
4.1.1. Baseline and measures to improve debt sustainability 52
4.1.2. Stress test scenarios 56
4.2. Programme financing 58
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Annex 1: Assessment of compliance with the Memorandum of Understanding on
Specific Policy Conditionality (seventh update, November 2012) 61
Annex 2: Macroeconomic forecast 133
Annex 3: Updated programme documents 139

Letter of Intent 141
Memorandum of Economic and Financial Policies 143
Memorandum of Understanding on Specific Economic Policy conditionality 189
Technical Memorandum of Understanding 259

List of Tables
Table 1. Macroeconomic scenario, main features (2010-2016) 10
Table 2. Fiscal quantitative performance criteria (EUR billion) 22
Table 3. Primary Balance and GG Balance 2013-2016 22
Table 4. Medium-term deficit ceilings 23
Table 5. Rationalization of social benefits 28
Table 6. Fiscal measures in the MTFS 2013-14 29
Table 7. Expected Privatisation Receipts 34
Table 8. Privatisation Plan 35
Table 9. Arrears to suppliers (EUR million) 39
Table 10. Addressing financing needs and reducing the debt-to-GDP ratio 54
Table 11. Disbursements under the Greek adjustment programmes (EUR billion) 58
Table 12. Detailed composition for next disbursement by EFSF following the review 59
Table 13. Milestones for the disbursement of 3 sub-tranches of the 2nd disbursement 59
Table 14. Financing programme: quarterly financing needs and disbursements of
official assistance 60

List of Boxes
Box 1. The documents for a comprehensive adjustment strategy 7
Box 2. The economic adjustment programme for Greece: some success stories 8
Box 3. Uncertainty shocks and effects on Greek economic activity 12
Box 4. The external adjustment continues at significant pace 14
Box 5. Swimming against the tide - what cyclically adjusted balances tell us about fiscal
adjustment in Greece 20
Box 6. Pre- and post-Adjustment Programme Trends in the Public Sector Wage Bill 24
Box 7. The contribution of defence expenditure in fiscal consolidation 26
Box 8. Pre- and post-programme trends: growth rates in social transfers 28
Box 9. How credible is the new MTFS for 2013-16? 30
Box 10. The EU's Fiscal Compact 32
Box 11. Economic Adjustment Programme and Social Equity 41
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List of Graphs inside Boxes
Graph 3.1. Uncertainty Index for Greece 12
Graph 3.2. The impact of uncertainty 13
Graph 4.1. External adjustments 14
Graph 4.2. Competitiveness indicators 15
Graph 5.1. Structural balance 20
Graph 6.1. Nominal Wage Bill Greece vs EA17 (2000=100) 24
Graph 7.1. Defence expenditure in EU countries (% of GDP) 26
Graph 7.2. Defence expenditure in Greece 26
Graph 8.1. Social transfers 28
Graph 11.1. Poverty Indicators 41

List of Graphs
Graph 1. Real GDP growth and Economic Sentiment Indicator (outcome and forecast) 9
Graph 2. Real GDP growth and contributions, inflation 10
Graph 3. Trade and current account balance 10
Graph 4. Equipment investment 11
Graph 5. Housing investment 11
Graph 6. Industrial production and capacity utilisation 11
Graph 7. Exports and non-domestic industrial orders 11
Graph 8. Employment and unemployment rate 16
Graph 9. Nominal unit labour cost (2000=100) 16
Graph 10. HICP inflation developments (% change, y-o -y) 16
Graph 11. HICP inflation: main drivers 17
Graph 12. Athens Stock Exchange Indices 17
Graph 13. Greek CDS 17
Graph 14. Bank deposits 18
Graph 15. Credit to private sector (% change, y-o-y) 18
Graph 16. Loan to deposit ratio by bank (in %) 18
Graph 17. Non-performing loans ratio 18
Graph 18. Outstanding stock of T-bills (including commercial paper), EUR million 19
Graph 19. T-bills auctions since July 2010 19
Graph 20. State primary payments - 2012 21
Graph 21. Government primary balance – 2012 21
Graph 22. Fiscal measures in the medium-term fiscal strategy for 2013 29
Graph 23. Fiscal measures in the medium-term fiscal strategy through 2014 29
Graph 24. Debt to GDP ratio 52
Graph 25. Debt to GDP evolution before and after the debt-reducing initiatives agreed by the
Eurogroup on 26/27 November 2012 55
Graph 26. Dynamic profile of stress-test scenarios and overall impact in 2020 (% of GDP) 57

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e-mail: [email protected]

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ACKNOWLEDGEMENTS

The report was prepared in the Directorate General Economic and Financial Affairs, under the
direction of Matthias Mors, director and mission chief, and coordination of Gabriele Giudice,
head of unit.
Contributors:
Matthias Mors, Chris Allen, Olfa Alouini, Stefan Appel, Zeta Astra, Peghe Braila, Laszlo Butt,
Pedro Cardoso, Giuseppe Carone, Jakob E. Christensen, Fotini Dionyssopoulou, Riccardo
Ercoli, Leila Fernández-Stembridge, Luis García Lombardero, George Gavanas, Gabriele
Giudice, Loukas Kaskarelis, Zenon Kontolemis, Peter Lohmus, Guillaume Prèvost, Christoph
Ungerer, Rafał Wielądek, Ana Xavier, and Christos Zavos. George Gavanas and Christos Zavos
provided statistical assistance and were responsible for the layout.
The report was prepared in liaison with the ECB.
Comments on the report would be gratefully received and should be sent, by mail or e-mail to:
Gabriele Giudice,
European Commission,
Unit ECFIN-G-3,
CHAR 10/236,
B-1049 Brussels.
e-mail: [email protected]

The cut-off date for this report was 13 December 2012

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