A strong slowdown in growth rates, despite the new NSRF and recovery fund, the organization sees in its report ● a significant drop in exports and an increase in the balance of payments deficit to an unimaginable 9% of GDP ● a fiscal deficit until 2025, the paradoxical optimism of inflation and bond yields Government rises to 6.5% ● Debt falls below 130% of GDP, i.e. pre-MOU levels, by 2033 at best.
The impressive findings and assessments, along with recommendations, are contained in the OECD’s report on Greece released yesterday. The immediate message of the report is that 2023-2024 will be two years of great economic – and therefore also social – “pain” and financial suffocation.
The most important message in the medium and long term is that the Greek economy suffers from structural weaknesses that require immediate remedy and that its horizon is burdened by high stakes and risks. Of course, during my presentation yesterday at the Ministry of Finance, the government’s tone of self-justification was excessive, commensurate with what was before the elections.
The report does indicate progress, especially with regard to the development performance of the Greek economy and debt decline as a percentage of GDP in the years 2021-2022, but at the same time it is full of unpleasant estimates for the coming year. Two years plus several important macro-data ‘caveats’.
The most impressive component of the organization’s expectations is to reduce inflation to 3.7% in 2023. It should be noted that the Greek budget expects inflation to rise to 5% in 2023, while the Commission estimated that it will move to 6%. 3.7% is the best prediction yet from an official international body.
One explanation is the optimism that has begun to take shape recently, based on November data published by ELSTAT and Eurostat, where the decline is mainly due to the “basic effect”, that is, the start of high inflation in the corresponding months of last year.
The OECD’s optimistic estimate of inflation should be read in conjunction with its other macroeconomic estimates, above all its negatively impressive estimate that Greek 10-year government bond yields will hover around 6.5% in both 2023 and 2024! This assessment betrays another, more general assessment: that the European Central Bank (ECB) will carry out its “threat” to continue raising interest rates to levels above the prevailing optimistic forecasts, up to 4.5%-5%!
The next, more negative estimate is that the current account deficit will widen more than 7.1% of GDP in 2022 to 8.9 and 8.8% of GDP in 2023 and 2024, respectively. This estimate contains an unflattering assumption: that even a strong slowdown in the economy cannot reduce the rise in the current account deficit, on the contrary, it will increase it! The combination of very high yields on government bonds and a very high current account deficit indicates a two-year fiscal “choke” in which the balance sheet deficit will increase the external financing needs of the Greek economy, while at the same time the size of the deficit is large. Increasing borrowing costs will “shut down” the markets causing a significant increase in the cost of borrowing for banks, businesses and the state.
“But” and recommendations
In such circumstances, the government’s celebrations that the economy will remain on a growth path and avoid recession, with a 5 percentage point slowdown compared to 2022, amounts to “denial syndrome” to meaningfully read the report’s projections as a whole and in relation to each of them. others. However, the report also opens up other important “fronts” with findings such as:
● It is not good for taxes to be based mainly on consumption taxes and social contributions rather than income taxes.
● The financial costs of healing climate change will increase and policy must be put in place to deal with them.
● That despite significant progress in curtailing “red” loans, Greek banks still have a long way to go.
● That there is a problem in the “fragmentation” of public contracts.
● that competition is not working satisfactorily, leading to high inflation.
● That in the transportation sector, road transport has been unilaterally given weight and needs to be rerouted.
The report includes not only findings and assessments, but also recommendations that at a given time acquire the actual character of “orders” to … the following government:
• Changes in income tax rates and broadening of the tax base. “Bell” fees for the broad tax base, i.e. low and middle income groups and possibly farmers.
• Achieving rapid primary surpluses of 1.5 to 2% of GDP as a condition of investment level as well. This in conditions of strong deceleration will exacerbate the social “pain”.
• Adaptation of public infrastructure and awareness campaign for citizens to take “preventive measures”. In order to reduce financial costs (which tend to increase constantly), Individual Responsibility must succeed in dealing with climate change.
• Dismantle public contracts by awarding them to “higher capacity” organizations. Proposing more “centralization” in public procurement is an indirect/”diplomatic” criticism of the government for its orgies in fragmentation and direct awarding of contracts.
• Measures to increase competition and open professions to reduce inflation. The “bell” tolls for the legal profession and perhaps for fuel.
• Increasing investment in public transport and focusing on the railway network, not just the roads.
• A negative “signal” of a new increase in the minimum wage, in anticipation of the risk of an acceleration of wage costs (see adjacent text).
• Liquidating the rest of the “red” bank loans and rebuilding the capital base of the banks by enhancing their organic profits and the regulatory capital.
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