Greece: Macroeconomic developments and prospects 2010-2012 - Fiscal adjustment and reforms

- EUREN-News, N.3, juin 2011

23/06/2011

The Greek economy continued to contract throughout 2010, with a year-on-year GDP decline of 4.4%. The contraction deepened in the last quarter, reaching 7.4% year-on-year, and will probably continue through 2011, as the dampening impact of fiscal retrenchment on economic activity is expected to remain strong.

Domestic demand is set to decline against the back-drop of further income losses, increasing tax burden and tight credit conditions. Imports are projected to continue to shrink during 2011, while the rebound in exports is expected to be strong, with positive indications already provided by accelerating non-domestic industrial orders.

Fiscal adjustment is progressing but deviations from fiscal targets call for further action.

In 2010, Greece’s budget deficit declined by 5 percentage points relative to GDP, amounting to 10.5% versus 15.5% in 2009. This reduction was still short of the 2011 State Budget’s estimates, according to which a 9.4% deficit was expected. The additional fiscal measures to keep the deficit within target over the short term will amount to a total of € 6.4 billion.

The medium-term prospects will heavily depend on the redefinition of the underlying growth model and the adherence to the programme of fiscal adjustment and structural reforms.

Ekaterini Tsouma and Ersi Athanassiou from KEPE (Centre of Planning and Economic Research, Athen)

See also in this issue : European Stability Mechanism: involvement of private investors essential (editorial)