In recent years, Greece has exceeded its fiscal targets and the current account deficit has narrowed. Increased revenues and better control of expenditure contributed, before the pandemic outbreak, to sustained and substantial primary budget surpluses, rebuilding fiscal credibility. Greece has successfully returned to the international bond market and rating agencies have raised its sovereign rating. The economy has become more open, although the COVID-19 shock is projected to hinder export growth.

The public debt ratio is projected to rise from already high levels due to the extraordinary fall in nominal GDP and, to a lesser extent, fiscal support following the COVID-19 shock. As the economy resumes its recovery, and the budget shifts gradually back to a primary surplus, the public debt ratio is projected to start declining again, helped by low interest rates. The European Central Bank’s decision to include Greek government securities in its asset purchase programmes have contained bond yields below the levels of mid-2019.

Past labour and product market reforms have improved Greece’s price competitiveness, and will stand Greece in good stead when domestic and foreign demand recover. In early 2019, Greece increased the minimum wage for the first time in many years and ended the subminimum wage. This boosted incomes without any obvious negative employment effects prior to the COVID-19 shock. Following the COVID-19 shock, the 2020 review of minimum wages has been deferred to early 2021. Mechanisms to extend sectoral collective agreements to non-signatory workplaces have been reintroduced, while conditional opt-out arrangements were introduced in late 2019.

The COVID-19 shock risks exacerbating Greece’s long-standing labour market challenges. The employment rate has increased over the past six years but is still one of the lowest among OECD countries and wages are low (Figure 2). Women and the young continue suffering from low employment rates. The dearth of child and elderly care centres restrict women’s job opportunities as caregiving responsibilities often fall on them. The lack of prospects has pushed many talented young people to emigrate, lowering the country’s entrepreneurial and innovation potential. Difficulties of integrating migrants into the labour market and education system together with limited support from other EU countries to deal with the large influx of asylum seekers compound these challenges. The COVID-19 crisis risks aggravating these problems as job growth has collapsed and a large number of discouraged job-seekers have left the labour force.

Poverty and material deprivation, while improving, are high, especially among the young and families (Figure 3). Following past reforms, Greece’s social protection system was much better prepared to deal with a large shock than at the onset of the global financial crisis. The government’s temporary income support measures have buffered household incomes from the COVID-19 shock. However, despite improvements in recent years, poverty rates among the young and families with children remain high while retirees fare significantly better. This and the large impact of the COVID-19 shock on the working age population and the young further underline the need to address the intergenerational imbalances of the social protection system. Pension payments as a share of GDP remain among the highest across OECD countries. Policy changes in mid-2019 will raise pension spending further over the short term, even as earlier extensive reforms will significantly reduce its weight on the economy over the medium- and long-term. The COVID-19 shock makes the need to continue modernising Greece’s social protection system manifest so as to better target anti-poverty programmes to people in need and significantly strengthen retraining schemes.

Economic activity, though shifting gradually to tradable sectors, is still concentrated in traditional and low-innovation sectors, contributing to low productivity growth. Small and low productivity firms continue to play an outsized role in the economy. Despite recent progress, such as the digitalisation of the public administration, high tax burdens, red tape, low quality regulations and a slow justice system mar the business environment, discouraging domestic and foreign investment and preventing businesses from thriving. Banks’ non-performing loans (NPLs) were falling before the COVID-19 shock but they are still high, curtailing banks’ capacity to finance investment. The severe liquidity constraints many firms are facing following the COVID-19 shock risks increasing NPLs further. The government has introduced temporary credit lines and guarantees to address this challenge. Nonetheless, it remains urgent to durably lower NPLs on banks’ balance sheets.

People in Greece have good health but environmental quality and housing detract from people’s overall life satisfaction. Air pollution in metropolitan areas is high, exposing a larger share of the population than most OECD countries to health risks. Waste treatment is over-reliant on landfills and illegal dumping is still common.

Ambitious and comprehensive reforms are key to overcoming the COVID-19 shock and durably raising well-being

The pandemic makes the short-term outlook highly uncertain. The government’s COVID-19 responses announced to date will support incomes and firms into 2021. A second outbreak would further curb tourism and service demand, and call for extending the government’s support. Aiding businesses and their workers to upgrade their activities and skills and to shift to sectors that promise better opportunities will accelerate the recovery and make the economy and society more resilient.

Once the COVID-19 emergency recedes, Greece can again focus on a programme of medium-term transformation to reinvigorate its recovery with stronger and inclusive growth. The government is working on a reform programme to achieve four policy objectives: protect the economy from the COVID-19 shock; achieve a sustained economic recovery; raise long-term growth; and improve inclusiveness. Consistent with this programme, this Survey puts forward an ambitious reform package to support stronger employment, productivity and investment and raise well-being. This package includes measures to encourage and help more people find jobs, boost innovation while lowering and sharing more fairly the burden of taxation and improving the public administration. These measures would increase annual trend GDP growth by 1 percentage point by 2030. Higher growth and a sustained primary budget surplus of 2.2% of GDP would ensure the debt-to-GDP ratio declines steadily into the long term.

Repair of the banking system needs to accelerate. The government is implementing a new asset protection scheme (Hercules) to help banks to dispose of the large stock of non-performing loans. The plan is expected to lower banks’ non-performing loans significantly over the next two years. However, the COVID-19 shock has slowed progress, and further action is needed to address the large stock of non-performing loans that will remain and improve the quality of banks’ capital.

Increasing productivity growth is key to raising living standards and offsetting the large negative effect of demographics (Figure 4). Raising productivity growth will require additional efforts to reduce barriers to competition, especially in professional services, including notaries, lawyers and retail sales of medicines, and increasing the efficiency and effectiveness of the public administration (including the justice system). This would contribute to enhance the rule of law, thus reducing the costs and uncertainties of doing business in Greece, attracting more foreign direct investment, and helping to rebuild trust in public institutions. The government’s efforts to reduce red tape, raise accountability and efficiency in the public sector, including through the use of digital technologies, are welcome, and demonstrated their effectiveness during the COVID-19 shutdown period. Efforts to prevent and prosecute corruption need to be pursued following international best practices. The recent establishment of the independent National Transparency Authority goes in the right direction.

The quality of public spending needs to further increase along with the fairness and efficiency of the tax system. Further improving the design and implementation of effective spending reviews and ensuring the results are available early in the budget cycle would help reallocate resources to more effective public programmes and public investment. Further broadening of the tax base, by continuing to improve voluntary tax compliance, and fighting tax evasion are key to lowering high statutory tax rates, making the tax system fairer and safeguarding fiscal credibility (Figure 5). Reducing the high employers’ social security contribution rates, especially at low incomes, would support employment and reduce informality.

Strengthening active labour market programmes, education and professional training would improve the workforce’s ability to adapt to the COVID-19 shock and to a changing labour market. Workers’ skills often do not match employers’ needs, while those out of work are at risk of long-term unemployment (Figure 6). Boosting the capacity of public employment services would improve job matching and jobseekers’ access to skill training. Public works programmes help the very-long term unemployed to maintain work habits but there is ample scope to enhance skills so as to improve enrolees’ job prospects. Implementing the active labour market and social inclusion pillars of the Guaranteed Minimum Income scheme would improve beneficiaries’ chances of sustained gains in income through work. Ensuring firms can use promptly and effectively, if eligible, the newly introduced opt-out clauses in sectoral collective agreements would improve the link between wages and productivity and give workplaces more flexibility while supporting social dialogue.

Education is valued highly in Greece, but it translates poorly into readiness for work, and a low share of adults engage in lifelong learning. Overdue steps are being taken to improve the quality of school education, by providing teachers with some autonomy and appraising performance. Regularising the large temporary teacher workforce with contracts that reward performance and provide career prospects, while avoiding the rigidities of current contracts, would raise teachers’ morale and teaching quality. Reforms to post-secondary education can offer the prospect of improving vocational education and providing adults with access to lifelong learning and skill training. Developing adults’ digital skills is particularly urgent, given the looming risk to jobs from digitalisation and automation.