OECD Economic Surveys: Greece 2018
Assessment and recommendations
Abstract
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Greece’s economic recovery is finally gaining traction after an unprecedented depression. GDP has started to recover after having fallen by a quarter from 2008 to 2016 (Figure 1). In the last two years, the pace of reforms has accelerated and broadened. The imbalances in public finances and the current account have been reversed due to large fiscal adjustments, which have strengthened fiscal credibility and reduced uncertainty (Figure 2). Exports are leading the recovery, building on competitiveness gains following labour market reforms. Jobs are being created and transitions into employment have picked up (Figure 3), supporting household incomes and improving labour force participation for women. In the summer of 2017, Greece returned to the international debt market after a three-year hiatus, signalling investors’ increasing confidence in the country’s prospects and improved fiscal credibility. In the past two years, the 10-year government bond yields dropped from nearly 12% to 4%.
Figure 1. Growth has resumed
Year-on-year percentage changes
Source: OECD (2018), OECD Economic Outlook: Statistics and Projections (database).
Figure 2. The external and fiscal imbalances have closed
Current account and government primary balance
Source: OECD (2018), OECD Economic Outlook: Statistics and Projections (database).
Figure 3. Transitions into employment improved following labour market reforms
Labour transitions between joblessness and employment, 25-59 year-olds, 2005-141
Note: Transition rates between joblessness and employment at the individual level at time t measure the number of times an employed worker at the end of year t-1 experiences a transition from joblessness to employment (and from employment to joblessness), based on monthly information on employment status of the worker: employed; unemployed; and inactive. Individual transition information is used to calculate aggregate transition rates at the country level. See for more details: Garda, P. (2016), “The Ins and Outs of Employment in 25 OECD Countries”, OECD Economics Department Working Papers, No. 1350.
1. The reference income year.
Source: OECD calculations based on European Survey on Income and Living Conditions (EU-SILC) 2005-2015.
Despite these positive developments, challenges abound. GDP per capita is still 25% below its pre-crisis level. The public debt is still high and a source of significant vulnerability. Poverty rose sharply during the crisis, especially among the young and families with children. Though poverty has stabilised, it remains near a record high (Figure 4 – Panel A). Skill mismatch is also high and investment remains depressed (Figure 4 – Panel B). This contributes to low productivity – which has fallen further behind other OECD countries – and low wages – resulting in high in-work poverty. Though improving, female labour participation is among the lowest across OECD countries. The recovery in investment is held back by a dearth of finance – due in part to high levels of non-performing loans and to capital controls – high cost of capital relative to wages, cumbersome regulations and low demand. These problems weigh on people’s well-being. In most dimensions of the OECD’s Better Life Index, Greece ranks below the OECD average (Figure 5). Greece compares favourably only in health status and work-life balance. The legacy of the crisis weighs especially on subjective well-being and civic engagement, which have deteriorated markedly in the latest 10 years (OECD, 2017).
Figure 4. Poverty rose sharply during the crisis, especially among children, and investment collapsed
1. The severe material deprivation rate is the proportion of the population living in households unable to afford at least four of the following items: unexpected expenses, a one-week annual holiday away from home, a meal involving meat, chicken or fish every second day, the adequate heating of a dwelling, durable goods like a washing machine, colour television, telephone or car, or are confronted with payment arrears.
Source: Eurostat (2018), EU Statistics on Income and Living Conditions (database) and OECD (2018), OECD Economic Outlook: Statistics and Projections (database).
Figure 5. Greece’s well-being outcomes are low
Better Life Index, 20171
1. Each well-being dimension is measured by one to four indicators from the OECD Better Life Index set. Normalised indicators are averaged with equal weights. Indicators are normalised to range between 10 (best) and 0 (worst) according to the following formula: (indicator value - minimum value)/(maximum value - minimum value) x 10.
Source: OECD (2017), OECD Better Life Index, www.oecdbetterlifeindex.org.
Extending the current recovery into durable improvements in social welfare will require maintaining the reform momentum. Since the start of the economic adjustment programmes, structural reforms have focussed mostly on the labour market and controlling pension spending. In the latest two years, reforms have accelerated, especially in product markets – supporting Greece’s competitiveness – and social protection, but progress has been uneven across sectors (Table 1). Reforms of education, job search and training policies, public administration, and fighting corruption and informality have ample room to progress. Improving the allocation of public spending and the fiscal policy mix can better support inclusive growth. The integration of refugees in the education system and the labour market has further to go so as to raise wellbeing and reduce social tensions.
Table 1. Selected elements of the reform programme
Source: European Commission (2017) Compliance Report of the Third Economic Adjustment Programme for Greece: Second Review – June 2017, Government of Greece (2016, 2017) National Programme of Reforms, IEA (2017), Energy Policies of IEA Countries: Greece 2017 Review, European Commission (2016), European Social Policy Network Flash Report, 2016/63.
In the coming years, the success of reforms will hinge on creating an enabling environment based on transparent regulation, an efficient public sector, competitive markets and effective social protection. Against this background the main messages of this Survey are:
Cutting tax evasion, enlarging the tax base, rationalising public spending and enhancing public administration efficiency are pro-growth and inclusive ways to sustain the primary surplus targets of 3.5% of GDP over the medium term and above but close to 2% over the long term. Pro-growth reforms and appropriate debt restructuring are needed to support the country’s economic outlook, improve debt sustainability and reduce vulnerabilities to shocks;
Enhancing the quality of regulation, continuing to fight corruption and boosting competition would help revive domestic and foreign direct investment, and productivity, thus leading to higher living standards;
Actively helping and retraining the unemployed and discouraged workers to find jobs and reducing poverty, especially among children and young families, while boosting work incentives, would sustain social progress.
The economy is finally growing again
In 2017 GDP expanded by 1.3%, according to initial estimates, the fastest pace since the onset of the crisis. The completion of the second review of the ESM Stability Support Programme in June 2017 and the progress made towards completing the third review, which was concluded in March 2018, buoyed confidence, supporting activity (Figure 6 – Panel A). Unemployment is declining (Figure 6 – Panel B), although many new positions are temporary or part-time and pay the minimum wage. Greece’s improved competitiveness in combination with rising external demand is boosting exports, though productivity growth remains weak (Figure 7). Private consumption has stabilised (Figure 8 – Panel A) and sizeable spare capacity continues mitigating consumer price and wage inflation (Figure 8 – Panel B).
Figure 6. Confidence is gradually increasing and the unemployment rate is declining
Source: European Commission (2018), Business and consumer survey database, and OECD (2018), OECD Economic Outlook: Statistics and Projections (database).
Figure 7. External competitiveness has improved but productivity continues to decline
1. Ratio of own unit labour costs against those of trading partners. An increase corresponds to lower competitiveness.
2. Real GDP per worker.
Source: OECD (2018), OECD Economic Outlook: Statistics and Projections (database).
Figure 8. Private consumption has stopped falling, investment is volatile, price and wage pressure remains moderate
1. Harmonised consumer price index (HICP).
2. Compensation of employees excluding employers’ total social contributions. Deflated by private final consumption expenditure.
Source: OECD (2018), OECD Economic Outlook: Statistics and Projections (database).
Overall the economy is becoming more open. Exports rose from 24% of GDP in 2008 to 34% in 2017, though this is still below the EU average of 46%. Moreover, the economy is gradually shifting towards tradable sectors. The share in total gross value added of tradable sectors rose from 40% in 2013 to 43% in 2017, slightly above the EU average. Goods account for an increasing share of total exports, having risen from 40% in 2008 to 50% in 2016. Within service exports, the share shipping dropped from 52% to 23% over 2008-16 while that of tourism increased from 34% to 53%.
Greece’s budget primary balance swung from a deficit of 2.4% of GDP in 2015, including bank recapitalisation, to a surplus of 3.5% of GDP in 2016 (Figure 9). In the same year, the general government budget balance was in surplus for the first time in 44 years. This fiscal consolidation effort has been unprecedented, totalling 13 percentage points of GDP between 2009 and 2016. Over the same period nominal GDP fell by more than a quarter and the IMF and EU programmes helped to close the external financing gap. In 2017, Greece’s primary surplus is expected to have been above 3.5% of GDP, outperforming its target of 1.75% of GDP. The fiscal over-achievement of 2015-17 may have boosted confidence, mitigating the contractionary effects of fiscal consolidation. As a result of its fiscal performance and expected further improvements, in 2017 Greece exited the EU Excessive Deficit Procedure. In its 2018 budget, the government projects to achieve a primary budget surplus of about 3.7% of GDP (against the ESM Stability Support Programme’s target of 3.5%) based on further improvements in tax compliance and spending controls. The government plans to maintain primary surpluses of 3.5% up to 2022 and equal to or just above 2% of GDP afterwards.
Figure 9. The primary balance has improved
Government primary balance, revenues and expenditure
Source: OECD (2018), OECD Economic Outlook: Statistics and Projections (database).
The government’s efforts to regain fiscal credibility are bearing fruit. Major credit rating agencies have upgraded Greece’s sovereign rating, which remains below investment grade but with a positive outlook. In July 2017, Greece returned to the debt market after 3 years. In November 2017, the government successfully completed a swap of the private-sector-involvement (PSI) bonds issued in 2012 with five new issues with maturities from 5 to 25 years. Government bond yields have been on a declining path for the past two years, narrowing the gap with European peers, though the ECB has not yet included Greece in its asset purchase programme. In January 2018, the 10-year government bond yield fell below 4% (reaching a 12-year low) and the 2-year yield hit a historic low of 1.3%, before rising in February in line with increased volatility in international capital markets. The 10-year Greek government bond yield is currently above Ireland (3.5%) and Portugal (3.7%) when they exited their EU programmes (in late 2013 and mid 2014 respectively). Maintaining the regained fiscal credibility is key to being able to access the debt market regularly and at lower interest rates when the ESM Stability Support Programme ends.
Bank lending interest rates have declined to pre-crisis levels after having peaked in 2011. However lending interest rates remain well above those in other EU countries and the differential is higher than in the pre-crisis period (Figure 10). Bank credit to non-financial corporations shows signs of stabilisation albeit at low levels as credit standards have yet to start easing, curtailing investment growth.
Figure 10. Bank lending rates in Greece have declined but remain higher than in other Eurozone countries
Bank interest rates on loans in EUR – new business, maturity up to 1 year
Source: ECB (2018), “MFI interest rate statistics”, Statistical Data Warehouse, European Central Bank.
Banks’ access to funding is improving. The central bank funding is diminishing steadily and is now below the levels of end-2014 (Figure 11). Greek banks’ interbank market access has also increased. Bank deposits have levelled off, though the bulk of bank deposits lost during the crisis (50% since 2009) have yet to return. The capital controls imposed in mid-2015 halted the deposit outflows and are being gradually relaxed, but they still contribute to tight financial constraints. The government has issued a roadmap to lift them as conditions improve while preserving financial stability.
Figure 11. Bank deposits have levelled off and reliance on the central bank’s funding is decreasing
Note: Deposits include deposits and repos of non-monetary and financial institutions (non-MFIs). Central bank funding includes ELA provided by the Bank of Greece and financing provided by the ECB.
Source: Bank of Greece.
GDP is projected to accelerate
GDP growth is projected to strengthen through 2018 and 2019, and remain above 2% in both years. Business investment will rebound, after 10 years of contraction, as the new investment law starts to yield results, and financing conditions as well as confidence improve, quickening domestic demand growth. The effect of product and labour market reforms will support competitiveness. Expanding employment and low inflation will buttress private consumption. The recovery in domestic spending will progressively raise imports, subtracting from aggregate growth, even as exports continue to expand (Table 2).
Table 2. Macroeconomic indicators and projections
Annual percentage change, volume (2010 prices)
1. Contribution to changes in real GDP
2. As a percentage of potential GDP.
3. As a percentage of household disposable income.
4. As a percentage of GDP.
5. The primary balance definition is different from that used in the ESM Support Stability Programme. The difference amounts to approximately 0.2 percentage points of GDP.
Source: OECD (2018), OECD Economic Outlook: Statistics and Projections (database).
High levels of public debt and non-performing loans (NPLs) make Greece’s economic outlook highly sensitive to any slippage in policy. Slower progress in addressing NPLs than expected would lower confidence and investment. An exogenous shock to public debt service costs after the ESM Stability Support Programme concludes in August 2018 could compress public finances and confidence, dragging growth. Slower trading partner growth or a disorderly Brexit could lower confidence and lead to lower exports. Additional public debt restructuring would reduce vulnerabilities and accelerate gains in access to finance and in activity. Stronger progress on the reform programme would raise productivity, investment and exports faster than projected. A faster recovery in main trading partners would further boost exports. The exposure of the Greek economy to large, low probability shocks is illustrated in Table 3.
Table 3. Low probability events that could lead to major changes in the outlook
Strengthening the banking sector
Continued improvement in the banking sector and re-starting bank lending to firms are paramount to revive investment growth and strengthening the ongoing economic recovery. The Greek banking sector has already undergone deep reforms centred on rationalisation of banks’ operations, consolidation, recapitalisation, and more recently improving banks’ governance. As detailed in Chapter 1, the restructuring of the banking sector has already yielded results. Following past recapitalisation rounds, banks’ capital ratios are now well above regulatory thresholds and the EU average (Figure 12 – Panel A). Confidence in the banking sector is starting to recover. From 2016, credit agencies have upgraded the rating of Greek banks (e.g. Moody’s, 2016), on the back of improving profitability and loan quality.
Figure 12. Capital ratios exceed thresholds but return on assets remains negative
1. % of the total risk exposure.
2. The ratio is calculated by dividing annual profit or loss by total assets.
Source: European Banking Authority (2018),“Risk Dashboard, Data as of Q3 2017”.
Past OECD recommendations on financial stability policies
Bank lending to non-financial corporations has stabilised but remains low and the banking sector still faces challenges. Banks return on assets is improving but still low compared to other OECD countries (Figure 12 – Panel B). Banks’ assets are declining, also because of disinvestment of foreign subsidiaries. Moreover, banks are well capitalised but the stock of NPLs remains high and about half of capital consists of deferred tax credits (or 7% of total assets) (Moody’s, 2017).
Banks’ governance framework has improved
Improving banks’ governance is essential to reap the full benefits of the banking-sector reforms already undertaken. In the past, banks had poor corporate governance. Eligibility criteria for banks’ boards were weak, resulting in poor management. Credit risks were not properly assessed due to insufficient risk controls, lack of data and uneven use of credit-scoring methodologies (IMF, 2006). These problems have skewed lending decisions and contributed over the crisis to the rise in NPLs and their ineffective management.
The Single Supervisory Mechanism and the Bank of Greece supervise banks’ corporate governance. The Hellenic Financial Stability Fund (HFSF) as a shareholder of banks plays an important role in implementing corporate governance reforms. Such reforms have progressed since the banks were consolidated and recapitalised in 2015. In 2016, the four systemic banks replaced many members of their boards to conform to the new strict “fit and proper” criteria. In 2017, the HFSF led an in-depth review of the governance and performance of the four systemic banks’ boards of directors and their committees, aiming at establishing a culture of evaluation at the board level and at focusing attention on managing NPLs.
Entrenching corporate governance reforms is a precondition for HFSF to divest its equity holdings in the banks by 2020. The HFSF should keep aligning banks’ corporate governance standards with international best practices and help ensure that respecting such standards becomes common practice. The government should ensure HFSF’s continued independence and authority to fully implement the new compulsory corporate governance standards.
Reducing non-performing loans
In September 2017, the gross value of NPLs stood at EUR 106 billion, which is about 47% of total loans (Figure 13 – Panels A and B). The size of non-performing exposures (NPEs) – which in addition to loans and advances consider debt securities other than those held for trading – is similar to that of NPLs. In September 2017 the NPE ratio was 42% in Greece, against 14% in Portugal and 10% in Italy and Ireland (EBA, 2017). In Greece, provisions amount to 48% of NPLs’ gross value, higher than the EU average, and the net value of NPLs (gross value minus provisions) amounts to about 175% of banks’ capital (Figure 13 – Panel C). A large share of NPEs consists of loans towards SMEs and residential mortgages (Table 4).
Figure 13. The stock of non-performing loans is large
2017Q3
Source: European Banking Authority (2018),“Risk Dashboard, Data as of Q3 2017” and IMF (2018), IMF Financial Soundness Indicators Database.
Table 4. Share of non-performing exposures for different types of loans
June 2017
1. Includes loans, advances and debt securities. NPEs are non-performing exposures according to the European Banking Authority definition and computed by the Bank of Greece. NPEs include either of the two criteria: a) material exposures which are more than 90 days past due; b) unlikely to pay in full without realisation of collateral, regardless of the existence of any past due amount or of the number of days past due.
Source: OECD computations and Bank of Greece (2017), Report on Operational Targets for Non-Performing Exposures, December.
The prolonged crisis has led to the rise in NPLs in combination with structural and bank governance problems. Private debt relative to GDP and the share of loans to non-financial corporations is low compared to other OECD countries (Figure 14) but the long crisis has eroded the capacity of households and businesses to service their debts. However, before the crisis the NPL ratio in Greece was 4.5% (in 2007), against 3% for the euro area average (HBA, 2017).
Figure 14. Private sector debt and loans to non-financial corporations are lower than in other OECD countries
1. Unweighted average of available countries. Includes Euro area countries which are OECD members.
Source: OECD (2018), OECD Economic Outlook: Statistics and Projections (database), OECD National Accounts Statistics (database).
Tightening regulatory policies
Banks’ supervisors have taken several steps to improve the regulatory framework of NPLs. Following an assessment of the quality of the loan portfolio, Bank of Greece has issued new and detailed supervisory guidance on NPLs, including a new reporting framework which goes well beyond the European Banking Authority’s guidelines (ECB, 2016; BoG, 2016). The introduction in 2016 of quantitative targets to dispose of NPEs and NPLs was an important step forward. Setting and enforcing targets is the approach followed by Japan, in the late 1990s and early 2000s, and Ireland and Cyprus, after the crisis. According to Greek banks’ current targets, the stock of NPEs should drop by 37% between June 2017 and December 2019 (BoG, 2017).
So far banks have been able to meet NPL disposal targets, but banks expect NPL inflows to remain high. The targets become more ambitious from 2018. Supervisors should provide robust and proactive supervision to ensure prudent NPL recognition and provisioning as well as strong capital buffers. Non-compliance with NPL targets should trigger additional supervisory measures, speeding up bank restructuring. Moreover, efforts should be pursued to enhance the capacity of banks to manage NPLs internally, which is still low. As requested by supervisors all major banks need to have independent internal units specialising in the management and recovery of NPLs. Supervisors should ensure they are well staffed and resourced.
Supervisors (the Bank of Greece and the Single Supervisory Mechanism) should ensure that as the disposal of NPLs gathers pace banks remain well capitalised. The banks’ stress tests to be conducted in 2018 should be able to identify potential capital shortfalls before the end of the ESM Stability Support Programme. In the event capital shortfalls are identified that cannot be covered by the private sector, ESM Programme’s funds should be used to ensure banks remain well capitalised.
Developing a market for distressed debt
The lack of a distressed debt market and weak demand for distressed debt explain why to date there have been few non-performing loan sales. The first two NPL sales by Greek banks took place in the second half of 2017; additional NPL sales are expected to be completed in 2018. Regulation and lack of competition has severely hindered the development of a loan servicing (i.e. loan administration) industry in Greece. New law and regulations were approved in 2015-16, lowering barriers to entry and allowing non-bank entities to be licensed as loan servicers, in-line with international best practices (IMF, 2015). Licensed servicers will be able to manage, transfer (i.e. purchase) and refinance large corporate loans. The BoG has licenced 10 loan servicers at the end of 2017. The licensed loan services will help develop distressed debt markets. Allowing loan services to manage or purchase SME loans is expected to accelerate resolution of distressed debt given the large number of distressed SME borrowers. Japan provides a good example of developing a distressed debt market in a relationship banking environment with many SMEs as detailed in Chapter 1.
Tax incentives for banks to dispose of NPLs need to be streamlined. The new loan servicing legislation introduced some tax-related provisions, but these are less advantageous and partly inconsistent with those provided by the 2003 securitisation law. Aligning the tax incentives provided by the loan servicing legislation with those of the securitisation law would enhance tax transparency and encourage the disposal of NPLs. Tax incentives can be an important tool to encourage the disposal of NPLs (KPMG, 2016). Making such incentives temporary, for instance with sunset clauses, will accelerate their effects and ensure such incentives expire when no longer needed.
Higher growth, prudent fiscal policy and debt restructuring will reduce the public debt
Greece’s government debt level as a share of GDP has stabilised. Yet, despite restructuring efforts early in the crisis, the public debt at 180% of GDP is still among the highest in the world. Under different assumptions (Table 5) debt will remain high, calling for additional debt restructuring (Figure 15). The results of such simulations depend on GDP growth, interest rate and other assumptions. The baseline scenario takes into account the effect of selected reforms undertaken by the Greek government and short-term debt relief measures being implemented by the ESM announced in December 2016 (Table 6). The primary surplus is assumed to reach 3.5% from 2018 to 2022, then to stay at 2.2% of GDP from 2025 onwards. Under this scenario the debt ratio will gradually decline to about 120% of GDP by the mid-2030s. Afterwards, it will start increasing as concessional official loans – given under favourable financing conditions to ensure low refinancing needs for the next decade – are refinanced on market terms. Market interest rates are assumed to gradually return to historical norms and remain 1.1 percentage points above the concessional interest rate.
Table 5. Assumptions of different scenarios for debt sustainability analysis
Note: All scenarios take into account the effect of the short-term debt relief measures announced in December 2016. These include: 1) Smoothening of the EFSF repayments within the current weighted average maturity; 2) Waiving the step-up interest rate margin on the EFSF debt-buyback tranche for 2017; 3) Using the EFSF/ESM funding strategy to fix interest rates on EFSF loans at the currently low market interest rate. As regards using the EFSF/ESM funding strategy to fix interest rates, simulations assume that EUR 50 billion of EFSF loans are fixed at 1.5% for 35 years (EUR 20 billion in 2017 and rising progressively to EUR 50 billion by 2022). The effective official interest rate includes the effects of deferred interest payments on EUR 95 billion of EFSF loan until 2022 and the short-term relief measures.
Source: OECD calculations.
Table 6. Impact of structural reforms on GDP level
Note: The decline of the Product Market Regulation index in the baseline scenario is based on a preliminary assessment of the effect of reforms passed since 2013. The additional decline in the PMR in the expanded reform programme is predicated on further improvements in the following areas: scope of state owned enterprises (gas transmission); licences and permits system (silence-is-consent rule and single contact points); barriers in network sectors (entry regulation in the gas sector); differential treatment of foreign suppliers.
Source: OECD calculations based on Guillemette, Y. et al. (2017), “A revised approach to productivity convergence in long-term scenarios”, OECD Economics Department Working Papers, No. 1385, OECD Publishing, Paris.; Cavalleri, M., and Y. Guillemette (2017), “A revised approach to trend employment projections in long-term scenarios”, OECD Economics Department Working Papers, No. 1384, OECD Publishing, Paris.; Guillemette, Y., A. de Mauro and D. Turner (forthcoming), “Saving, Investment, Capital Stock and Current Account Projections in Long-Term Scenarios”, OECD Economics Department Working Papers; European Commission (forthcoming), “2018 Ageing Report: Economic and Budgetary Projections for the EU Member States (2016-2070)”, Directorate General for Economic and Financial Affairs, Economic Policy Committee.
Figure 15. Locking-in lower interest rates and additional reforms will help reduce the public debt
General government debt as % of GDP, Maastricht definition
Note: The historical data and projections to 2019 follow the Economic Outlook No. 102 and updates (for the forecast). In all scenarios, the primary budget surplus is projected to be 3.5% of GDP until 2022, then decrease to 2.2% of GDP by 2025 and remain at that level. The GDP deflator growth is expected to gradually rise to 2% by 2023. The effective market interest rate is projected to gradually rise to 5.3% by 2029. The effective interest rate of official creditors’ loans (EFSF, ESM and GLF) is projected to rise to 4.2% by 2029. The baseline assumes the near-complete implementation of the current reform programme (Table 6); this raises annual real GDP growth to average 1.7% from 2020 to 2029, slowing to 1.3% over 2030 to 2039, then to 1% over the subsequent period, largely due to demographic factors. The “Expanded reform programme” assumes implementation of the current and additional reforms (Table 6). This raises average growth rates to 2.2% by 2027, before gradually slowing after 2031 to 1.4% by 2043. In the 1st debt restructuring scenario the effective interest rates of official creditors’ loans is fixed at 2% from 2020 onwards. In the 2nd debt restructuring scenario the effective interest rates of official creditors’ loans is fixed at 2% from 2020 onwards and the EFSF repayments are postponed until 2031. The projections consider the short-term relief measures described in the May 2016 and June 2017 Eurogroup statements. These include: smoothening the EFSF repayment profile under the current maximum weighted average maturity; waiving the step-upinterest rate margin on the EFSF debt-buyback tranche for 2017; diversifying the ESM funding strategy to reduce interest rate risk (the ESM has started implementing this measure through interest rate swaps; these projections assume that this measure will set the interest rate of EUR 50 billion in EFSF loans to 1.6% for 34 years). All scenarios include privatisation receipts of EUR 10 billion in total from 2020 to 2040.
Source: Calculations based on OECD (2018), OECD Economic Outlook: Statistics and Projections (database).
Under the expanded reforms scenario (Table 6) the debt ratio will decline to about 100% of GDP by mid-2050 and level off afterwards. The baseline and expanded reform scenarios above assume a primary surplus of 2.2% of GDP from 2025 onwards. Raising the primary surplus would accelerate the debt reduction, but historical comparisons suggest that this scenario is unrealistic since the likelihood of sustaining high primary surplus over the long term decreases rapidly as the primary surplus increases (Eichengreen and Panizza, 2014; Zettelmeyer et al., 2017). For instance, over a 20 year period, the probability of maintaining an average primary surplus above 1.5% of GDP is 25%, and the probability is close to zero for an average primary surplus above 3.5% of GDP (Zettelmeyer et al., 2017).
Additional debt restructuring in net present value terms would lower the debt ratio under realistic assumptions concerning GDP growth rate and primary surplus. As underlined in the previous OECD survey (OECD, 2016a), converting the outstanding debt with European partners and institutions (Greek Loan Facility, EFSF and ESM) to fixed-interest debt would lock in currently low interest rates for an extended period (Figure 15).
Under the expanded reform programme scenario, locking in low interest rates on concessional loans would lead to a faster and continued decline in the debt ratio throughout the projection period, which would fall below 80% by 2060. This policy would have the additional benefit of lowering the uncertainty relating to concessional loans’ interest rate movements, which might result in a lower Greek bond spread on benchmark rates than projected and further accelerate the debt reduction. Reducing the interest rate risk is already being partially undertaken as part of the short-term relief measures announced in December 2016, which these projections take into account. Rescheduling principal payments of European partners and institutions loans until 2031 will contribute to lower the debt ratio but only marginally (Figure 15).
Overall, this analysis suggests that durably reducing the public debt hinges on a three-pronged strategy: additional reforms to boost GDP growth, large but realistic primary surpluses (close to 2% of GDP) for an extended period, and additional debt restructuring, as needed, by for instance locking in currently low interest rates. To this end and to enhance trust, the government is designing a long-term National Growth Strategy with key commitments for the post-programme period in different areas, including strategic and private sector investments, use of European structural funds, infrastructure and entrepreneurship. Wide and strong political ownership of this strategy is key for its credibility and to maintain confidence in Greece’s reform momentum. The strategy will be finalised before the end of the programme.
Redressing public finance to bolster inclusive growth
Enlarging the tax base to build a fairer and pro-growth taxation system
The tax system relies on high rates and narrow bases. Following repeated increases, the rate of all major taxes are now higher than in other European countries but tax collection is lower relative to GDP (Figure 16). Also, the average tax wedge on labour for families with children is one of the highest among OECD countries. The tax wedge for households without children is lower but still ranks in the top half of OECD countries (OECD, 2017a).
Figure 16. Tax rates are high whereas tax revenues are low
1. Average of the marginal tax rates of the different income brackets for personal income tax rate; the combined corporate income tax rate for corporate income tax rate; and the standard rate for VAT rate.
2. Unweighted average of 22 EU countries which are OECD members. The aggregates for both direct taxes on households and on business include data in 2015 for Estonia, Hungary, Latvia and Slovak Republic as well as data in 2012 for Luxembourg.
3. National Accounts definition of tax revenues.
Source: OECD (2017), OECD Economic Outlook: Statistics and Projections (database), OECD Tax Statistics (database) and OECD (2016), Consumption Tax Trends 2016: VAT/GST and excise rates, trends and policy issues.
Most tax expenditures have been eliminated, but tax evasion results in a narrow tax base. For instance, in 2015 the VAT revenue ratio was one-third below the OECD average (Figure 17) because of low collections but also reduced VAT rates and exemptions. Some exemptions are without any social rationale as for instance exemptions for casinos and betting offices. Also, post office services and national broadcasting networks are VAT exempted whereas hotels enjoy a reduced VAT rate of 13% (from 6.5% in 2016). According to the Ministry of Finance, VAT exemptions account for 0.5% of GDP (those for casinos and betting offices amount to 0.2% of GDP). The tax-free personal income threshold is high (at about EUR 8 600 annual income) and is above the median private sector wage.
Figure 17. Value-added tax collection is low
Value-added tax revenue ratio 20151
1. The VAT revenue ratio (VRR) is the ratio of the actual value-added tax (VAT) revenue collected and the revenue that would theoretically be raised if VAT was applied at the standard rate to all final consumption. This ratio gives an indication of the efficiency and the broadness of the tax base of the VAT regime in a country compared to a standard norm. It is calculated by the following formula: VRR = VAT revenue/([consumption – VAT revenue] × standard VAT rate). VAT rates used are standard rates applicable as at 1 January. That public consumption is VAT-exempt under EU rules places an upper bound on the attainable VRR, especially in countries with a large public sector. Data for Canada and Japan refer to 2014. For Canada, data cover federal VAT only. For Japan, given the substantial VAT rate hike on 1 April 2014, an average VAT rate was used to calculate the VRR for 2014 i.e. (5X3+8X9)/12=7.25%. The OECD aggregate is an unweighted average of the data shown.
Source: OECD (2016), Consumption Tax Trends 2016: VAT/GST and Excise Rates, Trends and Policy Issues, OECD (2018), OECD Revenue Statistics (database) and OECD National Accounts Statistics (database).
Base broadening is more growth friendly than increases in tax rates (IMF, 2013; Gale and Samwick, 2016). The government is aware of this and is taking initiatives in this direction. In 2016 Greece moved from a dual to a comprehensive personal income tax by taxing labour remuneration, pensions and personal business income jointly instead of taxing these income categories under separate rate schedules (OECD, 2017a). The legislated medium-term fiscal strategy indicates that the tax-free personal income threshold will fall by 35% in 2020, and, if fiscal targets are met, the corporate, personal and property tax rates will also fall in a revenue-neutral way. VAT collection has increased as some reduced rates have been raised, some exemptions closed and collection approaches have improved. In 2016, the preliminary estimated VAT revenue ratio (net of arrears) was 42.3% against 35.9% in 2014. The 2018 budget abolished VAT exemptions for casinos and betting offices and is phasing out the discounted rates applied in some islands.
Past OECD recommendation on fiscal issues
The complex tax system discourages compliance, encourages informality and reduces revenues
The complexity of the tax system and the weak though improving tax administration discourage participation in the formal economy and lowers tax compliance. The World Bank’s “Paying Taxes” indicator ranks Greece 28th among OECD countries for the number and time spent completing tax payments and 27th for tax post-filing procedures covering VAT refunds, tax audits and administrative tax appeals. Low tax compliance and the crisis have led to the accumulation of a large tax debt. In 2015, the total accumulated tax debt was more than 190% of net revenue collections, one of the largest among OECD countries. Over 75% of tax debt was older than 12 months, which is more difficult to collect (OECD, 2017a).
In Greece, tax compliance methods have traditionally relied on punitive fines as well as audits and controls. Until recently, fines were set with no reference to the capacity to pay and often proved impossible to collect. Old fines significantly contribute to the large share of tax debt older than 12 months as in the past they were rarely written off even when impossible to collect. In 2017, they still accounted for more than 35% of total tax debt (down from 40% in previous years). As regards audits, in economies with a large share of cash transactions, such as Greece, they are less effective tools to uncover hidden income (Slemrod, 2007). In such environments access to third-party information is crucial to fight tax evasion. The widespread use of cash has abetted a large informal sector in Greece that, according to some estimates, could account for more than 25% of GDP (Bitzenis et al., 2016). Using bank lending data, Artavanis et al., (2016) estimated that more than 40% of self-employment income goes unreported and for 2009 alone the foregone tax revenues amounted to more than 10% of total revenue. The informal economy might have increased substantially during the crisis. Had the informal economy not expanded so much, the required increases in tax rates would have been smaller (Dellas et al., 2017).
Recent reforms have stepped up efforts against tax evasion and improved collection approaches based on better enforcement procedures and encouraging voluntary tax compliance. Better enforcement procedures require extending the use of risk analysis and targeted audits, and access to third-party information. Enhancing tax compliance depends on raising trust in the tax administration and tax awareness (Muehlbacher et al., 2011). The establishment of the independent revenue agency (Independent Authority for Public Revenues), as recommended in the previous OECD Survey, in early 2017 is a big step in this direction. In addition to extending the use of risk analysis and targeted tax audits the new agency has introduced a systematic approach to deal with the tax debt by systematically pursuing the largest possible number of debtors, prioritising new tax debts, large taxpayers, and enforcement against strategic defaulters. At end 2017 60% of tax debtors who could be pursued, about 1 million debtors, were under some enforcement measure.
These efforts are yielding results and should be pursued. The gross new tax debt declined markedly to EUR 11.5 billion in 2017 (from EUR 14 billion in 2016 and nearly EUR 16 billion in 2015). The growth of the total tax debt declined to 6% in 2017 and 9% in 2016 from double digit growth rates in the previous two years. The old tax debt is being managed in a more systematic way, focussing on collectable tax arrears and progressively writing off those arrears deemed uncollectable (to a large extent old punitive fines). Punitive fines have been abolished and are now based on the capacity to pay. A voluntary scheme introduced in 2016 has led to the disclosure of hitherto unreported income of EUR 9.5 billion.
Raising the share of non-cash payments, which is low by international standards, is essential to combat tax evasion. Capital controls have increased the share of non-cash payments, reversing the downward trend that started in 2011 (Figure 18), thus boosting VAT revenue significantly (Hondroyiannis and Papaoikonomou, 2017). The cash-payment threshold for retail transactions is already low (EUR 500) but electronic payments need to become the norm given the government’s plan to lift capital controls as the economy improves. The government has taken innovative steps to encourage electronic payments: firms have to pay salaries electronically for the cost to be deductible from the corporate tax base; households have to demonstrate minimum levels of purchases done electronically to be eligible for family tax credits. This approach emulates Korea’s cash receipt system, which reduced hidden payments (Krever, 2014). At a macroeconomic level, it also has the advantage of shifting taxation from personal income to consumption. Besides, the government has introduced a monthly lottery based on the number of electronic transactions. A similar scheme introduced in Chinese Taipei has raised VAT revenue by up to 20%. Other recent experiences in Portugal and Slovakia however indicate modest effect on revenues (European Commission, 2015).
Figure 18. There is large scope to increase non-cash payments
Non-cash payments as % of GDP
Note: Electronic payments include credit transfers, direct debits, and card payments with cards issued by resident payment service e‐providers, e-money payment transactions, cheques and other payment services.
Source: European Central Bank Payment Statistics.
These innovative approaches to combat tax evasion are welcome and represent a change with the past. However, they should better target those industries most prone to tax evasion, such as professional services (Artavanis et al., 2017). From mid-2017, commercial and most professional activities are obliged to have a point-of-sale terminal. The use of point-of-sale terminals can be further extended by ensuring all the self-employed have an electronic cash register. The introduction of e-invoicing will also help stanch tax evasion. Italy introduced e-invoicing for sales to the public administration in 2014 and will phase it in for business-to-business transactions from mid-2018. The experience of Korea and Portugal with the introduction of e-invoicing suggests it can significantly increase tax revenues if accompanied by improvements in tax administration (Lee, 2016). Other OECD countries have also taken decisive actions to tackle tax evasion (Table 7).
Table 7. Selected examples of recent actions taken to reduce cash payments and tax evasion
Source: OECD (2017), Technology Tools to Tackle Tax Evasion, OECD Publishing, Paris.
Better managing the state’s assets and completing the land registry
The management of the state’s non-financial assets has for a long time been poor, hindering the privatisation programme. This is attributable to the lack of comprehensive information on the state’s assets and of an overall management strategy linked with socio-economic goals as well as deficient corporate governance standards in many state-owned enterprises (SOEs). Because of budgetary constraints, the management of the state’s assets has mostly focussed on identifying assets to be privatised, with the sale price being the sole criterion to assess offers. Three large privatisation deals have been signed (regional airports, Port of Piraeus, the railway), totalling EUR 1.5 billion (0.8% of GDP). Other disposals have been stymied by administrative and regulatory burdens, combined with the incomplete land registry, thus curtailing privatisation receipts.
To improve the management of the state’s assets, the government has recently established a state-asset holding agency (Hellenic Corporation of Assets and Participations, HCAP). HCAP’s overall main objectives are implementing Greece’s investment and economic growth strategy and contributing to the reduction of public debt. HCAP has developed a state-asset management strategy linked with socio-economic goals, which is yet to be published. The strategy is based on comprehensive information on the state’s assets, which is a crucial element to effectively manage them (Bova et al., 2013). The asset-sale agency (Hellenic Republic Asset Development Fund) has been incorporated into HCAP. This is a positive development as it offers the opportunity to develop and update the state-asset management strategy taking into account the privatisation and the public investment programmes. This will enable the government to assess privatisation offers against wider development objectives and build complementarities among state assets, increasing their social and economic value. For instance, public investment decisions strengthening intermodal transport nodes would raise the efficiency and value of transport infrastructure.
The government should continue to ensure the HCAP’s corporate governance is aligned with international best practices. Setting a clear division of roles and responsibilities among various governing bodies, as well as operational independence for managers and supervisors with appropriate checks and balances is key to building legitimacy, reducing the risk of fraud and mismanagement, and forming a competent investment organisation (Al-Hassan et al., 2013). HCAP could be crucial to improving corporate governance standards in state-owned enterprises.
The absence of a comprehensive land registry may contribute to incomplete or inconsistent zoning, hampering the effective management of state (and non-state) assets and hindering the privatisation programme. For instance, the privatisation and redevelopment of Athens’s former airport (Hellenikon) was delayed because of uncertain land-use designation. The incomplete land registry often delays land acquisition procedures, hindering infrastructure projects. Completing the land registry should become a national priority. A complete registry is necessary to clearly identify all of the state’s non-financial assets and to develop a strategy to maximise their social and economic value (Bova et al., 2013). Completing the land registry, as mandated by the 2018 law, would allow for more effective land use management and environmental protection policies (OECD, 2010). Combined with real estate market transaction data, it would allow property ownership tax to be based on recent market values. The land registry is envisaged to be completed by the end of 2020.
Improving spending effectiveness through spending reviews and public administration reform
Reforming the public administration is a high priority to improve the effectiveness and quality of public spending as well as revenue collection. The ongoing public administration reform aims at depoliticising the public administration by replacing political appointees in top ministerial positions with career civil servants, facilitating work mobility within the public administration, and introducing new systems for selecting top managers and evaluating performance. The fight against corruption and bribery, as detailed below, is an integral part of the ongoing public administration reform.
Effective and evidence-based policies require timely and high quality statistics. The government is committed to strengthening the statistical agency (ELSTAT), and safeguarding its independence. Recent efforts in this direction include giving ELSTAT’s president more autonomy and an indemnity to cover costs incurred following legal challenges, strengthening ELSTAT’s financial autonomy and its freedom to reallocate personnel as well as hire specialised staff (EC, 2017b).
Cross-country experience suggests that spending reviews can improve prioritisation and identify the fiscal space for new spending priorities. The comprehensive spending review completed in 2017 has identified savings to fund the expansion of family allowances, school meals and early childhood education and care. In-depth spending reviews are planned for 2018 in the ministries of health, culture, and transport and infrastructure. Such reviews should be conducted regularly. The establishment of a new directorate in the Ministry of Finance responsible for conducting spending reviews on a regular basis goes in this direction. OECD country experience (OECD, 2017b) indicates that the success of spending reviews hinges on closely tracking their implementation. Also, integrating spending reviews in the budget process would help avoid across-the-board cuts in discretionary spending disconnected from structural priorities, making fiscal policy more inclusive and growth friendly. Spending reviews could also be accompanied by greater use of performance budgeting procedures. Between 2011 and 2016 Greece improved its performance budget practices in the central government, but these still remain below the OECD average (Figure 19).
Figure 19. Performance budgeting procedures can be used more extensively
Index on use of performance budgeting practices from 0 to 1 (highest)1, central government
1. Composite index of 10 variables that cover information on the availability and type of performance information developed, processes for monitoring and reporting results, and whether (and how) performance information is used. The index does not measure the overall quality of performance budgeting systems. Due to differences between the 2011 and 2016 surveys, some weights have been adjusted for comparability.
2. The OECD aggregate excludes Iceland, Israel, Latvia, Spain and the Slovak Republic.
Source: OECD (2016), Survey of Performance Budgeting and OECD (2017), Government at a Glance 2017.
Raising public administration efficiency and using spending reviews are crucial instruments to successfully undertake many of the reforms discussed above. The projected fiscal impact of selected reforms not yet legislated and conducive to more inclusive growth is reported in Table 8.
Table 8. Fiscal impacts of selected reforms
Percent of annual GDP
Note: For revenues: the VAT revenue increase comes from gradually improving the VAT revenue ratio from 0.42 (preliminary estimate) in 2016 to 90% of the OECD mean of 0.56 by 2030; the reported revenue increase is the increase in annual revenues in the year indicated relative to a baseline of no improvement; the tax exemption cuts concern subcategories of tax expenditures for firms and capital (totally 0.46% of GDP in 2018), households (0.02% GDP), car registration (0.04%) and special consumption (0.16%). For expenditures: savings from consolidating social protection programmes come from World Bank (2016), “Greece Social Welfare Review – Weathering the crisis: Reducing the gaps in social protection in Greece” and reducing by 50% existing public job creation and employment subsidy programmes; net savings from public spending rationalisation are estimated to average 0.014% of GDP per review after accounting for additional spending identified in the reviews, and these net savings are assumed to accumulate; estimates for the phasing out of fossil fuel support measures come from ODI (2017), “Cutting Europe’s lifelines to coal – Tracking subsidies in 10 countries” and are assumed to decline over time relative to the baseline; strengthening housing benefits comes from World Bank (2017) “Greece Social Welfare Review – Reforming Social Welfare in Greece”; the increased SSI income disregard is based on EUROMOD modelling; the additional increase in the programme cost is based on gradually developing an earned income credit valued at 0.8% of GDP by 2030 or about two-thirds of the size of existing schemes in countries with strong earned income benefit programmes such as the UK; the increase in disability benefit spending reflectsconvergence to 90% of the average spending of OECD-EU members; strengthening the public employment office comprises employment service spending converging to the average of OECD-EU members; training programmes spending consists of spending converging to the average of OECD-EU members on training (0.08%), supported employment and rehabilitation (0.14%), and start-up incentives (0.02%); spending on education increases from 4.3% to 5% of GDP, as enrolment rates increase to OECD averages in the areas of education where Greece is below the OECD average and spending per student rises to 70% of the OECD average, reflecting Greece’s GDP per capita at 66% of the OECD average (adjusted for purchasing power parity).
Source: OECD calculations.
Boosting employment, reducing poverty and improving skills
Supporting employment growth through more effective social dialogue
Rebuilding employment is essential for the recovery in activity and for reducing poverty. Substantial changes to wage setting during 2010 to 2013 focused primarily on giving firms the flexibility to adjust wages and employment. Collective agreements were frozen, and the mechanism to extend agreements to non-signatory workplaces was suspended. The principle of giving precedence where work agreements overlapped to the terms most generous to the employee (favourability principle) was also suspended, allowing firms to negotiate lower wages. “Associations of persons” representing at least 60% of an affected workforce were given standing to enter agreements at the firm level in the absence of a union representative. The minimum wage was given statutory status and reduced, a youth subminimum wage was introduced and additional allowances were suspended or ended. Collective dismissal procedures were made more transparent and systematic.
Following these changes, employment started to recover, salaries adjusted (Figure 20) and firms no longer report wages limit competitiveness. The labour market changes have led to wage cuts that were deep but rapidly restored Greece’s competitiveness. However, a growing share of jobs have been temporary or part-time and are paid at the minimum wage; as a result almost half of workers’ salaries are below the poverty line for a family of four (Figure 21) (OECD, 2017c). Enhancing workers’ skills and ensuring they match workplace needs as well as strengthening firms’ incentive to invest and innovate are crucial to raising wages and reducing in-work poverty. The labour market changes have improved the allocation of labour across firms, as more productive firms were able to attract or retain more workers (OECD, 2017k). This has not yet translated into wage growth because of high unemployment and workers’ weak bargaining position.
Figure 20. Wages have moved more closely with employment and productivity since changes to the wage-setting framework
Employment, wages and salaries, and productivity in the non-agriculture business sector, index 2014 Q1 = 100
1. The reference industry is aggregated according to the NACE Rev. 2. Wages and salaries are seasonally and calendar day adjusted.
2. Annual real gross value added per person employed. The reference industry is the non-agriculture business sector excluding real estate based on the ISIC Rev. 4.
Source: OECD (2018), OECD National Accounts Statistics (database) and Eurostat (2018), Labour Market Statistics (database).
Figure 21. Many private-sector employees earn less than the poverty line
Number of private-sector employees earning gross monthly salaries within specified ranges, September 2017
1. The poverty line refers to 50% of the median disposable income in 2016. Household income is adjusted for household size.
2. Private sector workers receive two 1-month bonus salaries, paid at Christmas and Easter, which are not included in the salary data presented in this figure.
3. At EUR 3 000, salary segments increase from EUR 50 to EUR 1 000.
Source: OECD calculations based on the ERGANI database from the Greek Ministry of Labour, Social Insurance and Social Solidarity, and Eurostat (2017), EU Statistics on Income and Living Conditions (database).
The favourability and extension arrangements are suspended to the end of the ESM Stability Support Programme. Greece’s labour market framework was reviewed by an expert panel in 2016 (van Ours et al., 2016), and the government intends to review in 2018 the arbitration systems for collective negotiations and to launch a project to simplify the labour law (European Commission, 2018). These reviews offer a good opportunity to establish a new wage bargaining framework covering a wide range of topics, including broad working conditions and continuous vocational training, and promoting inclusiveness while maintaining the flexibility of the current system.
Sector-level collective agreements without automatic extensions can bring significant efficiency and equity benefits by fostering social dialogue and reducing the costs of negotiating wages and other working conditions, especially for small firms (OECD, 2017c). Smaller firms may particularly benefit if sectoral collective agreements can adapt to their characteristics, including being less organised into unions and employers’ associations, fewer resources for workplace negotiations and lower productivity (OECD. 2017c). This is especially important for Greece given that small firms employ most workers. In Portugal, where smaller firms similarly dominate employment, crisis-period reforms lowered the minimum size of firms able to derogate from sectoral collective agreements from 500 to 150 employees (OECD, 2017n).
Past OECD recommendations on labour markets
Extending sectoral collective agreements to non-signatory workplaces, on a case-by-case basis in clearly and objectively defined circumstances, can improve efficiency and equity. Following the examples of other OECD countries (OECD, 2017c), Greece could require that extensions only be granted when, for instance, the original agreement is signed by representatives of minimum shares of both workers and of firms. This will ensure smaller employers have a voice in negotiations and encourage workers and employers to organise. In its reforms, Portugal introduced representativeness thresholds for extensions that require that employers who sign a collective agreement employ at least 50% of the workers that would be affected by the extension or that at least 30% of the signatories be micro-, small- and medium-sized enterprises (OECD, 2017n). Some OECD countries that allow agreements to be extended to non-signatories also enable individual workplaces to determine some details of working conditions, for example by allowing lower wages or flexible hours in smaller firms. Requiring an independent body to approve extensions based on economic and social considerations may avoid the adverse consequences of extending agreements automatically.
Requiring social partners to include in sector-level collective agreements prescriptions of acceptable ranges for negotiations while respecting minimum standards, so-called “framework agreements”, can provide sufficient flexibility for the diversity of firms and workers. Social partners at the firm level can then negotiate, within the agreed ranges, mutually beneficial trade-offs across pay and other working conditions reflecting their specific needs. Firm-level bargaining processes need to be easily actionable for smaller firms to be able to adapt a framework agreement to their circumstances (OECD, 2017c). Greece can also better protect employment from future shocks by including clauses in sectoral collective agreements that allow firms to temporarily opt out in clearly defined circumstances. A number of OECD countries have adopted these clauses and German experience demonstrated their effectiveness during the crisis (OECD, 2017c).
Greece adopted a statutory minimum wage as part of the early 2010s labour market changes. The minimum wage rate was frozen in 2012. In 2016, for all employees it stood at 48% of the median wage, lower than most other OECD countries. After the ESM Stability Support Programme concludes, the government may adjust the rate following consultations with key social partners, expert bodies, and taking into considerations competitiveness and labour market conditions and prospects. Adopting a specialised pay commission would improve on this process, and help ensure minimum wage adjustments are based on evidence and consensus, as the experience of such commissions in France, Germany, Ireland and the United Kingdom suggests. These countries’ commissions publish recommendations and in some cases determine the minimum wage adjustments. They consider a range of perspectives by including representatives of large and smaller firms, workers, and independent academics and analysts, and by holding regular public consultations, including with advocates for the unemployed and others facing disadvantage accessing work. In Greece, the final decision on minimum wage adjustments could rest with the government, which, however, should publically explain its reasons when it deviates from the Commission’s recommendations.
Increasing opportunities by improving education and skills
Participation in education compares well with other OECD countries, and completion rates for high school and tertiary education among younger cohorts are above most other EU members. Greece’s top students go on to perform well on a global stage. Greece ranks tenth globally in patents issued to its emigrants, taking into account the size of the population of origin (WIPO, 2013). However, many students gain less from their time in education than their peers elsewhere, as indicated by standardised assessment results, or their professional skills (Figure 22; OECD, 2017c; OECD, 2017d). At the same time an unusually large share of Greece’s workers report being over-skilled for their job, reflecting low demand for skills from workplaces and high skill mismatch. Adults have few opportunities to re-skill via on the job‐training or professional courses (Figure 23, Figure 24).
Figure 22. Years of schooling are above average
Average years of schooling, 25-29 year olds, 20101
1. Unadjusted years of schooling are based on Barro and Lee (2016). Years of schooling are adjusted for the strength of educational outcomes using the PIAAC mean numeracy assessment in the following way: a country’s unadjusted years of schooling are multiplied by the ratio of its median PIAAC numeracy score to its average years of schooling, divided by the benchmark ratio of the OECD median score to OECD average years of schooling. The benchmark ratio is calculated by dividing the median PIAAC numeracy score across available OECD countries by the average years of schooling across available OECD countries. The median PIAAC scores are from the 2012 assessment for 25-29 year olds, while estimates of average years of schooling are for 2010, also for 25 to 29 year olds.
2. Unweighted average of data shown.
Source: Barro and Lee (2016), Education Attainment Dataset, February, OECD (2016), Skills Matter: Further Results from the Survey of Adult Skills and OECD calculations.
Figure 23. Adults’ skills lag the OECD average
Mean PIAAC proficiency scores, 2014-151
1. 6 OECD member countries including Greece took part in the second round of the assessment from April 2014 to end-March 2015. OECD average covers all OECD member countries participating in the first and second round of the assessment.
Source: Calculations based on the PIAAC database.
Figure 24. Adults’ participation in life-long learning is low
% of population aged 26-64, 2016
Note: Participation in life-long learning includes formal as well as non-formal education and training.
Source: Eurostat (2017), Education and training (database).
Improvements in education are impeded by the system’s legacy of highly centralised management, fragmented institutions, and limited capacity to assess and improve its performance. Results from past governments’ reform efforts have disappointed, through limited ownership, inadequate resources, or the lack of long-term policy continuity (OECD, 2017e). Reduced resources and shifting demands for workforce skills following the economic crisis, and the need to integrate refugees, add to the pressures on the system. Currently the government is implementing a three-year reform plan, and is developing a longer-term agenda with the support of an OECD Education Review and in pursuit of the Europe 2020 Strategy goals. It is piloting trial policies in key areas, such as better support for school performance evaluation. Identifying and expanding successful approaches and building them into a comprehensive, long-term strategy supported by regular evaluation will provide a path to an equitable and quality education system.
Providing a strong start to education
Efforts to strengthen the education system are starting from early childhood. Participation in early childhood education and care is low among children younger than compulsory school age, currently 5 years. Childhood education and care places are scarce, especially in urban areas and for families that are not eligible for social assistance (OECD, 2017f; OECD, 2017g; World Bank, 2016). For infants, the focus is on care rather than pedagogical activities. The system’s administration has been split by age group between local authorities, the private sector and different national ministries, like in many other OECD countries.
Consolidating supervision of the systems within the Ministry of Education, Research and Religious Affairs (MoERRA) would facilitate strengthening the pedagogical content of early childhood care and its role as a foundation for school. The government will make enrolment compulsory at the age of four over coming years, bringing Greece into line with other European countries. Higher enrolment should be pursued for younger groups. Increasing participation will require expanding the early education and care system’s capacity. Part-time enrolment would aid this.
Past OECD recommendations on education
Improving the quality of schooling and tertiary education
School students’ performance has significant scope for improvement relative to other countries, and is little changed since the early 2000s, according to the PISA survey of 15 year olds (Figure 25; OECD, 2016b). Weaknesses in Greece’s schools contribute to poorer professional skills and to lower lifetime social well-being than in most other OECD countries (OECD, 2015a). Student assessment is focused on the competitive university entrance exam, and its importance and structure has led to a large and inequitable shadow education sector. University enrolment demand is high but course supply does not reflect institutions or students’ preferences or employers’ needs. This contributes to the lower employability and wage premiums of Greek graduates than in most other OECD countries, and this situation has changed little with the crisis.
Figure 25. Student performance at school is below the OECD average
Mean PISA score in reading, mathematics and sciences
1. The PISA reading assessment is comparable across years.
2. The OECD aggregate covers all OECD countries except Austria and the USA for reading and all OECD countries excluding the USA for mathematics and sciences.
Source: OECD, PISA 2006, 2009, 2012 and 2015 databases.
Greece’s legacy of unusually strong centralisation of curriculum and resource management decisions at MoERRA constrains the education system’s ability to improve teaching outcomes (OECD, 2017e) (Figure 26). Teachers’ working conditions and confidence in the administration are low and were reduced by some of the crisis-management measures (OECD, 2017i). The school curriculum is being reviewed. In primary and secondary schools, systems to assess and improve the quality of student performance and schools are now being developed and trialled. Professional support and development for teachers are planned to be introduced in the coming years (OECD, 2017i; MoERRA 2017a). Consolidation of fragmented universities and technical colleges is incomplete and the frameworks to track and improve teaching effectiveness are limited (OECD, 2017e).
Figure 26. Schools and teachers have limited influence over resource and curriculum management
Index of school autonomy1
1. % of tasks for which the principal, the teachers or the school governing board have considerable responsibility, including allocating resources to schools (appointing and dismissing teachers; determining teachers’ starting salaries and salary raises; and formulating school budgets and allocating them within the school) and responsibility for the curriculum and instructional assessment within the school (establishing student-assessment policies; choosing textbooks; and determining which courses are offered and the content of those courses). Results based on school principals’ reports.
Source: OECD (2016), PISA 2015 Results (Volume II): Policies and Practices for Successful Schools and PISA 2015 database, Table II.4.5.
The MoERRA is developing a reform programme giving school teachers and principals greater pedagogical and managerial autonomy. This will be accompanied by evaluation frameworks that help teachers, schools and central bodies identify successes and collegially work to improve outcomes. Linking evaluation frameworks with in-service support focusing on practical skills will be beneficial and could contribute to improve the conditions of the substitute teacher workforce. Students’ performance should be assessed continuously; combined with a general skills assessment, continuous assessments could replace the current university entrance examination. Refugees need specialised language support to successfully integrate into the general education system and the workforce (OECD, 2015c).
In tertiary education, both universities and technical education institutions would also benefit from more autonomy in their governance and resource use. Current efforts to connect tertiary institutions with regional employers can make it easier to adapt courses to the evolving needs of the labour market while ensuring the education system provides strong horizontal skills. Institutions should be encouraged to merge, resuming earlier consolidation efforts, and giving teaching programmes and institutions scale. Transparent and well-designed financing mechanisms could encourage institutions to provide courses that match students’ demands and employers’ needs, by for instance adapting elements of the reformed Australian approach to university funding (OECD, 2017l). Clearer information about the quality and benefits of different courses and projected skill demand should accompany these efforts (OECD, 2016b).
Active labour market programmes to support re-employment
Participation in active labour market programmes (ALMPs) is low (Figure 27), as capacity, scope and resources are limited. Passive measures have absorbed most of the limited funding for labour market programmes. Modest increases in spending and involvement in ALMPs and skill developments can bring high returns and improve jobseekers’ likelihood of finding work (OECD, 2015b).
Figure 27. Participation in active labour market programmes is limited
Participants in active labour market programmes, % of labour force, 20151
1. Active labour market programmes include all social expenditure (other than education) which is aimed at the improvement of the beneficiaries’ prospect of finding gainful employment or to otherwise increase their earnings capacity. This category includes spending on public employment services and administration, labour market training, special programmes for youth when in transition from school to work, labour market programmes to provide or promote employment for unemployed and other persons (excluding young and disabled persons) and special programmes for the disabled. Employment incentives consist of job rotation and job sharing schemes as well as programmes making payments for a limited period only to facilitate the recruitment, or continuing employment in the case of restructuring, of unemployed persons and other target groups into jobs where the majority of the labour cost is covered by the employer. Other active measures consist of training, sheltered and supported employment and rehabilitation, direct job creation and start-up incentives, excluding programmes related to public employment services. 2014 for Estonia and OECD average. 2012 for Greece. Average of 2011 and 2013 for training in 2012 in Greece due to lack of data.
Source: OECD (2017), OECD Employment and Labour Market Statistics (database).
Greece’s ALMPs are adapting to the diverse needs of different groups of job-seekers and focusing on the long-term unemployed, but their capacity needs to expand. Funding for expanded employability and job matching programmes can be reallocated from public works and employment subsidy programmes, which tend to be less effective in contexts other than immediate responses to a crisis than other interventions (Card et al., 2015; OECD, 2015b). ALMP reforms should ensure that those out-of-work can access effective programmes. Such programmes need to:
Enhance employability; adults with work experience benefit from programmes that strengthen practical skills; training courses are better integrating with local employers, but their scale is still modest and needs expanding.
Better match job seekers’ skills with employers’ needs; the public employment service is being re-engineered to connect better with employers, and would benefit from capacity dedicated to SMEs; new community service centres can improve access across the country; new requirements that social benefit recipients who are able to work engage in job search improves their likelihood of finding work; the Ministry of Labour and Social Inclusion’s improved IT platforms can support this engagement.
Bring youth into work; programmes that first ensure strong general skills, and then provide practical sector-specific skills and experience, generate the best results; these have been limited but are now a priority and successful programmes to improve youth work-experience now being piloted (MoERRA, 2017b) should be expanded.
Past OECD recommendations on labour market programmes
Lowering poverty and protecting households
Jobs are the best antidote against poverty (Causa et al., 2016). The loss of jobs and wage cuts through the crisis has led to a surge in poverty. Younger households without work and with children have been most severely affected, while poverty rates have fallen among retirees. Rising and more entrenched child poverty brings significant risks for long-term well-being and opportunities. Recent reforms improved the sustainability and targeting of social expenditure, but inequality and poverty after taxes and transfers remain high (Figure 28).
Figure 28. Poverty remains high despite extensive redistribution through taxes and benefits
Poverty rate at 50% of median income, before and after taxes and transfers, 2015 or latest year1.
1. The poverty line refers to 50% of the median disposable income. Household income is adjusted for household size.
2. Poverty rate after taxes and before transfers for Hungary, Mexico and Turkey.
Source: OECD (2018), OECD Social and Welfare Statistics (database).
Consolidating and improving targeting of social protection
Greece’s social expenditure system is large and remains dominated by pensions (Figure 29). Public social expenditure, at 27% of GDP in 2016 or nearly half of government expenditure, is above the average of OECD and European countries (OECD, 2017j). A series of reforms to delay retirement, reduce pension allowances, increase contributions, and lessen inequalities between beneficiaries and across generations, have improved the sustainability of the pension system. Merging agencies and funds have improved collections of contributions. However, pension spending relative to GDP remains significant, reflecting the deep fall in the latter. EU projections suggest that as the economy recovers and pension reforms produce their full effect, pension spending will fall from 17% of GDP in 2017 to 13% in 2020 and to 10.5% in 2070 (European Commission, forthcoming).
Figure 29. Pensions dominate Greece’s social spending
Social protection expenditure by function of social protection, 2015 or latest year
Note: Social protection encompasses interventions from public or private bodies intended to relieve households and individuals of the burden of a defined set of risks or needs, provided that there is neither a simultaneous reciprocal nor an individual arrangement involved. The eight main risks or needs are: old age, sickness/healthcare, survivors, disability, family/children, unemployment, housing, and social exclusion not elsewhere classified (n.e.c). The category “family children and other allowances” includes social expenditure on unemployment, housing and social exclusion n.e.c.
Source: Eurostat (2018), Social Protection Statistics (database).
Over the crisis, the structure of social spending and fragmentation of programmes allowed poverty to rise among young families relative to retirees. The effectiveness of social spending has been hampered by underfunding and splintered responsibility across ministries and between levels of governments and weaknesses in administrative systems, especially for in-kind benefits, creating gaps and overlaps in mandates and activities, and raising administrative costs (OECD, 2013a; Stefan, 2015; World Bank, 2017). Means-tests were applied to 5.4% of all social spending (including pensions) in 2015. Consolidation efforts and introduction of comprehensive, targeted cash-benefit programmes backed by rebuilt administrative systems are addressing these issues. The 2017 and 2018 reforms to consolidate and strengthen family benefits and rationalise several other overlapping anti-poverty programmes represent important progress in improving targeting. Supporting these programmes are electronic payment systems, new IT platforms and administrative processes, enhancing efficiency and equity of access for households in need. Families in poorer regions are now being supported by an expanding school meal programme.
Disability support is the next priority for reform, as the existing system is small and fragmented across at least 24 different programmes. These can be complicated to access and offer levels of assistance that vary between municipalities (World Bank, 2017). The government with World Bank support is preparing a roadmap to consolidate these programmes and to better identify disabled individuals’ needs. Developing a coherent administrative system will be central to these reforms. Existing housing benefits are minimal despite the high rates of housing stress. These are planned to be replaced by a means-tested allowance that complements the other new targeted cash benefits.
Other social protection programmes found in most OECD countries are still to be developed in Greece. Unemployment benefits are weak, and reforms tightened eligibility criteria such that only 12% of the unemployed receive benefits. The unemployed should be encouraged to register, obtain support, and participate in active labour market programmes by making these more accessible and unemployment benefits conditional on participation. Among the elderly, improvements in welfare have been slower for survivors, due to the structure of pensions. Further pension reforms should consider their needs. There are many other small, mostly in‐kind programmes which are often poorly targeted and expensive to administer that could be consolidated and their funding reallocated to better targeted programmes.
Helping low-income households while encouraging labour force participation
The national roll-out of the Social Solidarity Income (SSI) in February 2017, with the strengthened family benefits introduced in 2018, are important steps to better support the poorest households. The safety net ensures that households can access a minimum income, even if they are not supported by other social protection programmes. The SSI transfers are modest, at EUR 200 per month for the first household member, EUR 100 for the second and EUR 50 for children, and the eligibility thresholds are low. These amounts reduce the severity of poverty, even if, like other OECD countries’ guaranteed minimum income schemes, they are insufficient to lift a household above the poverty line (Figure 30 – Panel A). Two service delivery pillars complement the income transfer. These seek to improve households’ access to labour market programmes and to other social support services. The government intends to link social benefits with participation in active labour market programmes if beneficiaries are able to work. This will require greater capacity to enforce such obligations. The strengthened family benefit’s eligibility thresholds are higher than the SSI, and it provides households in the lowest income tier EUR 70 per month for the first and second children and EUR 140 for additional children, further reducing the severity of poverty. Access and eligibility assessments for these programmes have been improved relative to pre-existing programmes.
Figure 30. The social solidarity income, family benefit and housing allowance reforms support poor households’ incomes but also raise participation tax rates
Note: Each bar indicates an additional policy reform that adds to the existing policies. “Baseline” reflects the full set of tax and benefit policy rules at 1 July, 2016, excluding the Rent Allowance that concluded in February 2017. “SSI introduced” adds the Social Solidarity Income scheme rolled out nationally in February 2017 to the baseline. “Family benefits & tax reforms” adds the strengthened family benefit scheme introduced in 2018 and the reforms to personal income tax and social solidarity contribution rates legislated to be introduced in 2020. In the simulations the family would not be liable for income tax. “Introduce Housing Allowance (Option B)” adds a housing allowance scheme with the SSI’s income definition and equivalence scale and eligibility threshold 4 times those of the SSI, i.e., EUR 9 600 for a family of 2 adults and 2 dependent children, and provides a monthly allowance of EUR 50 for the first member, EUR 25 for the 2nd adult or 1st child, and EUR 12.50 for subsequent children. “Hypothetical: SSI 20%” adds a 20% increase in SSI allowances and eligibility thresholds and in the Housing Allowance income eligibility thresholds, and an increase from 20% to 40% in the SSI labour earnings disregard for determining SSI eligibility. The simulations apply the tax and benefit policy settings to a hypothetical family of two unemployed adults with two dependent children. The participation tax rate is the percentage change in net income relative to the change in the gross income when one adult shifts to permanent, full-time private sector employment at the minimum wage. Further details of the simulations are presented in Chapter 2, Box 2.5 and Figure 2.32 Figure 2.33.
Source: OECD calculations based on the OECD tax-benefit model.
OECD Tax-Benefit Model simulations demonstrate how the SSI and strengthened family benefits, and a potential housing allowance, would reduce the risk of poverty for a family of two unemployed adults with two children (Figure 30 – Panel A). By improving targeting, these measures also increase the participation tax rate faced by beneficiaries as they start working (Figure 30 – Panel B), although having different eligibility thresholds across different allowance programmes can reduce the participation tax rate, as demonstrated by the family benefit reforms relative to the SSI (Figure 30 – Panel B). Increasing the disregard of earned income to 40% when assessing eligibility for the SSI would reduce the risk households being trapped in dependency on these benefits. Increasing the earnings disregard would also have limited fiscal cost (Table 8).
Past OECD recommendations on social protection
Over time, as administrative capacity improves, the government should consider introducing working tax credits as a way to reduce in-work poverty, encourage labour force participation and formalise the shadow economy. Such systems already in place in some OECD countries, such as the United States, the United Kingdom, France and the Netherlands, have proved effective if targeted and designed well (OECD, 2005; Immervoll and Pearson, 2009). Increasing the earned income disregard applied to the SSI could be a step in this direction.
Greening the economy
Greece’s per capita greenhouse gases emissions have declined for several years and are now significantly below the OECD average. This is mostly due to the recession as CO2 intensity has remained broadly stable (Figure 31). Increased use of low-carbon energy has also played a part. The share of final energy from renewable sources is 15%, close to the EU28 average. Greece’s per capita levels of solar power (both for photovoltaic and solar thermal) is among the top five in the world (REN21, 2017).
Figure 31. Greece’s top green growth challenges are waste disposal and air pollution
Source: OECD (2017), Green Growth Indicators (database).
Average air pollution, measured in terms of particle pollution, is above the OECD average, although pollution hotpots are somewhat less prominent than in the average OECD country. Road traffic, heating and other human activities are the main source of air pollution. Also, pollution from local biomass burning has increased despite declining fossil fuel use (Emmanouil, et al., 2017).
Bathing water is among the best in the EU (EEA, 2017). Drinking water quality is generally good, but some areas lack comprehensive sewage treatment. Landfill remains by far the most common destination for waste and household waste production is rising, in contrast to many countries. There is still much unregulated and illegal dumping of household waste. Greece’s Waste Management Plan of 2012 foresaw the introduction of a landfill tax from 2014 but it is unclear whether it has been implemented (EC, 2017a).
The EU Court of Justice has repeatedly fined Greece because of numerous unregulated landfill sites and breaching the urban waste water treatment directives. The 2018 budget allocates EUR 1 billion for unforeseen and urgent spending, including environmental fines relating to landfill sites and sewage collection and treatment. Making all waste disposal sites and urban waste treatment conform to EU regulations is urgent to lower local pollution and avoid using scarce budget resources to pay fines.
Greece is one of the few countries where environment-related tax revenues have increased relative to GDP over the last decade. However, revenue from taxes other than on energy and motor vehicles remains negligible, as in most countries. The tax on diesel fuel is less than half that on petrol. Also, Greece grants several excise tax and VAT reductions for fossil fuels used in industrial and residential sectors. According to OECD’s data, Greece is one of the OECD countries with the largest fossil fuel support measures (i.e. measures encouraging the production and consumption of fossil fuels) as a share of government spending and total taxes. Greece also provides support to the development of coal-fired electricity plants, locking in carbon-intensive capital assets and increasing the risk of stranded assets. Phasing out fossil-fuel support measures would accelerate the shift towards renewable energy and facilitate the implementation of the new EU Emission Trading System Directive and the Industrial Emissions Directive.
Improving the business environment to raise investment
Lowering product market regulation
Since the start of the crisis, cuts in barriers to entry, trade and investment and reduced state control have made Greece’s product markets more open to competition. Between 2008 and 2013 reduced barriers to trade and investment contributed most to improving competitiveness by lowering the product market regulation (PMR) index (Figure 32). A preliminary and conservative assessment of reforms implemented since 2013 suggests that product market restrictions have eased further (Figure 32).
Figure 32. Product market regulation has eased but remains above most OECD countries
Index scale from 0 to 6, from least to most restrictive
1. Preliminary calculations of the product market reforms since 2013.
Source: OECD (2017), Product Market Regulation Database and OECD calculations
The drop in the PMR indicator might not reflect all the progress made since 2013 as the PMR indicator covers mostly horizontal regulations while the product-market reforms passed concern mostly sector specific regulations. Despite significant progress, Greece’s business environment still lags other OECD countries as corroborated by the World Bank Doing Business indicator (Figure 33). From 2010 Greece undertook an extensive legislative reform to streamline regulation of regulated professions including easing entry. The reform opened up to competition 75% of the 350 regulated professions in Greece. An assessment of the reforms in 11 professions suggests they supported employment (Athanassiou et al., 2015). As highlighted in previous Surveys (OECD, 2013b; OECD, 2016a), and as detailed in Chapter 1, liberalisation of regulated professions could go further.
Figure 33. Recent reforms have improved the business environment, which however remains poor
Ease of doing business indicator, distance to frontier, from 0 (lowest performance) to 100 (best performance)
1. Reference year of database. The 2018 database reports the data collection completed in June 2017.
Source: World Bank (2018), Doing Business 2018 (database).
The OECD is working with Greece to boost product market competition. Between 2013 and 2016, the OECD conducted, in co-operation with the Hellenic Competition Commission (HCC), three Competition Assessment Reviews that helped identify barriers to competition in selected sectors and ways to improve the overall regulatory framework. The Reviews covered 14 sectors, accounting for about 30% of GDP and 39% of employment, and made 773 recommendations (see Box 1.1 in Chapter 1).
Most of the recommendations of the three Competition Assessments have been legislated. As at January 2018, only one of the 366 recommendations of the third Competition Assessment had yet to be legislated (Figure 34). Progress was uneven across sectors: it was faster in pharmaceuticals, manufacturing and wholesale trade, and took longer in media, construction and e-commerce. Ownership of reforms has improved in some instances. On e‐commerce the Greek government has worked with the OECD and the European institutions to transform a set of e-commerce specific recommendations into a far-reaching review of consumer protection legislation. This is expected to lead to the codification of the 1994 law on consumer protection; the new code has already been drafted.
Figure 34. Implementation of OECD Competition Assessments’ recommendations has progressed
2013-17
Note: The OECD’s Competition Assessments aim to help governments eliminate barriers to competition by providing a method for identifying unnecessary restraints on market activities and developing alternative, less restrictive measures that achieve government policy objectives.
Source: EC (2017), “The ESM Stability Support Programme: Greece, First & Second Reviews July 2017 Background Report”, Institutional Paper 064, November 2017. EC (2018), Compliance Report of ESM Stability Support Programme: Third Review, January 2018, European Commission, DG ECFIN, available at www.esm.europa.eu/assistance/greece.
Full implementation of the legislated product market reforms, in the context of strong domestic ownership, would be an important step to promote competition and strengthen incentives to invest. Reducing horizontal product market restrictions would help the implementation of such reforms. One-stop shops now provide newly created companies with electronic access to the tax authority’s online platform and automatically make the founders’ details available to the social security agency (EFKA) to speed up the social security registration process. Moreover, the 2016 investment law has allowed for the registration of new companies remotely through the e-one-stop shop and simplified licensing procedures. By the end of 2018 a more complete version of the electronic system covering licensing procedures is expected to be in place. The new system is also expected to make inspections more effective by, among other things, prioritising them based on risk assessments and enabling the exchange of information among competent authorities. The e-one-stop shop is expected to provide services for free during the first year of operation. The government should make sure one-stop shops have the resources and capabilities to perform their tasks effectively.
Also, reaping the full benefits of recent progress will require streamlining cumbersome regulation and improving the public administration efficiency. The “silence is consent” rule, whereby licences are automatically issued if the competent authority does not act within the statutory period, could be expanded.
Greece attracts little foreign direct investment (FDI) despite lower FDI restrictions than many OECD countries (Figure 35; Figure 36). Attracting more FDI hinges on improving the business environment by lowering product market restrictions, improving the quality of institutions and the efficiency of the public administration. The World Economic Forum (WEF, 2017) ranks Greece 130th out of 137 countries for the burden of government regulation, 112th as regards FDI and technology transfer and 61st for the protection of intellectual property rights in 2017.
Figure 35. Greece’s inward FDI stocks are low but have improved recently
FDI inward stocks
1. 2015 for Mexico.
2. EU25 for data between 2004 and 2006, EU27 for data between 2007 and 2012 and EU28 from 2013.
Source: OECD (2018), “FDI statistics according to Benchmark Definition 4th Edition (BMD4): Foreign direct investment: Main aggregates”, OECD Globalisation Statistics (database).
Past OECD recommendations on product markets
Figure 36. FDI regulatory restrictions are low compared to other OECD countries
FDI regulatory restrictiveness index, scale from 0 (open) to 1 (closed)
Note: The index reports statutory restrictions on foreign direct investment across the four main types of restrictions: foreign equity limitations; discriminatory screening or approval mechanisms; restrictions on the employment of foreigners as key personnel; and, other operational restrictions. The overall restrictiveness index is the average of sectoral scores.
Source: OECD (2017), OECD FDI Regulatory Restrictiveness Index Database.
Improving the business environment will enable to reap the full benefit of the 2016 law establishing state aid schemes for private investment. This law introduces a range of financial incentives covering tangible and intangible capital with the aim of attracting FDI in addition to encouraging entrepreneurships, innovative SMEs and innovation clusters. Incentives for major investment projects include a fixed corporate income tax rate for 12 years, tax exemption equal to 10% of eligible expenditure (capped at EUR 5 billion) and fast track licencing procedures.
Improving the quality of regulation and fighting corruption
Greece has a well-developed framework to ensure the quality of regulation. The 2012 law on Better Regulation states basic principles for regulation, such as efficiency and transparency. Draft regulations are published on a portal (www.opengov.gr). Public consultations are usually informal but it is unclear how comments received are considered. The law also requires an ex ante regulatory impact assessment (RIA) for every legislative draft or amendment to existing regulations and an ex post impact assessment. Ex post reviews of existing regulations have been used rarely (Figure 37). To address this, the Ministry of Administrative Reconstruction is beginning an extensive evaluation of existing legislation, with a view to curtail the large “stock” of regulations.
Figure 37. Regulatory governance can be improved, especially by extending the use of ex post evaluations
Composite indicator,1 2014
1. The vertical axis represents the total aggregate score across the four separate categories of the composite indicators. The maximum score for each category is one, and the maximum aggregate score for the composite indicator is four.
2. This figure excludes the United States where all primary laws are initiated by Congress. In the majority of countries, most primary laws are initiated by the executive, except for Mexico and Korea where a higher share of primary laws are initiated by parliament or congress (respectively 90.6% and 84%).
Source: OECD (2015), OECD Regulatory Policy Outlook 2015.
Major challenges, however, persist in fully implementing the law on Better Regulation (OECD, 2015d). The Better Regulation Office (BRO) lacks budget and skills. RIA quality is often poor due to the limited time to develop new drafts. Responsibilities for regulatory policy are fragmented between the Ministry of Interior, the Ministry of Administrative Reconstruction, the General Secretariat of the Government (by means of the BRO), the Ministry of Finance, and other bodies in individual ministries. The BRO oversees the quality of RIAs but has no power to reject low-quality draft RIAs. To address these issues, the Greek Government is currently preparing a study, in co-operation with the European Commission, on the creation of a data analysis unit, which would provide quantitative analysis underpinning ex ante and ex post assessment of business-related legislation.
The government should simplify the allocation of responsibilities among the different agencies assessing the quality of regulation. Training civil servants on regulatory quality would build the skills of staff at the BRO and other agencies and facilitate the implementation of the Better Regulation framework. Creating internal networks of civil servants having expertise on regulatory quality, as in the Netherlands and the United Kingdom (OECD, 2015d), could be beneficial to spread knowledge and best practices.
The ongoing fight against corruption and bribery is a key element of public administration reform and is paramount to improving the business environment. Across countries effective control of corruption is positively associated with the capacity to innovate and retain talented people (Figure 38). In 2015, the government established the General Secretariat Against Corruption (GSAC) inside the Ministry of Justice, Transparency and Human Rights, replacing national co-ordinator against corruption under the Prime Minister, and it revised the National Anti-Corruption Action Plan (NACAP). It is receiving technical assistance from the OECD to implement the NACAP (Box 1). Progress so far highlights the importance of a whole-of-government and society-wide approach to advancing anticorruption efforts and the NACAP. Specific strategies to fight fraud and corruption should target high-risk policy fields and sectors, such as public procurement – including public works – local governments, state aid and subsidies, and health and social welfare services. Ongoing efforts should also focus on developing a robust corruption and fraud risk-management system across public organisations, within a legal framework that is robust and stable.
Box 1. The National Anti-Corruption Action Plan and Greece-OECD project on anti-corruption
The main objective of the Greece-OECD project on anti-corruption activities is to strengthen and empower Greek authorities responsible for the implementation of the National Anti-Corruption Action Plan (NACAP). The overall aim of the NACAP is to better integrate anti-corruption activities in the government’s reform agenda and private sector business models, as well as raising public awareness of anti-corruption efforts. It identifies key areas and detailed actions for reform.
The OECD’s technical assistance has 10 objectives, including: the modernisation of internal and external audit mechanisms; development of specific anti-corruption approaches for high-risk policy areas; strengthening the General Secretariat against Corruption; enhancing anti-corruption awareness across all stakeholders; strengthening whistleblower protection in the public and private sectors; improving processing of corruption complaints; improving integrity safeguards through enhanced Asset Declaration and Political Financing systems; enhancing mutual legal assistance and asset recovery arrangements; empowering law enforcement agencies; and promoting anti-corruption corporate compliance programmes.
Following the plan and its main objectives, the OECD is helping to improve internal audit across central administration so as to enhance accountability and good governance. Activities on specific high-risk areas cover health, tax and customs, public procurement, local government entities, defence procurement, and public and private investments. The Ministry of Health has fully endorsed the OECD proposals and included them in the Ministry’s action plan. Other activities with the Ministry of Education aim at developing approaches to integrate anti-corruption related concepts within the education system.
Activities to enhance anti-corruption awareness across all stakeholders have involved highly visible activities such as a nation-wide public opinion survey on corruption experiences, a public integrity hackathon to identify innovative tools to foster transparency and integrity, the first Public Integrity Forum, which attracted more than 400 participants, and a series of workshops to engage the private sector and law enforcement.
Source: Report from the 3rd Steering Committee of the project “Technical Support on Anti-Corruption in Greece”, held on 13 July 2017.
OECD recommendations on public sector efficiency and government reforms
Figure 38. Control of corruption is positively associated with capacity to innovate and retain talent
1. The Global Innovation Index measures the innovation performance of 127 economies and comprises 81 indicators over a broad vision of innovation, including political environment, education, infrastructure and business sophistication. It ranges from 0 to 100 (best performance).
2. The Control of Corruption Index is a component of the Worldwide Governance Indicators. It reflects perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as “capture” of the state by elites and private interests. The data is percentile rank among 127 countries, ranging from 0 to 100 (highest rank).
3. Refers to a component of the World Economic Forum Global Competitiveness Index, which ranges from 1 (not at all) to 7 (to a great extent).
Source: World Bank (2017), Worldwide Governance Indicators (WGI); Cornell University, INSEAD and WIPO (2017), Global Innovation Index 2017; and World Economic Forum (2017), Global Competitiveness Index 2017-2018.
Accelerating insolvency proceedings
Long and costly insolvency procedures trap capital and other resources in low productivity firms. Evidence suggests that a nontrivial share of the collapse in aggregate business investment in Greece is attributable to the survival of non-viable “zombie” firms (i.e. firms having problems meeting their interest payments) (Adalet McGowan et al., 2017; Figure 39).
Figure 39. Large shares of employment and capital are trapped in zombie firms
Note: Zombie firms are defined as firms aged 10 years or older and with an interest coverage ratio less than 1 over three consecutive years. Capital stock and employment refer to the share of total capital and labour that are in zombie firms. The sample excludes firms that are larger than 100 times the 99th percentile of the size distribution in terms of capital stock or number of employees.
Source: Adalet McGowan, M., D. Andrews and V. Millot (2017), “Insolvency regimes, zombie firms and capital reallocation”, OECD Economics Department Working Papers, No. 1399, OECD Publishing, Paris.
Greece’s Bankruptcy Code governs the legal framework of insolvencies. Recent changes to the insolvency framework, as detailed in Chapter 1, have aimed at accelerating bankruptcies, enhancing pre-bankruptcy rehabilitation plans and facilitating the discharge of entrepreneurs (i.e. second chance). In 2017 the Greek Parliament legislated to facilitate out-of-court dispute resolution and speed up the settlement of debt of non-financial corporations and professionals. It allowed a debt settlement agreement to be binding on all creditors if it has been concluded between the debtor and creditors representing three-fifths of all claims and two-fifths of secured claims and ratified by the court. The last amendments on simplifying SME-related insolvency procedures were enacted in 2017. Also, electronic auctions are finally underway and are expected to accelerate enforcement procedures and to deter strategic defaulters.
Overall, these changes to the insolvency framework and out-of-court business dispute resolution mechanism go in the right direction and Greece’s insolvency regime has improved markedly since 2010 (Figure 40). Despite this progress however, recovery rates remain low and insolvency proceedings slow compared to most OECD countries (Figure 41).
Figure 40. Greece’s insolvency framework has improved
Insolvency indicator
Note: The indicator is a composite that aggregates 13 insolvency indicators across 4 dimensions: treatment of failed entrepreneurs; prevention and streamlining; restructuring tools; and other factors. Calculations are based on the OECD questionnaire on insolvency regimes which collected specific information (mostly in the form of Yes/No questions and numbers) about personal and corporate insolvency regimes for 35 OECD member and 11 non-member countries.
Source: Adalet McGowan, M., D. Andrews and V. Millot (2017), “Insolvency regimes, zombie firms and capital reallocation”, OECD Economics Department Working Papers, No. 1399, OECD Publishing, Paris.
Figure 41. Insolvency proceedings in Greece are slow and the asset recovery rate is low
20181
Note: Time for creditors to recover their credit is recorded in calendar years and the period of time is measured from the company’s default until the payment of some or all of the money owed to the bank. Potential delaying tactics by the parties, such as the filing of dilatory appeals or requests for extension, are taken into consideration. The cost of the proceedings is recorded as a percentage of the value of the debtor’s estate. The cost is calculated on the basis of questionnaire responses and includes court fees and government levies; fees of insolvency administrators, auctioneers, assessors and lawyers; and all other fees and costs. The recovery rate is calculated based on the time, cost and outcomes of insolvency proceedings and is recorded as cents on the dollar recovered by secured creditors. The calculation takes into account whether the business emerges from the proceedings as a going concern or the assets are sold piecemeal. The costs of the proceedings are deducted. The value lost as a result of the time the money remains tied up in insolvency proceedings is also deducted. The recovery rate is the present value of the remaining proceeds.
1. Reference year of database. The 2018 database reports the data collection completed in June 2017.
Source: World Bank (2018), Doing Business 2018 (database).
The government should ensure that approved reforms are effectively and timely implemented. For instance, the first electronic auctions started in November 2017, though the legislation and a pilot version of the platform was ready in mid-2017. The results of the first electronic auctions show they have the capacity to push strategic defaulters to repay loans. The government should ensure electronic auctions proceed unimpeded. Besides, the government should ensure sufficient well-trained insolvency professionals are available. The first cohort of insolvency professionals became available in September 2017. Training should cover not only insolvency laws and regulations but also finance and economics so as that insolvency professionals can effectively and efficiently steer liquidation and restructuring processes. The government also needs to make further progress on establishing an insolvency registry, following international best practices.
The efficiency of the insolvency regime is intertwined with that of the judicial system. This is especially important in Greece as the new insolvency framework passed in 2016 applies only to proceedings started after 22 December 2016, meaning that the previous regime continues to apply to existing cases. Greece is among the countries with the lengthiest trials and highest litigation rates (OECD, 2013b). The World Bank’s Doing Business Indicator also suggests that enforcing contracts is difficult in Greece relative to OECD countries (Figure 42).
Figure 42. Enforcement of contracts is weak
Index scale from 0 to 100, 100 indicating strongest performance
Note: The index reports the distance of each economy from the best performance observed on each of the indicators across all economies.
1. Reference year of database. The 2018 database reports the data collection completed in June 2017.
Source: World Bank (2018), Doing Business 2018 (database).
The digitalisation of the justice system is an important and thus far underutilised tool to improve the efficiency of Greece’s justice system. Across countries, the budget devoted to digitalisation is associated with a shorter trial length (Palumbo et al., 2013). Finland’s Insurance Court provides a successful example of applying case-flow management along with an advanced time-frame alarm system enabled by digital technologies (Pekkanen et al., 2015).
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