(1)

The macroeconomic and budgetary situation has deteriorated markedly in Greece over the last year and Greek public finances have worsened much beyond what could have been expected as a result of the downturn. These developments are largely due to national factors that have developed over the longer term, resulting in a deterioration of the net lending position of the Greek economy and high and persistent external imbalances, mirroring large competitiveness losses and a marked deterioration of the fiscal position.

(2)

National policies in terms of the conduct of fiscal policy, the efficiency of public administration and lack of structural reforms (where indicators show that Greece ranks poorly compared with international benchmarks) have contributed to poor economic and fiscal performance.

(3)

The current situation poses major challenges for the long-term sustainability of the Greek economy, and the economic and fiscal situation may have negative spill-over on other euro-area members, as evidenced by movements in the financial spreads of a number of Member States. The current situation also risks jeopardising the proper functioning of the economic and monetary union.

(4)

The Council and Commission have repeatedly pointed to the longer-term structural problems of the Greek economy in various multilateral surveillance exercises. These include budgetary surveillance in the framework of the Stability and Growth Pact and the Lisbon Strategy in which the Broad Guidelines of the Economic Policies (1), provide a general reference framework for structural reform in the Union and in the euro area. These include recommendations to Member States to respect their medium-term budgetary objectives and to take effective action in order to ensure a prompt correction of excessive deficits, as well as to aim at correcting the current account deficit by implementing structural reforms, boosting external competitiveness and contributing to their correction via fiscal policies.

(5)

In this context, reflecting the deep structural problems in the Greek economy covering fiscal, labour and product market issues, the Council, in its Recommendation of 25 June 2009 (2), noted that for Greece it is ‘imperative to intensify efforts to address the macro-economic imbalances and structural weaknesses of the Greek economy’ and directed country-specific recommendations to Greece, including that it should continue with fiscal consolidation; increase competition in professional services; reform to increase investments in R&D; use structural funds more efficiently; reform public administration and take a broad range of labour market measures within an integrated flexicurity approach. At the same time, the Council recommended that Greece, as a member of the euro area, secure the sustainability and improve the quality of public finances, modernise public administration and implement the Union’s common principles of flexicurity.

(6)

Greece's economic and budgetary policies are not in line with the country-specific recommendations issued under the Broad Guidelines of the Economic Policies, nor the recommendations addressed to Member States forming part of the euro area, set out in the Council Recommendation of 14 May 2008 on the broad economic policy guidelines for the Member States and the Community.

(7)

On 15 January 2010, Greece submitted the 2010 update of its stability programme, which contains objectives in the budgetary area for the period up to 2013 and which should be read in conjunction with the budget for 2010 adopted by the Greek Parliament on 23 December 2009; the Council delivered an opinion on 16 February 2010 on the 2010 update of the Greek stability programme in accordance with Article 5(3) of Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (3). On 16 February 2010, the Council also adopted a Decision under Article 126(9) TFEU giving notice to Greece to take measures for the deficit reduction judged necessary in order to remedy the situation of excessive deficit (4) (hereinafter ‘the Council Decision of 16 February 2010’).

(8)

The proper functioning of the coordination of economic policies in the euro area requires a timely use of instruments available under Article 121 TFEU. Article 121(4) TFEU establishes that the Commission may address a warning to the Member State concerned and may recommend the Council to make the necessary recommendations to that Member State. Given the gravity of the situation and in order to ensure consistency with the Council Decision of 16 February 2010, it is appropriate that the Council adopt the necessary recommendations. In addition, the Council may, acting on a proposal from the Commission, decide to make its recommendations public.

(9)

Although the deterioration in macroeconomic conditions in 2009 has been more pronounced than anticipated by the authorities, public finances have worsened much beyond what could have been expected as a result of the stronger-than-projected downturn. The deterioration is to a large extent the result of budgetary policies implemented by the Greek government. The general government deficit in 2009 is currently estimated at 12,75 % of GDP, compared to a target of 3,75 % of GDP in the January 2009 update of the stability programme.

(10)

The 2010 budget was adopted by the Greek Parliament on 23 December 2009 setting a deficit target of 9,1 % of GDP in 2010. In the meantime, the Greek authorities announced the intention to step up fiscal adjustment already in 2010, setting the budgetary target for 2010 at 8,7 % of GDP. The January 2010 update of the stability programme confirmed the revised budgetary target for 2010 at 8,7 % of GDP.

(11)

The long-term budgetary impact of ageing on public expenditures is well above the Union average, mainly as a result of a very high projected increase in pension expenditure as a share of GDP over the coming decades. Available indicators, as evidenced in the Commission services’ 2009 sustainability report, point to very high risks to the sustainability of public finances, which, in addition to budgetary consolidation, needs to be addressed through the reform of the pension and health care systems. The Greek pension system suffers from several problems, including the fact that it is fragmented in its coverage. Although Greece has one of the highest average benefit ratios in the Union — with a negative impact on incentives to work, as reflected in particular in the low employment rate among older workers — it has one of the highest poverty rates among the elderly. There are also problems with early retirement schemes that provide alternative, but costly, pathways to retirement. The health care system also needs reform, in particular to significantly improve efficiency and management as these have been a cause of recurrent budgetary overruns. Labour market reforms should support the increased labour supply in order to increase the contribution base.

(12)

Greece should recover competitiveness losses and address large external imbalances. In this context, in accordance with the Broad Guidelines of the Economic Policies, Greece should aim at correcting the current account deficit ‘by implementing structural reforms, boosting external competitiveness and (…) contributing to their correction via fiscal policies’. To this end, the Greek authorities should implement permanent measures to control current primary expenditure, including the wage cost in the public sector, and urgently implement labour and product market structural reforms. In particular, the Greek authorities should ensure that fiscal consolidation measures are also geared towards enhancing the quality of public finances within the framework of a comprehensive reform programme, while swiftly implementing policies to further reform the tax administration.

(13)

A variety of indicators and analyses confirm that Greece has been losing price competitiveness on a large and sustained basis over the past ten years. The rise in wages in excess of productivity growth is an explanatory factor. Public sector wages relative to private sector wages have risen faster in Greece compared with other euro area economies and have affected overall wage bargaining, underlining the need for the public sector to play a lead role in helping restore wage moderation. In addition, some features of the Greek collective bargaining system (for example, the intermediate level of bargaining) can also explain the misalignment of wage and productivity growth, and require adjustments to be agreed by social partners. Looking forward, the wage bargaining system must support wage changes which more closely reflect competitiveness, productivity developments and local labour market conditions.

(14)

Public administration has been a major obstacle in raising efficiency in Greece. Greece ranks poorly as regards the public sector in most international comparisons and many problems are thought to derive from insufficient administrative capacity and efficiency. The authorities have made commitments to improve its functioning. These should translate into reduced staffing, improved human resource management in public entities, reduced costs, increased transparency, increased legal certainty and the effective implementation of policies.

(15)

Greece has considerable scope to improve its business environment and product market functioning. Businesses face complex, burdensome and lengthy administrative procedures. Professional services are heavily regulated, barriers to competition are amongst the highest within the Union. Moreover, the liberalisation of network industries (for example, energy) is lagging behind the Union average, as well as the opening of markets in the transport sector, especially in rail. Reforms in these areas could increase private investment and employment at little cost for public finances. Product market reforms could also help the implementation of labour market reforms by reducing cost pressures.

(16)

Greece's labour market is also in need of reform in line with the common principles of flexicurity, as noted by the Council in its 2009 recommendations on the implementation of employment policies. Particular attention needs to be paid to young persons, given the difficulties they face in entering formal employment. There is serious scope for supporting labour market transitions including by improving education and training policies, upgrading the skills of the workforce, and improving the efficiency of active labour market policies, drawing also upon the support of the European Social Fund. There is also a need to ease employment protection legislation. Furthermore, policies should encourage active labour market participation. Implementation of these recommendations is of key importance for the Greek economy. The employment effects of the structural actions implemented in the economic area should thus be duly taken into account.

(17)

The faster and more effective absorption of the Union's structural and cohesion funds has the potential of playing a critical role in the success of efforts to restore competitiveness and sustainable public finances. Compared to other Member States, progress with the absorption of funds has been lagging. By working with the Commission to take measures to improve absorption capacity and the design of operational programmes, Greece could finance key public investments that support long-term growth potential whilst at the same time allowing budgetary consolidation to proceed. Particular attention should be paid to the operational programme on ‘Administrative Reform’ and ‘Digital Convergence’ as these support essential reforms in the public administration which are central to the reform strategy outlined in the January 2010 update of the stability programme. For example, the Union’s structural funds under these operational programmes could be relied on to support the public sector in reforms of the health care system, public employment services, lifelong learning, fighting undeclared work, and the building up of effective regulatory control and enforcement capacities.

(18)

The Greek banks appear relatively sound in terms of profitability and capital adequacy. Furthermore, the resilience of the sector has been confirmed by extensive stress-testing. In addition, the Greek banks maintain a low level of non-performing loans (approximately 7,2 % of total loans) and a relatively low loan-to-deposit ratio. However, the Greek banking sector has experienced difficulties in accessing liquidity on wholesale markets, leaving it substantially reliant on Eurosystem lending. In sum, while the Greek banking system is overall robust and suffered less than some other Member States from the global financial crisis, it is unlikely to remain immune from the difficulties in the Greek public finances. Moreover, the impact of economic and financial problems in some of Greece's neighbouring countries is a concern.

(19)

In the light of the impact on the Greek economy of the global economic and financial crisis, the implied re-pricing of risks puts further pressure on debt burden and raises risk premia on government debt,