Bank of Greece Governor Yannis Stournaras appeared optimistic about the course of the Greek economy in the special edition of Kathimerini "CEOs 2025" and to journalist Irini Chrysolora.
As he said, the Greek economy will continue to grow at a satisfactory rate, higher than the eurozone average, after five years if economic policy continues on the same path of reform, effective use of available European resources, and fiscal responsibility.
Stournaras assessed that in an international environment where new uncertainties are piling up, reform fatigue is the biggest challenge to further strengthen the resilience of the Greek economy.
Where do you see Greece and its economy after 5 years?
According to recent Bank of Greece forecasts, the growth momentum of the Greek economy will continue in the coming years. The growth rate of the Greek economy is expected to reach 2.2% in 2024, accelerate to 2.5% in 2025 and decline slightly to 2.3% in 2026. The main drivers of economic activity in the coming years will continue to be investment, private consumption and exports. Overall, I believe that the Greek economy will continue, after 5 years, to grow at a satisfactory pace, above the euro area average, provided that economic policy continues on the same path of reforms, efficient use of available European resources and fiscal responsibility. This will lead to a further decline in the public debt-to-GDP ratio and help to bring the credit rating of the Greek government closer to the euro area average.
How will access to bank lending for businesses be improved? Do you think the ECB's interest rate policy in the near future will make it easier?
The supply of credit to businesses has been maintained at a satisfactory level in recent years, with the annual growth rate of funding to non-financial corporations reaching 7.6% in May 2024. Moreover, as a recent survey by the European Investment Bank (EIB) shows, the percentage of firms reporting that they face financing constraints fell significantly in 2023 to 7.9%, down from 16% in 2022.
The improvement in banks' profitability, capital adequacy and liquidity, coupled with Greece's investment grade credit rating upgrade and positive macroeconomic outlook, create favourable conditions for boosting financing to non-financial firms. At the same time, in the coming period, the full utilisation of the loan component of the Recovery and Resilience Fund will further increase the availability of business credit on favourable terms.
Finally, the gradual easing of monetary policy through the reduction of the European Central Bank's key interest rates is expected to lead to a deceleration of domestic borrowing rates.
Foreign direct investment declined in 2023. Why would a foreign company invest in Greece? Do we need more FDI and why?
Foreign direct investment (FDI) inflows recorded a decline in 2023 compared to 2022, but, according to the available data for the period January-April 2024, FDI is higher compared to the corresponding period in 2023, which we expect to be the case for the whole of 2024. Consequently, foreign companies continue to invest in the country, as there are significant opportunities in the manufacturing, communications, real estate, transport, logistics, tourism and network sectors. A prerequisite for this to continue is the implementation of reforms that improve the business environment and the functioning of the public sector.
Of course we also need more FDI, as it helps to close the gap between domestic savings and investment. At the same time, FDI directed to productive sectors of the economy can help to diffuse new technologies and forms of production organisation and to enhance the extroversion of the economy.
Household savings are negative, while consumption remains at a high percentage of GDP. What are the risks of this reality and what needs to be done to start saving?
The savings deficit (mainly of households), or more specifically the insufficiency of domestic savings to finance investment, leads to recourse to external borrowing and is reflected in persistently high current account deficits. This effectively suggests that the country continues to spend far more than it generates and constitutes a major macroeconomic imbalance. Indicative measures to boost household savings to bring them closer to the European average include the following: 1) combating tax evasion; 2) enhancing competition in the banking sector, leading to an increase in interest rates on time deposits; 3) developing the capital market by providing targeted tax incentives so as to stimulate savings in capital market products; 4) strengthening private insurance and the capitalisation of social security; and 5) enhancing financial literacy so that individuals are able to take appropriate long-term financial decisions.
Are you concerned about the composition of investment, relative to the production model?
The large investment gap is a major obstacle to productivity growth and its convergence with the European Union (EU) average. However, in recent years public and private investment has recovered significantly. In particular, gross fixed capital formation in Greece has increased by around 42% since 2019 in real terms, compared to around 1% in the euro area. Moreover, the composition of investment has improved markedly in recent years. Fifteen years ago, two-thirds of investment was in residential construction and only about one-third was in productive investment. Today, 3/4 of private investment is in productive capital and the remaining 1/4 in residential investment. This change in composition, if sustained, combined with an increase in the volume of investment, will help to change the productive pattern.
Is there an issue of insufficient competition in the Greek market and how does this affect prices for the consumer?
The structure and level of competition certainly affects prices for the consumer. The participation of more firms, for example, in a market increases the levels of competition, which in turn can lead to lower prices in the market, but also to higher quality products. In several sectors of the Greek economy, however, oligopolistic conditions are observed, which are in fact favoured by barriers to entry for new firms, bureaucracy, a slow justice system and inadequate market supervision. In order to improve the conditions of competition, it is necessary to remove all existing barriers to the entry of new firms. It is also necessary for the competent supervisory authorities to ensure competition levels, not only by enforcing the law, but also by stepping up and speeding up the procedures for monitoring and imposing fines in cases where infringements are found.
Are the government's measures against tax evasion inadequate or excessive?
The measures recently enacted by the government - such as the more complete exchange of information between businesses and the AADE on electronic transactions (including through the interconnection of cash registers and POS), e-commerce and e-platforms, the automation of the completion of tax returns and the change in the way freelancers are taxed with the introduction of a minimum presumptive income - are initiatives in the right direction. It is expected that these measures will make a positive contribution to the fight against tax evasion by broadening the tax base, as well as to enhancing tax fairness. The measures taken could be accompanied by adequate tax incentives for consumers not to hide transactions in sectors with increased tax evasion.
Are you concerned about labour market shortages? How should they be addressed?
The shortages are the result of the economic recovery and falling unemployment. However, this mismatch between demand and supply of jobs may have a negative impact on the growth of the Greek economy. The sectors with the greatest shortages are agriculture, tourism, construction and manufacturing. In order to fill the critical labour and skills gap in the domestic labour market, it is important to integrate immigrants, as well as to introduce incentives to reverse the brain drain and to increase the participation of older people and pensioners, young people, women, the disabled and the Roma in the labour force. At the same time, education, particularly technical education and lifelong learning, has an important role to play in matching labour market needs with workers' skills. Finally, controls to combat undeclared and under-declared work should be stepped up.
Is there still a concern about high debt? What should a prudent fiscal policy look like in the coming years?
Although the debt-to-GDP ratio is still the highest in Europe, its downward trend is still pronounced and its resilience to adverse scenarios is strong, given both the specific characteristics of the debt and the structural fiscal position of the country. It should be stressed, however, that the current favourable characteristics of the accumulated debt are not permanent. They only provide an important window of opportunity for the government debt to remain sustainable during the upcoming phasing out of the concessional loans granted under the adjustment programmes and their replacement by new borrowing on market terms. Preserving fiscal credibility, pursuing countercyclical fiscal policies and implementing the new EU fiscal rules are prerequisites for exploiting this window of opportunity. A key tool of the new framework is the control of public expenditure, which does not allow for one-off measures on the expenditure side unless they are accompanied by an equivalent increase in revenues.
You are talking about reform fatigue. What other reforms need to be run?
In an international environment where new uncertainties are piling up, reform fatigue is the biggest challenge to further strengthen the resilience of the Greek economy. Geopolitical instability, technological challenges, the green transition, the productive use of artificial intelligence are just a few areas that call for strengthening the economy's resilience to external shocks and make it necessary to maintain high growth rates in the medium term. In this direction, economic policy should focus on maintaining the momentum of reforms by strengthening national ownership of the planned changes. Accelerating the administration of justice, further improving the business environment, fighting bureaucracy, simplifying the tax system, enhancing competition and increasing labour force participation, especially of women and young people, are just a few examples of changes that need to be accelerated.
Why is the economy's competitiveness on the decline again?
The competitiveness of the Greek economy has improved significantly in recent years. There was a deterioration mainly in relative consumer prices in 2023 and early 2024, which was due to the appreciation of the euro against the dollar. However, this deterioration does not exist in relation to trading partners within the euro area. On the contrary, within the euro area, Greece's competitiveness has continued to improve. In terms of structural competitiveness, Greece's ranking in composite indicators shows an improvement in 2024, but the business environment is still less attractive than in most EU countries. The improvement in competitiveness is also reflected in the increase in market shares of Greek exports over time. However, further improvement of the country's competitiveness requires accelerating reforms related to the functioning of the state and improving the business environment.
Isn't twenty years too long to get to where we were 20 years ago in terms of convergence with the EU? And will we?
The debt crisis has left a very strong negative imprint on the Greek economy. It has reduced real GDP, reduced investment and increased unemployment and the emigration of young and highly qualified workers. At the same time, the European economy, despite the shocks that it itself suffered from the debt crisis, continued to grow over the past decade. As a consequence, in the period 2010-2017, there was a real divergence of Greece's GDP per capita from the euro area average levels. Despite the progress so far and the positive outlook I have mentioned, according to our estimates, it will take more than 20 years, at current growth rates, for Greece's GDP per capita to converge with the euro area average. However, a prerequisite for making up for lost ground is the continuation of reforms, the faster implementation of the actions of the National Recovery and Resilience Plan and the absorption and effective use of NSRF 2021-2027 resources.
Do you see Europe winning the competitiveness battle with the US and China?
In recent years, the global landscape has changed radically and Europe will have to do the same if it wants to compete successfully with the US and China. Geo-economic fragmentation, the re-emergence of inward-looking industrial policies and trade protectionism require the EU to act with a common strategy, common tools and close coordination. For this to happen, the governance model in Europe will need to become more federal. When Europe is hit by a shock, it is fragmented, so it does not respond as coherently as the US.
The competitiveness gap equals a productivity gap. To bridge it, we need to increase public and private investment to US and Chinese levels and upgrade the workforce with skills in modern technologies. Some of the actions needed (e.g. improving the business environment, reducing regulation and focusing on public investment) can be implemented at Member State level.
However, the most important actions to boost private and public investment are linked to the implementation of common European policies. These include the completion of the Capital Markets Union and the Banking Union, the harmonisation of tax legislation for companies, the adoption of a single European platform to support education, research and innovation, the strengthening of the role of the EIB and the EBRD, the financing of public investment through common European resources such as the NGEU, and the exclusion of public investment for green and digital transition from European budget
