Future prospects and challenges - a LSE study

Over the last 15 years Greece has exhibited a remarkable record of economic growth and monetary convergence with the Eurozone. Its economy has almost doubled in real terms since the early 1990s (grown by 60% since 1998) while in per capital terms it covered a 15 percentage points distance from the EU27 average in the space of 8 years. Reversing a very long trend, the country has become a net migration recipient and net capital exporter, having placed significant direct investments in the Balkan countries over the last decade. Its financial system has expanded significantly, while many of its sectors of specialisation have developed a competitive international profile.

Nevertheless, as the recent economic turbulence has manifested, the Greek economy is still not based on a solid foundation and rather suffers from a number of structural problems and weak fundamentals. On the one hand, there are significant fiscal problems that have to do with tax evasion, inelastic government expenditures, an ageing population and an unsustainable pension
system. On the other, a number of significant structural problems exist, related to export penetration and economic competitiveness, structural unemployment and inactivity, low labour mobility and wage flexibility, low productivity, low technological absorption, low educational performance (as revealed in the OECD PISA studies) and, above all, economic duality (with a large shadow economy and a disproportionately protected public sector).

Economic expansion has been largely sustained through the liberalisation of the financial sector (which provided cheap credit to households), the reduction in interest rates due to EMU, the migration inflows, the opening-up of the Southeast European market and the significant growth of public investment and consumption (related to the Athens Olympics and the 3rd CSF). However, progress with labour productivity, employment participation, and the technology content of production has been much more modest.

Given the fact that most of the earlier drivers of growth will be of much less importance in the future (e.g., a much lower allocation of funds under the 4th 19 CSF and of course no economic boosts anticipated similar to the Athens Olympics and the EMU), the economic outlook for Greece could seem much less secure than what the recent record of robust growth suggests. Significant
improvements in the regulation of product and labour markets, rationalisation of the pension and education systems, and more focused interventions to attract domestic and foreign investment in the country are essential ingredients for a strategy to improve employment participation rates, improve the sustainability of public finances, increase the competitiveness of the economy
and its export penetration, raise innovation and productivity and upgrade the position of the economy in the value-added chain.

In the short- to medium-run, of course, the most urgent problems have to do with the fast acceleration of inflation, which erodes economic competitiveness and living standards, the decline in private consumption and real household incomes, and the control of the fiscal stance of the country.