In terms of real GDP growth, the Greek economy has performed very well in recent years and has weathered the international slowdown in activity better than most OECD countries. However, in part this has been achieved at the cost of a sharply widening fiscal deficit to very high levels and high and rising public indebtedness. Hence, a major challenge of economic policy will be to rein in government deficits to meet European obligations and to prepare for the spending pressures that will start emerging after 2015 arising from an ageing population and an actuarially unsound and largely unreformed public pension system. The growing cost of the public health system will also add to the pressures on the government budget. Further policy challenges arise from the government’s objective to narrow the gap in living standards between Greece and the European Union, which had widened from the...

Fiscal policy faces difficult challenges in both the short and medium run in light of the recently revealed sharp deterioration in the fiscal position. The latest Stability and Growth Programme envisages a reduction of the general government deficit from 6% in 2004 to below 3% of GDP in 2006, requiring significant corrective action within a period of two years. The public debt remains high, at around 110% of GDP, with large demographic pressures emerging after 2015. The key is to constrain primary expenditure – through spending prioritisation – and limit tax evasion, reducing budget deficit to the levels targeted by Greece’s Stability Programme and making room for lower taxes and enhanced spending in growth-promoting areas. Decisive steps will also be needed to enhance administrative efficiency and reform the health care system, ensuring its financial viability. Tax reform should seek to further simplify the system and to reduce its various distortions of resource...

This chapter looks at structural policies which would improve Greece’s long-term productivity performance and help speed economic and social convergence with European Union member countries. It focuses on a number of key areas which are particularly important for rapid productivity growth as they offer substantial scope for catching up with international best practice. These areas are: competition policy reform; fostering a knowledge-based economy; the liberalisation of product markets, in particular the energy, telecommunication and transport sectors; policies to foster entrepreneurship; and the implementation of a better corporate governance regime....

This chapter discusses a number of features of the labour market which are particularly important for raising labour force participation and employment rates, which would improve Greece’s long-term economic performance and help speed economic and social convergence with European Union member countries. These are: the flexibility of the wage system; non-wage labour costs; employment protection provisions; labour mobility; active labour market policies; and the stock of human capital. The chapter concludes with a box (Box 4.3) summarising recent progress in labour market reforms and main recommendations for further policy action.

Migration has always been an important phenomenon in Greece with large flows of emigration for several decades after the Second World War and large immigration flows since 1990. The cycle of emigration followed by significant return migration to Greece can be seen as part of Greece’s adjustment from a rural economy to an urban one, although there were significant political influences involved as well. The inflow of immigrants during the 1990s was large, possibly raising the share of foreigners in the population to over 10% and increasing the labour force by between 5 and 10%. Given the rigidities of the formal labour market in Greece, the existence of a substantial informal sector with latent demand for low-paid labour allowed illegal immigrants to find jobs in large numbers even while structural unemployment...