Council opinion

of 10 February 2004

on the updated stability programme of Greece, 2003-2006

(2004/C 43/06)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and co-ordination of economic policies(1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission, after consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 10 February 2004, the Council examined the 2003 update of the stability programme of Greece which covers the period 2003 to 2006. The updated programme largely complies with the data requirements of the revised "code of conduct" on the content and format of stability and convergence programmes. An update of the analysis of long-term sustainability of public finances would have been helpful in light of the previous assessment clearly pointing out the risk of long-term imbalances.

The budgetary stance underlying the update is based on maintaining high primary surpluses over the programme period, consistent with a reduction in the expenditure ratio and an accelerating decline in the debt ratio. At the same time, a significant programme of public investment is expected to be implemented.

The 2003 update projects real GDP growth to accelerate from an estimated 4,0 % in 2003 to 4,2 % in 2004 and decelerate somewhat afterwards, averaging 4 % in the period 2004-2006, from an expected average rate of growth of 3,8 % in the 2002 update of the stability programme. Employment growth is projected to decelerate from 1,7 % in 2004 to 1,2 % on average in 2005-2006. Inflation is expected to decline gradually, the private consumption deflator decelerating to 2,6 % by 2006 from 3,0 % in 2004. On the basis of currently available information, the macroeconomic scenario in the update seems optimistic. In particular, the evolution of potential growth over the medium-term reflects rather favourable assumptions about the contribution of capital formation. Moreover, in a context of such robust demand, pressures on costs and prices can be stronger than expected in the update, putting even more at risk the control of some government expenditure items, and thus endangering the external competitiveness of the economy. In this regard, some government expenditure items, such as the wage bill, increased substantially in 2003 and should therefore be contained in the coming years.

The update targets a general government deficit of 1,2 % of GDP in 2004 as against an expected deficit of 1,4 % of GDP in 2003. In cyclically-adjusted terms, based on Commission calculations according to the commonly agreed methodology, in 2004 the cyclically-adjusted deficit remains unchanged at 1,7 % of GDP. For 2005 and 2006, the projections are for headline deficits of 0,5 % of GDP and balance in 2006. In cyclically-adjusted terms, the corresponding deficits amount to 1,2 % and 0,9 % of GDP respectively. In the light of the high debt ratio, the overall proposed adjustment is limited while a more balanced "policy mix" would call for a stricter stance of fiscal policy and an effective use of the opportunity provided by favourable growth prospects.

Although the budgetary targets in the programme seem to provide a sufficient margin against breaching the 3 % deficit threshold with normal macroeconomic fluctuations throughout the programme period, there are risks linked to the macroeconomic scenario, the likely underestimated deficit in 2003 and the lack of information on envisaged measures to contain primary expenditure. It is noted, however, that lower primary expenditures after the Olympic Games in 2004 should help to reduce deficits. Under plausible macroeconomic and budgetary assumptions, the Stability and Growth Pact medium-term objective of a budgetary position of close-to-balance or in surplus would not be achieved over the programme period.

The government debt ratio is projected to gradually decline from 101,7 % of GDP in 2003 to 90,5 % of GDP in 2006. Developments in the debt ratio are likely to be less favourable than projected, given the risks to the deficit outcome and possible negative developments in stock-flow adjustment, the latter having been a persistent source of debt accumulation in recent years.

On the basis of current policies, there is a risk of severe budgetary imbalances emerging in Greece in the future due to an ageing population, taking also into account the high debt ratio. Thus, the budgetary challenges posed by ageing population should be tackled through a comprehensive strategy that includes further reform of the pension system.

The economic policies as reflected in the 2003 update are not fully consistent with the recommendations in the Broad Economic Policy Guidelines, specifically those with budgetary implications, including the request to improve the cyclically-adjusted budget position by at least 0,5 % of GDP each year as calculated according to the commonly agreed methodology. Moreover, the projected decline in the debt ratio is subject to risk and there is the need for an effective control of government current primary expenditure, in particular of its inelastic components, like the wage bill and social transfers.

(1) OJ L 209, 2.8.1997.