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  Assessment and Recommendations

  Domestic demand remained the main engine of activity in 2001, boosted by low nominal and real interest rates, buoyant consumer confidence, large capital inflows under the EU’s Community Support Framework, and preparations for  the 2004 Olympic Games. Nevertheless, Greece did not entirely escape unscathed the global slowdown, and GDP was slowing markedly towards the end of the year, though the year-on-year growth rate, at 4.1 per cent, was the same as in the year 2000. Unemployment fell to a still-high 10½ per cent, but despite brisk output growth in 2001, total employment may have declined slightly. The strong gains in labour productivity were mainly attributable to the ongoing major restructuring of the Greek economy, and the rising capital-labour ratio. But there may be some upward bias in measured labour productivity, to the extent that the underrecording of immigrant labour inputs is not reflected in unrecorded output.

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  Macroeconomic Developments and Prospects

  The Greek economy has expanded continuously since 1993, with growth particularly strong and averaging almost 4 per cent during the five-year period starting in 1997, exceeding that of the European Union by more than 1 percentage point. The economy was barely affected by the downturn which hit most OECD countries in the second half of 2001 and appears well placed to outperform growth of the OECD area by a substantial margin this year and next. The current expansion was led by robust domestic demand, which entailed a widening of the current external deficit to more than 6 per cent of GDP in 2000 and 2001. Notwithstanding accelerating growth, consumer price inflation, which was still in two-digit rates in 1994, has been reduced to 2 to 3 per cent in 1999-2000, before edging up somewhat in 2001. Dark spots in an otherwise bright picture are low labour market participation and the high level of structural unemployment. The actual unemployment rate appears to have fallen in 2001, but remains the second highest in the OECD (Figure 1).

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  Fiscal Policy Issues

  Greece has made substantial progress towards controlling public finances since the early 1990s, correcting fiscal imbalances within the framework of convergence programmes. The general government deficit declined by around 15 percentage points of GDP during the 1990s, falling to below 1 per cent of GDP in 2000. The fiscal improvement was aided by strongly rising revenues, and since the mid-1990s, by lower debt interest payments. By contrast, primary current expenditure has continued to drift up. The debt-to-GDP ratio, though falling since 1996 to its current value of about 100 per cent of GDP, remains well above the 60 per cent Maastricht ceiling, despite sizeable privatisation proceeds. Fiscal policy has become less restrictive since 1998, moving to a neutral stance in 2001. On a cyclically adjusted basis, net lending narrowed only slightly between 1998 and 2001 (by around 1 percentage point, compared with 12½ percentage points between 1990 and 1997). However, budgetary outcomes up to 2000 have been close to, or even outperformed, the initial targets, reflecting mainly positive surprises on the revenue side.

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  Public Expenditure in Greece

  This chapter discusses and evaluates public expenditure trends in Greece, as well as future prospects and implications for policy. The evolution of total public expenditures is discussed, and the major driving factors identified. Policy issues are raised and ongoing reforms are described. A short account and evaluation of the budgetary process and the management of public money is given, with emphasis placed on the system and the bodies responsible for public expenditure auditing and control. Lastly some conclusions are drawn and recommendations are given.

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  Progress in Structural Reform

  This chapter looks at structural impediments to better economic performance, and structural policies that could lessen or remove them. It focuses on a limited number of key areas that seem, in the Greek context, to be particularly important for faster growth, to wit, the quantity and quality of labour inputs, and the efficiency of product and financial markets. The areas discussed below are: the improvement of labour market flexibility; the upgrading of training and education: competition policy reform; the liberalisation of product markets, in particular the energy, telecommunication and transport sectors; and the reform of financial markets. The chapter concludes with a box (Box 11) summarising recent progress in structural reforms more generally.

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