Over the past decade, Greece has progressed rapidly in closing the income gap with the best performing economies, particularly once the recent 26% upward revision to the level of GDP is taken into account. This data revision is largely the result of improved measurement of the fast-growing services sector, while, contrary to many press headlines, the contribution from the inclusion of illegal activities was less than 1% of GDP. A full assessment of growth performance is difficult because data revisions prior to 2000 have yet to be published, but it is likely that growth in GDP per capita over the past decade has exceeded 4½ per cent per annum, which would rank Greece second highest (after Ireland) in the OECD. Explanations for the rapid catch-up in living standards include: financial market liberalisation coupled with membership in monetary union, which led to a substantial reduction in borrowing costs; buoyant activity in export markets in southeastern Europe; and the fiscal stimulus and focal point given by the Olympic games in 2004.

There has recently been a major revision to the national accounts, increasing the level of real GDP by over one quarter since 2000. Understanding the nature of this revision is important for assessing growth performance, but there are limitations due to the absence of a consistent historical series. Growth in GDP per capita over the last decade has been among the most rapid in the OECD. Most of the explanations for this strong growth performance – notably the effect of a large reduction in competition-curbing product market regulation and financial market deregulation – are of a transitory nature. This raises two questions with important policy implications. Firstly, what is the risk that the current period of strong growth will end with a hard landing? Secondly, what should the policy priorities be to sustain strong growth over the longer term?

A major achievement has been the reduction in the fiscal deficit since 2004 by over 5% of GDP to below the 3% limit in 2006. The government plans a more gradual reduction over coming years so that overall balance or surplus is reached no later than 2012. However, fiscal consolidation should continue, possibly at a more rapid pace than planned given the high level of government debt, favourable outlook for output growth, and long-term fiscal costs of ageing which are estimated to be among the largest in the OECD. There are as yet no specific proposals to reform pensions, which account for most of the prospective ageing-related increase in public expenditure, although the government is expected to announce reforms later this year. Delaying fiscal consolidation, particularly the urgently needed pension reform, would have substantial longer-term costs in terms of higher taxes and additional debt service costs, including an increase in the risk premium paid on government debt. In addition, this would heavily skew the tax burden towards future generations. Consolidation should focus on reducing primary spending and on enhancing tax revenues. This can be achieved particularly through increased efficiency of public administration and by tackling tax evasion and other measures to further broaden the tax base. Ensuring long-run fiscal sustainability will further require the implementation of wide-ranging reforms in the key area of health care, as well as an early decision to introduce a comprehensive reform of the pension system.

A major pension reform is urgently required to ensure fiscal sustainability, eliminate distortions against working at older ages and deal effectively with poverty issues. First, pension expenditure is projected to increase to mid-century by more than for any other OECD country. Reform is required not only to ensure fiscal sustainability, but also because pension expenditure will otherwise account for more than one-fifth of (unrevised) GDP and inevitably crowd out other social outlays which are needed to support social cohesion and structural objectives. Judged against projections for other EU countries a fall in pension benefits relative to average wages is likely to bear the brunt of any adjustment, although the extent of this adjustment can be limited by reforms which reduce disincentives to continue work in old age and curtail the many alternative early retirement pathways.

Unemployment remains high, particularly among first-time labour market entrants (mainly the young) and re-entrants (mainly women), while the long-term unemployed account for a high share of the total. There is scope for policy to facilitate entry to the labour market particularly by reducing minimum labour costs and easing the relatively strict employment protection legislation. Neither is currently on the government’s policy agenda.

A well-performing higher education system is crucial for human capital formation, innovation and the take-up of new technologies. However, tertiary education outcomes in Greece are poor in international comparison as evidenced by low graduation rates; the high number of students that study abroad, despite the costs borne by students studying in Greece being low; and a poor performance in terms of academic publications. Tertiary education is entirely provided and largely financed publicly, which raises questions about the effectiveness of this public spending. New OECD indicators suggest that the current institutional framework for tertiary education falls short of best practice by a wide margin. In particular, it is one of the most centralised and least flexible systems in the OECD. This chapter highlights the shortcomings of the current set up and assesses the recent reform of the university system. These plans provide a necessary step in the right direction, with a focus on improving governance and setting up a system of evaluation. However, further steps will be required, to remedy all shortcomings, most notably to allow private universities and to link funding to performance. At a later stage deeper reforms to student finances should also be considered.

Effective competition in the network industries remains weak. While commendable progress was made in partly or fully privatising state-owned enterprises, the stake of the government in key public utilities remains high, and price regulation is still pervasive, especially in the transport sector. Substantial challenges exist in the energy sector, where vertical integration hampers the emergence of genuine competition, despite the legal opening of the market. In telecommunications, the unbundling of the local loop needs to be speeded up to facilitate access to broadband services and the rapid diffusion of information technologies. The postal services market is being liberalised gradually, in line with the relevant EU Directive. Important concerns arise, however, about the financing of a universal service. In the transport sector, the liberalisation of ferry economy class fares is expected to trigger competition, but the privatisation of the national airline is still pending. Regulation of the road freight sector has remained among the most restrictive in the OECD. In the railway industry, reforms need to continue to promote competition. Effective regulators are essential for ensuring non-discriminatory access to the network and fostering competition in all the newly liberalised sectors.