The Greek economy recovered vigorously from the pandemic, driven by strong domestic demand and tourism, the European Stability Mechanism (ESM) said in its annual report for 2021 approved in Luxembourg.
Greece’s economic activity grew by 8.3% in 2021, ESM noted, “essentially recovering the output losses recorded in the previous year due to the impact of Covid-19,” as households and firms used accumulated savings to boost consumption and investment, and tourism surged. The government’s large fiscal support package propped up incomes and employment throughout the year, it said.
The primary balance improved significantly to -5.5% of GDP in 2021, from -8% the year before. As the ESM report noted, “The government provided extensive support to households, employees, and firms, with one of the largest discretionary fiscal packages in the euro area.”
Thanks to rapid growth, the debt-to-GDP ratio fell to 193.3% of GDP from 206.3%, while “Greece’s sovereign financing conditions remained favourable throughout the year,” noted the report, while banks more than halved their aggregate NPL ratio to 12.8% by the end of 2021. “Yet the overhang of private debt remains, underscoring the need for an efficient enforcement framework,” the report warned.
Speaking of the overall economic reforms, the ESM report noted, “Greece reached several important milestones in its comprehensive reform agenda: the implementation of a new insolvency framework; further progress in privatisation, notably of land at Athens’ former airport; and the adoption of an ambitious strategic plan to strengthen governance in state-owned enterprises and improve financial discipline.” It also made note of some setbacks in reform efforts, citing as example the plan to reduce non-pension arrears to zero in 2021.
In the short term, Greece enjoys a comfortable liquidity position, stable market access, low financing needs that reflect a long average maturity, and significant financial support from NextGenerationEU (NGEU funds), it said, “but over the long term, Greece remains vulnerable due to macroeconomic imbalances, particularly its very high public debt, as well as to a persistent investment gap, low productivity, and high NPLs.”
To remedy these weaknesses, ESM said, Greece has embarked on an ambitious journey to modernise its economy, with priorities including addressing long-standing weaknesses in infrastructure; education and skills; and public administration, including the justice system. “The war in Ukraine casts shadows over the economic outlook for Greece. The magnitude of the impact remains to be seen, but Greece may be affected given its dependence on tourism and on imports of Russian oil and gas,” the report’s page on Greece concluded.