May 3, 2013
1. Greece is making progress in overcoming deep-seated problems in the midst of a very serious and socially painful recession. The adjustment challenges facing Greece in 2010 were daunting, with fiscal and current account deficits both well into the double digits, reflecting runaway increases in public expenditures and the emergence of a large competitiveness gap in the years following the adoption of the euro. For any country belonging to a currency union, addressing dual imbalances of this magnitude would carry very high risks to growth, as recognized at the outset. In the event, the recession in Greece has been much deeper than expected. But Greece’s achievements must also be recognized:
- Progress on fiscal adjustment has been exceptional by any international comparison, with the primary balance set to have cumulatively improved by 10 percent of GDP by end-2013, amid a contraction in GDP of more than 20 percent.
- Greece has also made a significant dent in its competitiveness gap. Far-reaching labor market reforms have helped to realign nominal wages and productivity at the enterprise level. We estimate that the competitiveness gap as measured by Unit Labor Costs (ULC) has been reduced by close to two-thirds since 2010, while the current account deficit has come down cumulatively by about 10 percent of GDP.
- Financial sector stability has been preserved, despite large losses associated with the debt restructuring and a sharp rise in NPLs associated with the deep recession.