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11 November 2013

ECB/Mersch: 'Greece today stands at a crossroads'


Mersch said that the process of restoring sustainability and growth in Greece is not yet complete nor so far secured. If the authorities fail to address the remaining challenges, they will put at risk what has already been achieved.

Since the loss of market access in early 2010, the Greek people have made extraordinary efforts to refute the naysayers and turn the economy around. They have executed a fiscal adjustment of historic proportions and embarked on the difficult road of structural reforms. The results of these actions have accrued first and foremost to Greece - but they have also accrued to the wider euro area.

However, this turnaround is still only half complete. There is still much work to do. Like all Western societies, and some rapidly ageing Eastern ones, Greece faces long-term fiscal challenges linked to high public debt levels and demographic developments.

What Greece has achieved

The primary deficit has declined by almost 10 percentage points of GDP between 2009 and 2012. Taking into account the deep and prolonged recession, the underlying fiscal adjustment has been even larger. The OECD estimates that structural adjustment was nearly 14 percentage points of GDP in this period.

Greece has also made important progress in addressing the long-term fiscal challenges linked to its ageing population. There is little doubt that before the crisis the Greek pension system was unsustainable. But the Greek people have taken vital measures to ensure long-term fiscal sustainability.

What remains to be done

Nevertheless, this is the painful cost of reversing the misguided economic policies and lack of reforms in the past. And fiscal sustainability is not yet assured. While the government appears to be on track to meet its 2013 primary balance target, Greece still has some way to go to reach the primary surplus targets of 1.5 per cent of GDP in 2014, 3 per cent of GDP in 2015 and 4.5 per cent of GDP in 2016. This means that fiscal consolidation has to continue.

Based on current projections, a fiscal gap has emerged for 2014. It comes mainly from delayed gains from the tax administration reform, shortfalls in the collection of social security contributions and the continuing underperformance of the instalment schemes for outstanding tax obligations. Measures will have to be identified to close it.

Beyond that, accelerating the implementation of public administration reform is key to the success of the wider reform agenda.

The economic situation in Greece has started to pick up this year, with the economy stabilising and seasonally-adjusted real GDP increasing by 0.2 per cent quarter-on-quarter in Q2 2013. Overall, GDP growth is expected to turn positive next year at 0.6 per cent.

The authorities in Greece have also taken important steps to preserve the stability of the banking sector. The recapitalisation of the four core banks was completed in June 2013, while the consolidation of the banking sector has continued through the resolution of non-viable banks and the absorption of Greek subsidiaries of foreign banks. Deposit inflows have continued, in part offsetting the deposits lost between the end of 2009 and the middle of 2012.

Greece has made tremendous progress in recent years to close its fiscal deficit. But Greece today stands at a crossroads. In the one direction lies the path of difficult choices. This is the steep and thorny way, and it requires great commitment to negotiate, but it is the one that will lead to a reformed state, a sustainable economy and justice between generations. In the other direction lies the path of easy answers. This path is littered with false alternatives, such as recurrent proposals for debt restructuring.

From what I see today, I trust that the Greek people know which path they need to take. A recent poll shows that 69 per cent of the public supports the euro - and being part of the euro means taking tough but necessary decisions.

Full speech



© BIS - Bank for International Settlements


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