European Commission sharply cuts Greek growth, primary surplus forecasts

Pierre Moscovici

Pierre Moscovici [EC]

The Commission slashed Greek economic growth and primary surplus projections on Tuesday (5 May), forecasting deeper price falls and a higher public debt as a result of uncertainty that has dogged Athens policymaking since late 2014.

Europe’s executive, which finished gathering data for its forecast on 21 April, said it now expected the Greek economy would grow only 0.5% this year, after 0.8% in 2014 and accelerate to 2.9% in 2016, unless policies change.

Three months ago, the Commission forecast Greece would grow 2.5 percent this year, and 3.6% in 2016, after a 1.0% expansion last year.

“The positive momentum, however, has been hurt by uncertainty since the announcement of snap elections in December,” the Commission said in its quarterly economic forecasts of main indicators for all 28 countries of the European Union.

“The current lack of clarity on the policy stance of the government vis-à-vis the country’s policy commitments in the context of the EU/IMF support arrangements worsens uncertainty further,” it said.

Greece is in heated negotiations with its international creditors to secure more loans in exchange for reforms as it quickly runs out of cash and faces the prospect of default.

The country’s primary surplus, the budget balance before debt servicing costs, will be only 2.1% this year, rather than the 4.8% projected only three months ago.

Next year it will be even worse. The surplus will be 1.8% of GDP, rather than the earlier expected 5.2% of GDP unless Athens changes policy.

The budget balance will also be much worse than thought only three months ago. Rather than a surplus of 1.1%, Greece will have a budget deficit of 2.1% this year.

A surplus of 1.6% forecast for 2016 has now turned into a deficit of 2.2%, unless policies change.

This deficit forecast assumes that Greece will get back almost €2 billion in profits that the European Central Bank made on buying Greek securities at the peak of the sovereign debt crisis.

To get that money, however, Athens will have to reach an agreement with its creditors on reforms — a deal that has eluded negotiators for the last three months.

Because growth will be lower, Greece’s debt-to-GDP ratio will be higher than previously expected. Instead of having peaked last year at 176.3% of GDP, the debt will only have reached its highest point this year at 180.2% of GDP, before declining to 173.5% in 2016.

The European Trade Union Confederation (ETUC) warned policy-makers not to put the recovery at risk by shifting back to the old approach. If the same policies of austerity and wage devaluation are repeated, the same results will follow, and the recovery will falter again, they said.

“Europe needs a sustainable recovery, not just a temporary bounce. Europe still needs a substantial investment plan to transform the recovery into a robust process,” said Bernadette Ségol, ETUC general Secretary.

On 20 March, the European Commission offered Greece funds to deal with what it called a humanitarian crisis, after Prime Minister Alexis Tsipras vowed to clarify bailout reform pledges demanded by creditors.

Following crisis talks between Tsipras and European leaders, EU Commission chief Jean-Claude Juncker said he was making available €2.0 billion in unused EU structural funds to Greece.

>> Read: Greece promises to deliver full reform list after three-hour 'mini summit'

Greece secured a four-month extension of its financial rescue on 24 February, when its eurozone partners approved an economic reform plan that backed down on key measures and promised that spending to alleviate social distress would not derail its budget.

>> Read: Eurozone approves Greek reform plan with reservations

Germany's rejection of an initial Greek request for a six-month loan extension forced Athens into a string of politically sensitive concessions, postponing or backing away from campaign promises to reverse austerity, scrap the bailout and end cooperation with the Troika of EU, ECB and IMF inspectors, which are now called "the institutions".

>> Read: Greece, eurozone agree to four-month loan extension, avert crunch

  • 11 May: Eurogroup meeting in Brussels.

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