Greece pushes debt ratio

Athens Most EU countries significantly reduced their public debt ratios in the past year. According to the statistics authority Eurostat, the decline in 2022 in the euro area was 3.9 percentage points compared to the previous year. The average debt ratio of the euro countries at the end of 2022 was 91.6 percent of gross domestic product (GDP).

The high average is mainly due to six EU countries whose debt is over 100 percent of GDP: Greece, Italy, Portugal, Spain, France and Belgium. Germany’s debt ratio was 66.3 percent at the end of 2022.

Greece, by far the most indebted country in the monetary union, was even able to reduce its debt ratio by 23.3 percent. That was the best value in the EU. Since public debt in Greece reached its all-time high of 206.3 percent of GDP in 2020, the country has even reduced the ratio by 35 percent to 171.3 percent. The decline is mainly due to the strong economic growth over the past two years. In 2021, GDP increased by 8.4 percent, in 2022 it was 5.9 percent.

The good economy brought more tax money into the coffers of the Greek tax authorities than expected. Instead of an expected primary deficit, which excludes interest costs, of 1.6 percent of GDP, the bottom line at the end of 2022 was a small surplus of 0.1 percent.

The fiscal success is all the more remarkable given that the government paid out around ten billion euros in energy subsidies last year. The consolidation trend continued in the first quarter of 2023. Tax revenue was 12.4 percent above target.

Greece is setting itself ambitious goals

The government of conservative Prime Minister Kyriakos Mitsotakis is therefore going into the parliamentary elections on May 21 with solid public finances. Mitsotakis is running for a second term. In the polls, his party Nea Dimokratia is currently around five percentage points ahead of the radical left alliance Syriza of ex-Prime Minister Alexis Tsipras.

Mitsotakis promises voters a continuation of the course of consolidation and reform. In its stability program, which it submitted to the EU Commission last week, the Greek government has set itself ambitious goals for the next four years.

Economic growth of 2.3 percent is expected for this year, in 2024 and 2025 GDP is even expected to increase by three percent in each case, and by 2.1 percent in 2026. Finance Minister Christos Staikouras wants to gradually increase the primary surplus in the budget over the four-year period from 1.1 to 2.5 percent of GDP.

By 2026, the debt ratio is to be reduced by a further 36 percentage points to 135.2 percent. If this forecast comes true, Greece could then no longer be the biggest debt laggard: Italy, according to its own stability program, will have a ratio of 140.4 percent in 2026.

Despite strong growth and fiscal consolidation, Greece remains the most indebted country in the EU for the time being – a legacy of the severe financial crisis, which brought the country to the brink of default several times in the 2010s.

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In the crisis years from 2010 to 2018, the euro partners and the International Monetary Fund supported Greece with bailout loans of 288.7 billion euros – the most expensive bailout in financial history.

Why the debt is considered sustainable

Despite the high debt ratio of currently 171.3 percent of GDP, the Greek government debt is considered sustainable according to the EU Commission. This is supported by the fact that more than two thirds of the liabilities are with public creditors such as the Euro Stability Fund ESM and its predecessor EFSF. The average interest rate is 1.4 percent and at 20 years, Greece has the longest average maturity of government debt in the EU.

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But the country still has a long way to go when it comes to debt reduction: repayments of the ESM and EFSF bailout loans will not start until 2034 and will last until 2070.

According to the latest forecast by the European Commission, Greece will not achieve the EU Stability Pact target of a maximum government debt ratio of 60 percent of GDP until the early 2050s – provided that the country generates annual primary surpluses averaging two percent of GDP by then.

More: This is how high the current national debt in Germany is

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