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Greece’s Economy Is Improving But Needs to Keep Reform Path

Bloomberg logoBloomberg 2/26/2020 Sotiris Nikas

(Bloomberg) --

Greece’s fiscal and economic outlook has improved but the country still faces risks from a weak banking sector, high unemployment, large stocks of public debt and lack of international investment, the European Commission warned Wednesday.

“The continued solid fiscal performance and the growth-friendly policy agenda have made their impact on the economic climate as sentiment indicators approach pre-crisis levels,” the Commission said in its report for the country’s fifth post-bailout review. Greece has progressed well in implementing its specific reform commitments for the end of 2019 and should take “further significant action” for the financial sector, the Commission said.

After losing around 25% of its economic output during a decade-long debt crisis, Greece now needs to mainly focus in fixing its banking sector. Greek lenders’ non-performing loans exceeded 107 billion euros ($116.5 billion) in March 2016. That level has now fallen to some 71 billion euros, but this stock of bad loans remains the economy’s biggest problem.

a screenshot of a cell phone: Better, But Not Enough © Bloomberg Better, But Not Enough

“The further normalization of the financial sector is a key ingredient for sustained growth,” the Commission said in a separate report for the country. The high ratio of NPLs - just below 40% - constrains deleveraging and banks’ profitability, reducing the amount of credit that can be channeled to the economy, which suffers from underinvestment and slow productivity growth, it said, acknowledging “signs of improvement for companies.”

High debt

European authorities are also worried about Greece’s high government debt, even if it’s forecast to drop to 169.3% of GDP in 2020 from 175% of GDP last year. In order to further reduce the debt-to-GDP ratio “it is important that reforms agreed under the enhanced surveillance framework, in particular pension and health care reforms, as well as improvements in the budgetary process, continue to be implemented,” the Commission said.

An investment boost will also help the crippled economy. The Greek government is trying to attract investments but the investment gap is large and can’t be quickly filled. In 2018 investments accounted for 11.1% of GDP while in 2007 they peaked at more than 25%.

“Further reforming efforts are needed in the areas of business environment, investment licensing, trade facilitation, labor and product markets,” the Commission said. The effective implementation of reforms “has the potential to jump start the economy, spurring the creation of productive, rewarding and sustainable jobs.”

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