Greece faces major challenges from a weak banking sector, high unemployment, large stocks of public debt and an unfavorable net international investment position, the European Commission warned Wednesday.
“The accumulated imbalances will require further reform efforts in the coming years,” the Commission said in its assessment for the country. After losing around 25% of its economic output during a decade-long debt crisis, Greece needs to speed-up its reform efforts in order to gradually return to pre-crisis levels.
Fixing its banking sector is one of the main challenges. Greek lenders’ non-performing loans exceeded 107 billion euros ($116.5 billion) in March 2016. They have now been cut to some 71 billion euros, but this stock of bad loan remains the economy’s biggest problem.
“The further normalization of the financial sector is a key ingredient for sustained growth,” the Commission said. 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.”
In a separate report for Greece’s fifth post-bailout review, the Commission stressed that Greece should take “further significant action” for the financial sector. This report concludes that Greece has progressed well in implementing its specific reform commitments for the end of 2019.
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.”