ESM: Sees difficulties for Greece since the war in Ukraine

By Tasos Dasopoulos

The European Stability Mechanism (ESM) frames its annual report on the Eurozone, with reference to the promotion of the necessary reforms and the strong economic recovery in 2021, but also questions about the effects of the war in Ukraine. .

According to the report for 2021, the Greek economy has recovered dynamically from the pandemic, due to strong domestic demand and tourism. At a cost of a higher budget deficit of 7.3% of GDP, a significant package of interventions has supported households and businesses in the pandemic.

Lending conditions from the markets remained favorable for Greece, which was also supported by the European Central Bank (ECP) emergency bond purchase program (PEPP), while economic activity was strengthened and will continue to be strengthened by the Recovery Fund. Meanwhile, in the past year, banks have strengthened their balance sheets, significantly reducing the percentage of non-performing loans.

The effects of the war

However, the report notes that the war in Ukraine casts a shadow over the economic prospects for Greece. The magnitude of the impact remains to be seen, but Greece could be affected by its dependence on tourism and Russian oil and gas imports.

The ESM report notes that Greece enjoys a comfortable liquidity position, stable market access, low financing needs that reflect a long medium term and significant financial support from the Recovery Fund.

However, in the long run, Greece remains vulnerable due to macroeconomic imbalances, especially its very high public debt, as well as persistent investment gap, low productivity and high non-performing loans (NPLs).

To correct these weaknesses, Greece has embarked on an ambitious journey to modernize its economy. Reform priorities include addressing long-term weaknesses in infrastructure, education and skills, but also in public administration, including the justice system. All this must be continued and completed to make the economy more resilient to current and future crises.

2.5% slowdown for Europe

Economic growth in the eurozone, which was on a strong recovery trajectory after the most severe period of the pandemic, was revised downwards, the report said. “The conflict has caused great uncertainty about future economic developments, exacerbating supply chain disruptions and contributing to higher inflation, as evidenced by the sharp rise in energy and food prices. The economic impact of the conflict may be long-lasting. “, warns.

For the eurozone in particular, the loss from the war amounts to about 2.5% of GDP for the first quarter of 2022, the largest trade loss ever recorded.

It also stresses that the war has raised awareness of the need to reduce dependence on energy imports and diversify energy sources, stressing the need to move towards a green transition. This war could also be the trigger for more far-reaching changes, such as the formation of a new economic world order that could reduce globalization and change trade flows. “In this context, cooperation within Europe should be further enhanced,” the ESM report said.