Greece is one of the European nations that has best managed the Covid-19 pandemic. In early July, the country reported fewer than 200 Covid-related deaths and the contamination rate per inhabitant was among the lowest in Europe. The 45-day reopening period initiated on 4 May is now over. Since 1 July, Greece has reopened its borders to foreign tourists from 14 countries outside of the EU, although a ban remains in place for travellers from the United States, India, Brazil and Russia.
Despite managing well the epidemics, Greece’s economy will be hard hit. The contraction in Q1 GDP was limited to only 1.6% q/q because strict lockdown measures were implemented late in the quarter (23 March). Even so, the tourism industry came to a standstill in April-May and consumption plummeted in April, with retail sales reporting a record monthly decline of 27.6%. The purchasing managers index (PMI) for manufacturing climbed back to 49.4 in June, but this still signals sluggish growth. According to the European Commission, GDP will contract by 9.7% in 2020 before rebounding by 7.9% in 2021.
In response to the crisis, the government set up an emergency fiscal stimulus equivalent to 10% of GDP.[1] This programme includes aid for the healthcare sector, the suspension of social security and VAT payments, EUR 800 in assistance[2] for employees unable to work because of the epidemics, an extension of unemployment benefits and state-backed loans via the Hellenic Development Bank.
GROWTH AND INFLATION (%)Prime Minister Kyriakos Mitsotakis subsequently announced a EUR 24 bn recovery package focused on the tourism industry. The plans introduces a VAT rate cut from 24% to 13% on transport tickets (ferries, airlines, buses) as well as on non-alcoholic beverages. The government will continue to subsidize part of the wages of employees hit hard by the crisis, using the financial support from the European SURE programme. [3]
The evolution of the job market will be scrutinised. The unemployment rate had dropped below 16% in February, the lowest level in nine years. The government now forecasts the unemployment rate to rise to about 20% by the end of the year.[4]
Indeed, a rebound in tourism activity remains highly uncertain. The epidemic is not under control in the United States, China, Brazil and
Russia, and the European Union has banned entry to all tourists arriving from these countries. If there is a resurgence of the epidemic in Europe (as seen in Portugal, Spain and Germany), the government would have to impose new restrictions.
The Covid-19 crisis will further weaken the banking sector. Although non-performing loans have diminished in recent years, they still accounted for 36.45% of Greek bank loans outstanding at the end of 2019 (IMF data). This will disrupt the Hercules bank securitisation programme, which was implemented last fall with the objective of lowering the share of non-performing bank loans outstanding below 20% by end-2021. Greek sovereign rates have nonetheless remained under control, partly thanks to the ECB’s Pandemic Emergency Purchase Programme (PEPP) launched in March. Greek sovereign debt is one of the assets eligible for purchase in the PEPP.
The European Commission is now forecasting a fiscal deficit of 6.4% of GDP in 2020, which will narrow to 2.1% in 2021. The debt to GDP ratio will climb from 176.6% in 2019 to 196.4% in 2020, before falling back to 182.6% in 2021.
