The leaked second economic adjustment programme for Greece

The European Commission has produced an  new document on the Second Economic Adjustment Programme for Greece, which you can find here.

The salient features of the report are:

The economic growth outlook has been far worse than expected. Real GDP fell by more than 7 percent in the last quarter of 2011, on a yearly basis. Current account deficit ought to contract substantially in 2012, but is forecasted to remain at around 7 percent of GDP in 2012.  Inflation remains high for an economy that is entering its fifth year of recession. The differential in the constant tax HICP with the euro area has not been sizeable enough to quickly recover previous losses in price competitiveness. Cost competitiveness is instead improving, the latest labour market measures together with those legislated in 2011 are expected to contribute to reduce labour costs by at least 15 percent over the next three years.

Fiscal targets for 2012 and subsequent years have been revised to take into account the unfavourable macroeconomic development. The objective for 2012 is a primary deficit of 1 percent of GDP. To achieve the revised fiscal target, the Government committed to reduce expenditures by 1.5 percent of GDP. Around three quarters of the cuts is of a permanent nature. These measures are all on expenditure driven. It is the first time since May 2010 that a re-calibration of the fiscal strategy was not accompanied by an increase in taxes.

However, current projections reveal a cumulated fiscal gap in 2013-14 of 5½ percent of GDP. Therefore, substantial additional expenditure cuts will have to be discussed, announced and adopted by Greece in the coming months, in particular when Greece updates its medium-term budget in May 2012, to reach the objective primary surplus of 1.8% of GDP in 2013 and 4.5% in 2014.