Greece made mixed progress towards the ambitious objectives of the first adjustment programme. Several factors hampered implementation : political instability, social unrest and issues of administrative capacity and, more fundamentally, a recession that was much deeper than previously projected. Important fiscal targets were missed, which led to the adoption of additional consolidation measures throughout 2010 and 2011. However, Greece achieved a substantial reduction in the general government deficit: from 15¾ per cent of GDP in 2009 to 9¼ percent in 2011. This fiscal adjustment was necessary given the extremely high deficit reached in 2009. The adjustment is much larger than most other fiscal consolidation episodes in EU countries observed in the past. This fiscal consolidation had to be achieved over a period in which the economy contracted by more than 11 percent, which was unavoidable given the substantial positive output gap that had built up due to the non-sustainable policies conducted until 2009. The pension reform and the agreed privatisation plan were important institutional changes which will bear fruit in the medium term. Financial stability has been supported by exceptional Eurosystem measures that contributed to the appropriate financing of the Greek banking system and economy. However, insufficient progress was made in modernising revenue administration and expenditure control, and steps taken in the fight against tax evasion and the prompt settlement of payments to suppliers have remained far too timid. In addition, while several steps were made with regard to growth-enhancing structural reforms since May 2010, achievements in this field were clearly not commensurate with the need to accelerate productivity growth and restore competitiveness. On several occasions, there were legitimate doubts about the ownership of the programme by the Greek Government. More fundamentally, reforms adopted since spring 2010 were insufficient in restoring growth and in ensuring fiscal sustainability, and Greece has been unable to return to the markets so far. The programme strategy has been adjusted. Through large-scale assistance to Greece, the international community provides Greece with financing at low interest rates, thereby compensating for the fact that Greece is not expected to be able to return to market financing over the next three years. Greece will need to use the additional time to underpin its fiscal consolidation efforts with structural fiscal reforms to generate expenditure savings on a durable basis. In a similar vein, structural reforms to boost growth will need to be accelerated to improve competitiveness, and financial stability will need to be preserved. These objectives are the same as under the first programme. Nonetheless, in the second programme, the implementation of the growth-enhancing structural reform agenda gains prominence in the overall implementation of the programme, while the debt restructuring and higher official financing allows a slower fiscal adjustment and a more gradual privatisation process.
