Greek Public Debt: The Quest for a “Happy-end” to an Unsustainable Story

The paper discusses the origins and recent developments of Greek public debt and shows that even if high primary surpluses of 3.50% of GDP consistently materialize it is unlikely to be sustainable. The reason is that the anemic growth envisaged for the medium and longer run is not sufficient to increase country’s GDP and, thus, drive either the debt to GDP ratio to less threatening levels or the Gross Financial Needs below 20% of GDP. The paper suggests an alternative policy mix with primary surpluses reduced to 1.50% of GDP, with the rest 2% used to finance investment in infrastructure and export-led growth. This significantly enhances growth, making the debt/GDP ratio to fall below 100% by mid 2020s, while GFNs remain safely below 20% of GDP in the face of stochastic shocks impinging the economy. In the higher growth scenario, the implementation of tax cuts and lower social insurance contributions further increases employment and disposable incomes without affecting fiscal stability.