This trend has continued Greek government expenditures in 2009 accounted f 50

This trend has continued greek government

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superior.” This trend has continued. Greek government expenditures in 2009 accounted for 50% of GDP, with 75% of (non-interest) public spending going to wages and social benefits. Successive Greek governments have taken steps to modernize and consolidate the public administration. However, observers continue to cite overstaffing and poor productivity in the public sector as an impediment to improved economic performance. An aging Greek population—the percentage of Greeks aged over 64 is expected to rise from 19% in 2007 to 32% in 2060—could place additional burdens on public spending and what is widely considered one of Europe’s most generous pension systems. According to the OECD, Greece’s “replacement rate of 70%-80% of wages (plus any benefits from supplementary 7
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schemes) is high, and entitlement to a full pension requires only 35 years of contributions, compared to 40 in many other countries.” Absent reform, total Greek public pension payments are expected to increase from 11.5% of GDP in 2005 to 24% of GDP in 2050. Weak revenue collection has also contributed to Greece’s budget deficits. Many economists identify tax evasion and Greece’s unrecorded economy as key factors behind the deficits. They argue that Greece must address these problems if it is to raise the revenues necessary to improve its fiscal position. Some studies have valued the informal economy in Greece at between 25%- 30% of GDP. Observers offer a variety of explanations for the prevalence of tax evasion in Greece, including high levels of taxation and a complex tax code, excessive regulation, and inefficiency in the public sector. Like his predecessor Constantine (Costas) Karamanlis, Prime Minister Papandreou has committed to cracking down on tax and social security contribution evasion. Observers note, however, that past Greek governments have had, at best, mixed success seeing through similar initiatives. Structural Policies and Declining International Competitiveness Greek industry is suffering from declining international competitiveness. Economists cite high relative wages and low productivity as a primary factor. According to one study, wages in Greece have increased at a 5% annual rate since the country adopted the euro, about double the average rate in the Eurozone as a whole. Over the same period, Greek exports to its major trading partners grew at 3.8% per year, only half the rate of those countries’ imports from other trading partners. Some observers argue that for Greece to boost the competitiveness of its industries and reduce its current account deficit, it needs to increase its productivity, significantly cut wages, and increase savings. As discussed below, the Papandreou government has begun to curb public sector wages and hopes to increase Greek exports through investment in areas where the country has a comparative advantage. In the past, tourism and the shipping industry have been the Greek economy’s strongest sectors. International Factors Increased Access to Capital at Low Interest Rates Greece’s adoption of the euro as its national currency in 2001 is seen by some as a contributing factor in Greece’s buildup of debt. With the currency bloc anchored by economic
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