While Greece has managed to implement reforms to emerge from the 2010 economic crisis, the country remains vulnerable due to its external financing conditions, a new study has shown.
Research conducted by two economists, Zamid Aligishiev and Robert Blotevoge, shows that the European Union’s Recovery and Resilience Facility (RRF) and the associated Recovery and Resilience Plan (RRP) are crucial tools in addressing Greece’s vulnerable state, though these alone would be insufficient and deeper reforms would be necessary to safeguard the Greek economy from unexpected foreign developments.
While EU initiatives are composed of substantial public investments and reforms designed to enhance Greece’s long-term potential, researchers argue that even such an ambitious plan may not suffice long term in addressing the country’s external financing imbalance. Aligishiev and Blotevoge employed a dynamic general equilibrium model calibrated to reflect Greece’s features as a small open economy. They monitored potential impacts of the RRF and RRP on savings, investment, and external accounts.
The results indicate that a successful RRF/RRP program could correct most of Greece’s external financing imbalances due to significant increases in public savings, but it would not solve all issues within the economy.
The RRF/RRP program does not guarantee success in external financing position for Greece
The Greek economy is on good footing, but the fundamental problem of external deficits remains a top concern. Recent forecasts from the European Commission (EC), the International Monetary Fund (IMF), and the Organization for Economic Cooperation and Development (OECD) point to sustained current account deficits into the Eastern Mediterranean country’s foreseeable future.
Such external financing “flow” deficits would emerge on top of large “stock”
deficits. Greece’s net international investment position (NIIP) stood at at around -136 percent of GDP at the end of 2023. Both the IMF and the EC expect the NIIP in Greece to remain the weakest among euro area (EA) countries—Greece, Cyprus, Ireland, Portugal, and Spain—that have received financial assistance.
The researchers argue that a well-executed RRF/RRP program could significantly contribute to unwinding Greece’s external financing deficits, potentially leading to substantial improvement in its net international investment position (NIIP). In comparison to a scenario without RRP or RRF, the dynamic general equilibrium model scenario demonstrates account improvements of up to 2.6 percentage points of GDP over a fifteen-year period, increasing the NIIP by almost 30 percentage points of GDP. Naturally, this would be a good thing.
However, it must be noted that such a positive outcome would not be automatic. The RRF/RRP is not a magic wand. This is because a successful RRF/RRP program could, paradoxically, sow the seeds of new threats to external financing sustainability. Intuitively, an investment-led economic boom creates pressures (political and otherwise) to utilize some of the economic dividend to boost consumption instead of repaying debt.
The advantages of the RRP may be wasted, resulting in substantially smaller improvements in the external financial situation if fiscal policy becomes unduly expansionary (through significant tax cuts) or if people dramatically increase their borrowing in expectation of future income gains. Prudent and encouraging internal measures are necessary to maintain long-term improvements in foreign financing.
According to research, Greece’s RRP implementation has been performing quite satisfactorily; as of the first quarter of 2025, the nation had successfully unlocked more than half of its allotted resources. Although the entirety of their impact remains unknown, this progress indicates that the instruments for potentially increasing national savings are being put into place.
Public investments, savings, and the RRF/RRP in Greece
New public investments through the RRF/RRP add to public assets, which helps make private capital and labor more productive. This pushes domestic interest rates up as returns on capital rise. Over time, the benefits of productivity-boosting reforms slow down, and businesses in both traded and non-traded sectors face lower returns while building up private capital.
Total spending initially rises quickly and then significantly slows down. Households that plan ahead expect higher income later on and try to spread out their spending evenly over time. Because interest rates are lower in other countries, they borrow money against their future income, raising foreign private debt to pay for the early increase in spending.
Investment adjustment costs are obstacles that slow down how quickly companies build up capital. This reduces output growth and allows domestic spending to grow faster, partly because government spending and foreign consumption increase quickly. As productivity improves and wages become more balanced, the cost of traded goods decreases, leading to a slow increase in exports. Because people spend more on local goods at first, this balances out the drop in currency value from reforms, making it possible to boost imports.
At first, imports increase more in relevance to exports, worsening the trade balance as domestic spending surpasses output. As productivity is enhanced, however, local products become more appealing, leading to a reliance on fewer imports and less of a need for outside funding.
Suggestions
New government spending from the RRP/RRF boosts public resources, leading to higher private capital and worker efficiency. This, in turn, raises expected profits on investments and pushes domestic interest rates up.
The researchers conclude that policymakers in Greece should implement prudent complementary domestic policies. The case for fiscal prudence prioritizing debt reduction is well-known and internalized in Greece, as the government successfully makes timely payments to its creditors and improves its external financing position.
The report does, however, also caution against the potential for a fresh spike in foreign borrowing, or capital inflows, that has garnered less attention. The study highlights the necessity of carefully analyzing how external financing and macroprudential policies interact, especially at a time when the RRP/RRF is effectively increasing investment and productivity.
Given the limited role of private savings in driving improvements in Greece’s external position, the analysis suggests value in policies aimed at boosting private savings. One option could be to establish greater incentives in the tax system for people to contribute to a fully-funded auxiliary pension system, particularly for low- and middle-income households.
A shift in the composition of capital inflows toward productive foreign direct investment (FDI) could also be advantageous for Greece. Establishing a top-notch regulatory framework for FDI and specific incentives in vital sectors such as manufacturing, renewable energy, and research and development could be beneficial in improving current account balances over time, given the crucial role of FDI.
The paper concludes that although the RRF/RRP combination is a powerful tool, domestic policy is more vital, as it is a decisive factor in determining whether Greece can truly break free from its history of external financing imbalances and secure a more resilient economic future.