IMF Warns: Greece’s Recovery Plan Needs Prudent Policies to Ensure Lasting Impact

In a deeply researched IMF working paper, economists Zamid Aligishiev and Robert Blotevogel explore whether the country’s economic Achilles’ heel, its chronic external deficits, can finally be healed. Drawing on analytical support and seminars hosted by institutions such as the Bank of Greece, the European Stability Mechanism, and the IMF, the study evaluates the macroeconomic implications of the European Union’s Recovery and Resilience Facility (RRF). The centerpiece of this initiative in Greece is a €36 billion investment and reform package, known as the Recovery and Resilience Plan (RRP), which amounts to 16% of the country’s 2023 GDP. The core question is whether this funding can reverse decades of structural weaknesses or if, without careful policy, the country will risk squandering another historic opportunity.

A Legacy of Deficits and the Promise of Reform

Greece’s economic vulnerabilities are stark. As of 2023, it had the worst net international investment position (NIIP) in the euro area, an eye-watering -136% of GDP. Over the last 40 years, Greece has rarely run a current account surplus, averaging a -5% deficit, in contrast to the EU average of +1%. Although past reforms helped reduce fiscal deficits, the external side of the economy remains shaky. Interestingly, the problem is no longer driven by reckless public spending. Instead, the culprit is low private-sector savings, particularly among households. Low labor force participation, high informality, and weak per capita income limit Greeks’ ability to save. Around 20–30% of the economy operates in the shadows, undermining both the tax base and household financial stability.

The RRP addresses these issues through targeted investment in areas like green energy, digital infrastructure, education, and labor reforms. A core element of the plan is reducing informality by modernizing tax systems and offering support to small and medium-sized enterprises (SMEs) to transition into the formal economy. If successful, these reforms could lift productivity, improve income predictability, and expand access to financial tools, leading to higher private and public savings in the long term.

Modeling a Future of Fiscal Discipline and Growth

To assess the effectiveness of the RRP, the authors employ a dynamic general equilibrium model (DIGNAR-19), tailored to small open economies like Greece. The model includes optimizing and rule-of-thumb households, distinctions between traded and non-traded goods sectors, and explicit fiscal rules. The simulation assumes six “shocks” from the RRP: increased official grants, loans, public investment and consumption, productivity gains, and improved labor market conditions.

Under a disciplined policy regime, the results are promising. The model forecasts a 2.6 percentage point improvement in the current account balance and a 30-point improvement in the NIIP over 15 years. This improvement is driven not by a surge in private savings, which rises only temporarily, but by sustained increases in public savings. As economic activity expands and tax revenues rise, the government runs persistent surpluses and uses these to repay external liabilities. Meanwhile, investment in capital and labor reforms raises productivity and output. Exports become more competitive over time, and the initial surge in imports, fueled by public investment, gradually normalizes.

The Risks of Fiscal Looseness and Easy Credit

Yet the path to external stability is narrow. The authors simulate several alternative scenarios where domestic policies fail to support the RRP’s objectives. In the “fiscal slippage” case, the government uses rising tax revenues to reduce consumption taxes instead of repaying debt. The result is higher consumption, weaker labor supply, and rising imports. External debt remains elevated, the current account fails to improve, and the NIIP only rises by 7 percentage points, far short of the baseline.

In another scenario, dubbed “unproductive capital inflows,” private households borrow aggressively from abroad, anticipating future income growth. This is modeled by reducing the costs of foreign borrowing, similar to conditions that prevailed during Greece’s eurozone entry. As a result, external private debt climbs rapidly, consumption soars, and import demand crowds out the trade gains from RRP-induced productivity growth. After 15 years, households are left with 10 percentage points more in foreign debt and only marginally better external indicators. A third scenario, assuming weak export competitiveness, shows how failure to penetrate global markets can undo much of the gains: even as prices fall, exports remain sluggish, and the improvement in NIIP stalls at around 19 percentage points.

No Magic Wand, But a Roadmap Forward

The study’s overarching message is both hopeful and cautionary. The RRP can reshape Greece’s external position, but only with steady hands at the policy wheel. Strong fiscal rules, prudent macroprudential oversight, and full implementation of structural reforms are essential. The authors advise that Greece should also do more to encourage private saving, perhaps by offering tax incentives for pension contributions among low- and middle-income groups, and refocus capital inflows toward long-term productive investment such as foreign direct investment (FDI) in renewable energy, manufacturing, and R&D.

While previous studies emphasized the RRP’s potential to increase GDP, this paper shifts the spotlight to external sustainability, a critical metric for a country still recovering from a debt-driven crisis. By showing that even the most generous financial support mechanisms can falter without strong domestic policies, the study serves as a reminder that there truly is no quick fix. For Greece to secure lasting stability, the RRP must be seen not as a windfall but as a platform, one that demands discipline, transparency, and vision to carry the country into a more resilient future.