Greece over time has a higher proportion of GDP in defense than other European countries
The need for Greece to continue to move on the path of fiscal stability and further reduction of its debt and to claim equal treatment in the context of the procedures for the strengthening of defense spending on the European Union is highlighting a research note that issued the State Budget Office in Parliament.
At the same time, he notes that “the Rearm Europe plan should not be considered as a stoppage of fiscal prudence, but as an opportunity to replace national public resources with common European funding for designed defense spending and the development of the EU and Greece defense industry”.
The research note, entitled “Fiscal Space and Sovereign Bond Market Developments in Selected European Economies” (“Financial Space and Developments in the State Bond Market in Selected European Economies”), the Professor of Economics at Business School Coordinator of the State Budget Office in Parliament and Professor of Finance at Adam Smith Business School at the University of Glasgow, Yiannis Tsoukalas. This is the first of a series of notes to be issued by the Budget Office on topical financial issues, with a focus on European developments that have a direct reflection on the Greek economy.
Analyzing data from the Greek government bond markets and 9 other European countries (Belgium, France, Germany, Ireland, Spain, Italy, the Netherlands, Portugal, Finland) from the first quarter of 2004 until the second quarter of 2024 and comparing data to the fiscal space in the first quarter of the year in the first quarter of 2024, the note notes that Greece has made significant progress in the field of fiscal adjustment, achieving primary surpluses for many years and reducing the debt to GDP by 54.8 percentage points from 2021. However, the country is facing a changing European environment which includes increased European environment and increased European environment and Geopolitical uncertainty. “Greece’s fiscal performance has been impressive, but the latest developments in Europe require constant vigilance”emphasize Mr. Kontonikas and Tsoukalas.
The European “bet” of increasing defense spending
Specifically for defense, it is emphasized that the need to strengthen it at European level creates a significant fiscal challenge for all EU member states, including Greece, which has been a higher proportion of GDP in defense over time than other European countries. It is noteworthy that in 2022 our country’s defense spending amounted to 2.6% of GDP, consistently overcoming NATO’s target for costs of at least 2% of GDP and the European average was only 1.3% of GDP.
The budget office note characterizes the framework of the European Commission Plan Rearm Europe as “welcome development, especially if additional defense costs can be funded through EU resources” and emphasizes:
“In this fiscal exercise there should be no winners and losers. In order to gain the Commission’s plan, the majority of EU member states should increase its defense spending. At the same time, EU Member States that have historically allocated a high proportion of their GDP (such as Greece, Poland, Estonia, Lithuania and Finland), at a price for reduced public spending in other areas, must be fair. It is in the interests of Greece, which is already one of the countries with the highest defense spending in the EU, to argue that designed defense spending from countries traditionally have a higher GDP rate in defense than the European average should be addressed in the same way that will be treated with historical costs.
At the same time, there is a need for “to take Europe as a whole a bold step towards the issuance of a common debt, beyond the 150 billion -euro portfolio announced in the Rearm Europe Plan”, since in the medium term no country can increase its defensive costs in medium term. At this point, it is commented that the role of the European Central Bank (ECB) in supporting European bond markets will also be decisive if the risks of upheaval and fragmentation are re -intensified, “But” in the event of new inflationary shocks, complications that could limit the capacity of the ECB. “
‘Stability Price’ that brings great savings to the cost of serving Greek debt
The research note identifies significant developments in the composition of investors who have been holding Greek debt in recent years, which have multiple interaction with the availability of the fiscal space:
“It is important that 70% of Greek public debt was in the foreign official portfolios in late 2024, as a result of the restructuring agreements during the crisis. This section of debt is locked at fairly low interest rates (much lower than the market), forming a low real debt service interest rate. In addition, the Greek debt portfolio is characterized by a very high average ripening, which was estimated at 18.8 years in late 2024. Even if the deferred interest payments of EFSF loans were included, the average interest rate in 2024 (on a cash base) was only 1.73%. If this is compared to the average market interest rate for the 10 -year bonds, which stood at 3.4% in the same year, it appears that Greece enjoys a “stability” of 1.67% and highlights the enormous savings of debt service costs. The particularly favorable composition of Greece’s investment base, which is fitted with the presence of investors who “buy bonds and holds them” (“Buy and Hold” Investors with long -term perspectives, coupled with the ECB’s support measures, contribute to the shielding of the Greek bonds from the Greek bonds “.
However, as highlighted in the analysis, while Greece benefits from favorable investor composition and debt service conditions, future debt -rates and increasing European lending costs may create additional pressure on the country’s fiscal position. In addition, “in today’s conditions of increased geopolitical uncertainty, the projected increase in EU governments’ issuance to fund not only defense costs and infrastructure costs but also the energy transition will probably lead to higher borrowing costs, at least short -term costs.” That is why the note of the State Budget Office in Parliament observes that the commitment to fiscal prudence, the utilization of EU financial mechanisms, the continuation of debt reduction efforts and the acceleration of growth reforms is crucial.
