Saving for stability: Greece’s Recovery and Resilience Plan and its impact on the external position

Title: Saving for stability: Greece’s Recovery and Resilience Plan and its impact on the external position

Summary: This paper presents a small open-economy general equilibrium model to track the dynamic effects of the RRP/RRF on savings, investment, and external balances in Greece. 

Authors: Zamid Aligishiev and Robert Blotevogel (ESM)

Abstract: For over two decades, Greece’s external position has been characterised by current account deficits and negative net foreign assets. The Recovery and Resilience Plan (RRP), supported by the EU’s Recovery and Resilience Facility (RRF), is a large-scale investment and reform programme, which may improve Greece’s economic and external prospects. How will a successful implementation of this plan affect the evolution of the country’s external position over the long term? Using a dynamic small open-economy general equilibrium model, we track the dynamic response of savings, investment, and external balances. We find that: (i) a successful RRP/RRF can go a long way towards unwinding Greece’s external imbalances, due to large increases in public savings; (ii) the RRP/RRF is, however, no magic bullet, and domestic policies remain critical. If macroeconomic policies stimulate domestic demand over and above the impulse generated from higher investments (through new tax cuts or looser macroprudential policies), even a successful RRP/RRF would fail to make a substantial dent in Greece’s net international investment position.

Non-technical summary

Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.

Keywords: Greece; external position, national savings and investment, Recovery and Resilience Facility, fiscal policy, macroprudential policies

JEL codes: C54, E21, E61, F45, F47

Source: European Stability Mechanism | Working Paper Series | Volume 2024 | No. 65 | November 2024 | 45 Pages
 

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