No quick fix: The recovery and resilience plan and external position in Greece

Greece has long struggled with substantial current account deficits and high external debt. The country now has a significant opportunity to address this vulnerability through the European Union's Recovery and Resilience Facility (RRF) and the associated Recovery and Resilience Plan (RRP). The initiatives involve large public investments and reforms to boost Greece's long-term potential. A crucial question is can this ambitious plan fix Greece's external imbalances in the long-term? Using a dynamic general equilibrium model calibrated to capture Greece's characteristics as a small open economy, we track how the RRP/RRF may affect savings, investment and external balances. Results indicate that (i) a successful RRP/RRF can correct most of Greece's external imbalances due to large increases in public savings and (ii) the RRP/RRF is not a cure-all. An investment-led economic boom creates pressure to direct the economic dividend towards boosting consumption rather than repaying debt. If fiscal policy becomes overly expansionary or if households significantly increase borrowing in anticipation of future income gains, the benefits of the RRP/RRF would dwindle—and the improvement in the external position would be substantially reduced. Sustaining long-term external improvement requires prudent and supportive domestic policies.