Governor's Annual Report 2025

Governor's Annual Report 2025

06/04/2026 - Press Releases

FROM CRISIS TO RESILIENCE: THE GREEK ECONOMY AMID HEIGHTENED GLOBAL UNCERTAINTY AND SUCCESSIVE SHOCKS

Speech by Bank of Greece Governor Yannis Stournaras at the Annual General Meeting of Shareholders

The global economy is once again confronted with a negative shock. The recent military escalation in the Middle East is causing serious disruptions to energy markets and global supply chains, with adverse effects on both growth and inflation. These are likely to worsen if the crisis is prolonged or spreads across the region. Against this background, the balance of risks to the global and euro area economies has deteriorated significantly.

In this uncertain, complex and unstable international environment, the Greek economy is in a much stronger position than in the past.

- Over the recent years, it has strengthened its resilience, thanks to the improvement of its fundamentals, the consolidation of fiscal credibility, the restoration of confidence and progress in the banking sector.

- This resilience is a critical legacy for the Greek economy, which now has to operate in a new normal of increased uncertainty and successive shocks. It does not, however, allow for complacency, as external risks remain high and domestic challenges are still considerable.

In this international environment, it is worth reviewing European and domestic economic developments in 2025, in order to better understand the conditions in which the Greek economy is entering this new period of uncertainty.

The euro area economy showed resilience in 2025, with growth accelerating to 1.4%, despite adverse global conditions.

- Economic activity was mainly supported by a recovery in investment and stronger private consumption.

- In particular, investment (especially in defence and infrastructure) benefited from improved financing conditions and stronger economic sentiment.

- At the same time, private consumption was supported by rising disposable income and sustained high employment levels.

- By contrast, net exports made a negative contribution, reflecting structural competitiveness weaknesses, subdued external demand, the impact of trade tensions and the appreciation of the euro.

On the prices front, inflation in the euro area declined further in 2025, to levels consistent with the European Central Bank's medium-term target.

- Headline inflation fell to 2.1%, mainly reflecting a gradual easing of wage pressures, stronger labour productivity, the appreciation of the euro and lower energy prices over the course of the year.

- Core inflation fell to 2.4%, mainly on the back of lower services inflation.

- At the same time, inflation expectations remained at levels consistent with price stability, i.e. the medium-term inflation target of 2%.

Against this background, the Eurosystem's monetary policy in 2025 gradually became less restrictive.

- The cuts in key interest rates, which had started in June 2024, continued into the first half of 2025, adding up to a cumulative 200 basis points decline by June.

- Since July 2025, the Governing Council of the ECB has kept its key policy rate unchanged at 2%, considering that inflation has converged towards the target and that its medium-term outlook remains unchanged.

These developments set the broader operational context of the Greek economy, which maintained its positive momentum in 2025.

Growth remained at 2.1%, outperforming the euro area average for the fifth year in a row.

- It is worth noting the qualitative improvement in the composition of growth, as the contribution of investment exceeded that of private consumption.

- Investment kept edging up, with the investment-to-GDP ratio reaching a 16-year high, thereby contributing to the gradual closing of the investment gap of the previous period.

- Of particular importance is also the fact that productive investment (excluding construction) as a percentage of GDP reached its highest level in 30 years, a development directly linked to productivity gains and the gradual rebalancing of the economy towards a more investment-led growth model.

- Private consumption continued to grow, supported by rising disposable income and improving labour market conditions.

- The contribution of the external sector was also positive, with exports of goods reaching a 3-year high.

Turning to prices, both headline and core inflation stood close to the 2024 levels, at 2.9% and 3.6% respectively.

- The past disinflation process weakened significantly, mainly on account of persistent services inflation.

- The large inflation differential between Greece and the euro area average reflects, among other things, the positive output gap of the Greek economy - i.e. the fact that the economy grows above potential, exerting upward pressure on prices.

The labour market remained strong in 2025, with the unemployment rate falling to a 16-year low of 8.9%.

- At the same time, the labour force participation rate further increased - especially among young people and women.

- It is worth noting that female unemployment has fallen to historical lows, while youth unemployment (which had surged during the crisis) is now close to the European average, having recorded an impressive decline in recent years.

- Also, labour market tightness showed signs of gradual easing, though remaining elevated compared to the pre-pandemic period.

- Overall, these developments show that the economic recovery of recent years has been accompanied by substantial job creation, reflecting the impact of reforms that have strengthened the functioning and flexibility of the labour market.

The international competitiveness of the Greek economy presented a mixed picture.

- On the one hand, the appreciation of the euro had a negative impact on price competitiveness, more than offsetting the benefit from the smaller increase in relative prices vis-à-vis trading partners.

- On the other hand, competitiveness in terms of unit labour costs improved, as unit labour cost growth was below the euro area average, while productivity growth was comparatively stronger.

- However, as regards structural competitiveness, Greece's position remained relatively weak. Progress has been made in areas such as the tax framework, the functioning of the justice system and starting a business. By contrast, weaknesses in critical areas - such as innovation, the speed of administrative and judicial procedures, labour shortages and energy costs for businesses - remain a drag on improving the country's ranking in international composite indicators.

The current account deficit narrowed markedly to 5.7% of GDP, but remains elevated. This was mainly the result of a lower oil deficit and continued strong tourism performance, with travel receipts reaching a new high.

Foreign direct investment maintained its upward trend, reaching an all-time high of EUR 12 billion (about 5% of GDP).

- This development reflects both the improvement of the business environment and the strengthening of international investors' confidence in the prospects of the Greek economy, especially after the successive upgrades of its sovereign credit rating.

As regards fiscal developments, which are instrumental in maintaining market confidence and overall economic stability, the positive momentum of recent years continued into 2025.

- The overperformance of tax revenue relative to the Budget targets largely reflects the strengthening of tax compliance as a result of measures to combat tax and social security contribution evasion.

- This has allowed the financing of additional permanent public expenditure, both for investment and to support vulnerable social groups.

According to Bank of Greece estimates, the primary surplus for 2025 is expected to reach 4.4% of GDP, once again exceeding the fiscal targets.

- At the same time, the overall fiscal balance is estimated to remain in surplus, making Greece one of the few European countries with a general government budget surplus for the second consecutive year.

- These outcomes are a clear indication of a responsible fiscal policy and further strengthen the country's credibility.

The public debt continues to decline rapidly, both as a percentage of GDP and in nominal terms.

- According to Bank of Greece estimates, it is expected to have fallen in 2025 by around 8 percentage points of GDP against 2024, reaching 146% of GDP, its lowest level since 2010.

- The favourable profile of public debt and its active management in recent years - including early repayments - have enhanced its sustainability and, combined with high cash buffers, limit its exposure to short-term market fluctuations.

The resilience of the Greek economy is reflected not only in growth performance and public finances, but also in the significant progress achieved in the banking sector.

Bank lending rates continued to decline across all loan categories, reflecting the key interest rate cuts and the gradual normalisation of financing conditions.

- The decline in borrowing costs was more pronounced in business loans, thereby supporting business financing and investment activity.

- For small and medium-sized enterprises, although borrowing costs remained relatively higher, actual financing conditions were more favourable, thanks to the contribution of the financial instruments of the European Investment Bank Group, the Hellenic Development Bank and the RRF.

- Households also saw improved financing conditions, especially for housing loans, with additional support provided by dedicated financing programmes.

Deposit rates also fell, though not evenly among different types of deposits.

- As regards time deposits, the decline tracked the key interest rate cuts, with a faster adjustment in the case of firms and a more limited adjustment in the case of households.

- By contrast, for overnight deposits, interest rates remained broadly unchanged at very low levels.

The annual rate of credit expansion to the private sector as a whole edged down in 2025, but remained higher than the euro area average. This was mainly due to weaker growth in financing to firms and sole proprietors.

- On the other hand, for the first time in many years, there has been an expansion of bank credit to households. This reflects both a strengthening of consumer credit and a gradual recovery in housing credit.

Bank deposits by the private sector recorded another marked increase in 2025, growing faster than in the previous year.

- Overall, deposits rose by EUR 10.4 billion, with their total outstanding balance reaching a post-2010 high of EUR 213 billion.

- The rise in deposits came almost equally from firms and households, reflecting improved economic conditions and strengthened confidence.

Greek banks maintained their strong performance and improved their fundamentals, despite mounting global uncertainty.

- Profitability improved further, mainly on the back of credit growth, higher fee and commission income and lower loan-loss provisions.

- Capital adequacy ratios have remained high and have now largely converged with European ratios.

- Liquidity ratios remained particularly strong, at levels above both supervisory requirements and the euro area average.

- Loan portfolio quality improved further, with non-performing exposures continuing to decline and converging towards the European average.

- This progress was also mirrored in the successive credit rating upgrades of Greek banks, which are now within investment grade territory, further strengthening confidence in the country's financial sector.

- In addition, improved performance among less significant institutions (including cooperative banks) has enhanced competition and financial stability, while also supporting the financing of small and medium-sized enterprises.

- Finally, the results of the EU-wide stress tests confirmed the resilience of the Greek banking system even to adverse scenarios.

Taken together, all these developments reflect the starting position of the Greek economy in this new period of heightened global uncertainty. Against this background, I would now like to briefly outline the Bank of Greece's projections for the coming period.

In an environment of heightened geopolitical tensions, the growth rate of the Greek economy is expected to slow to 1.9% in 2026, mainly due to consumption growth moderation and a negative contribution from the external sector.

- Similarly, a significant slowdown is also projected for the euro area economy, with growth falling to 0.9% (from 1.4% in 2025) due to the impact of the war in the Middle East, heightened uncertainty and disruptions in the energy market, which are increasing the risk of stagflation.

- Despite a weaker growth rate, the Greek economy is expected to continue expanding faster than the euro area, confirming its enhanced resilience and remaining on track for real convergence.

- Investment is expected to remain the main driver of growth, supported by the RRF, credit expansion and foreign direct investment.

- Private consumption is projected to continue rising, supported by higher employment, wages and disposable income, albeit at a somewhat milder pace than in the previous year.

- Turning to the labour market, the outlook remains favourable, with a projected further increase in employment and a decline in the unemployment rate to 8.2%.

The disinflation process is expected to be halted in 2026, due to a resurgence of exogenous cost pressures from international energy markets.

- Headline inflation is projected to rise to 3.1% and remain above the euro area average.

- By contrast, core inflation is expected to continue to ease, falling to 3.0%, as a result of a gradual decline in services inflation.

The current account deficit is not expected to improve further in 2026, as it will be affected by offsetting forces in the external environment.

- On the one hand, exports of goods, travel receipts, inflows of European funds and foreign direct investment are expected to support the overall external position of the economy.

- On the other hand, higher international energy prices, rising imports of investment goods and renewed inflationary pressures are expected to weigh on the trade balance.

- External balance developments heavily depend on the duration and intensity of the conflicts in the Middle East, as well as their impact on global demand, tourism and international energy prices.

- In any case, the persistent current account deficit is expected to remain the key source of vulnerability for the Greek economy in 2026.

On the fiscal front, the country's strong structural position provides more flexibility for addressing the impact of the new crisis, without jeopardising fiscal stability.

- The significant fiscal adjustment of previous years, combined with high primary surpluses and rapid debt reduction, has strengthened the credibility of economic policy.

- The favourable profile of public debt and high cash buffers act as an additional shield against potential turbulence in financial conditions.

Fiscal aggregates are projected to remain sound also in 2026, with a high primary surplus (around 3.2% of GDP) and a marginal general government budget surplus, while the government debt is expected to maintain its downward trajectory.

The outlook for the ECB's monetary policy in 2026 is characterised by increased uncertainty, but also by the need to maintain a high degree of agility.

- Recent geopolitical developments and fluctuations in energy prices have made it more difficult to predict the course of inflation and economic activity.

- In such an environment, the ECB Governing Council will assess whether higher energy prices risk spilling over into broad-based and persistent inflation, through expectations, wage developments and the price-setting mechanism.

- The appropriate monetary policy response will depend on the nature, size and persistence of the shock.

- If energy cost pressures prove short-lived, the shock can be looked through.

- But if they turn out to be stronger and more persistent, affecting medium-term inflation expectations and wage developments, a tighter monetary policy stance is to be expected.

- At the same time, the fiscal response will matter: targeted and temporary measures can help cushion the effects of the shock, while broad-based and permanent measures may add to demand and hamper monetary policy.

- Against this background, the ECB is expected to maintain its data-dependent, meeting-by-meeting approach, while standing ready, if appropriate, to adjust its stance.

As regards the outlook for the financial sector:

- Bank financing is expected to remain buoyant, supported by economic growth, a relatively more favourable interest rate environment and the continued use of EU funds, in particular for small and medium-sized enterprises and housing credit. However, heightened uncertainty and potentially tighter financial conditions could dampen this momentum.

- Deposits are also expected to continue increasing, broadly following developments in the economy, the labour market and household disposable income. Nevertheless, very low interest rates on deposits make them less attractive and reinforce the shift of savings to alternative holdings.

- The outlook for banks remains positive, as the solid performance of 2025 creates favourable conditions for further strengthening resilience, profitability and their capital base. However, the current geopolitical uncertainty is a risk factor for the cost of funding, loan portfolio quality and credit growth momentum.

The macroeconomic outlook presented above is subject to uncertainties and risks, which are of particular relevance at the current juncture.

Growth projections for the euro area are surrounded by heightened downside risks, reflecting its high structural vulnerability to energy shocks.

- Being a net energy importer, the euro area is disproportionately affected by increases in international energy prices, which squeeze real incomes, increase production costs and dampen consumption and investment.

- At the same time, rising protectionism and trade tensions weigh on exports and worsen business expectations, especially in an environment of already weak external demand.

- A tightening of financial conditions or a sharp repricing of risk in financial markets could further dent domestic demand.

- With regard to inflation, risks are mainly on the upside, as higher energy prices, mounting protectionism and supply chain disruptions could maintain price pressures for longer.

- Overall, this heightened uncertainty reinforces stagflationary pressures and points to an environment of protracted low growth and persistent inflation, especially if supply-side shocks turn out to be stronger and more persistent.

Similarly, for the Greek economy, the balance of risks is clearly tilted to the downside, mainly reflecting unfavourable developments in the external environment.

- Inflationary pressures are likely to prove more persistent, owing to rising prices for energy, raw materials and transport, but also through second-round effects on labour costs.

- This will weigh on households' purchasing power, weaken consumption and adversely affect economic sentiment.

- At the same time, uncertainty and a deterioration in financial conditions may dampen investment activity.

- In the external sector, the Greek economy remains more vulnerable, as tourism, transport and services exports in general are directly affected by geopolitical and exogenous shocks.

- The high concentration of exports in a limited number of sectors implies that unfavourable developments in these sectors can have a disproportionately large impact on the current account balance.

Moreover, domestic challenges - such as labour market tightness, natural disasters and possible delays in absorbing European funds - may dent the growth momentum of the economy.

Despite these risks, the Greek economy presents significant features of resilience, such as a strong fiscal position, high cash buffers, well-capitalised and liquid banks, as well as the support of RRF funds.

- A faster implementation of investment and reforms could further strengthen the economy's resilience and mitigate short-term negative effects.

The increase in risks and international uncertainty makes it imperative to continue pursuing a coherent economic policy, aimed at further strengthening the resilience and growth dynamics of the Greek economy.

- This calls for an even stronger emphasis on investment, the use of RRF resources, digital transformation, green transition and strengthening of innovation and human capital.

- Further improving the structural competitiveness of the economy remains crucial, through continued reforms that cut red tape, improve the functioning of public administration, accelerate the delivery of justice and enhance market competition.

- Reducing the external deficit requires a further broadening of the export base, development of higher value-added industries, bolstering high-tech goods production and gradual import substitution, where feasible.

- Maintaining the strong dynamics of tourism requires a qualitative upgrade of the tourism product, improved infrastructures, promotion of new destinations and addressing labour shortages in the industry.

- Financing of growth requires further strengthening of financial intermediation, both through higher bank lending and through alternative financing sources from capital markets, with a view to improving access to finance for small and medium-sized enterprises and channelling resources more efficiently to high value-added investments.

- Speeding up the delivery of justice is a crucial reform for productivity, investment and improving the business environment. Faster and more predictable dispute resolution can boost confidence, facilitate resource allocation and improve access to finance.

- Advancing the energy transition is necessary for both competitiveness and resilience, with a focus on investing in renewable energy sources, grids, interconnections and electricity storage capacity, as well as ensuring more affordable energy for households and businesses.

- Social policy needs to be better targeted and more efficient, if it is to effectively support the most vulnerable households and at the same time invest more in education, health and skills.

- Tackling the housing problem requires policies that increase housing supply, through better utilisation of the existing stock, removal of administrative barriers and a comprehensive strategic housing framework.

- In the labour market, priority should be given to increasing labour force participation and addressing skills shortages, in particular through care structures, incentives to work, technical education, lifelong learning and better matching of labour supply and demand.

- In fiscal policy, any additional support measures should be targeted, temporary and fully consistent with fiscal sustainability, while continuing the efforts to combat tax evasion, broaden the tax base and streamline tax expenditures.

- Finally, tackling the country's adverse demographics is a national priority, as it directly affects both the long-term growth potential and labour supply. This requires a comprehensive family support framework, investment in human capital, improved housing affordability and policies to facilitate a "brain regain".

To sum up, the current international upheavals are not only a threat to Europe, but also a clear wake-up call. In this light, strengthening the resilience of the euro area requires accelerating European integration and more effective coordination of common policies.

- Enhancing the EU's competitiveness and strategic autonomy is now a necessary condition for tackling growing challenges.

- The EU needs to pursue a coherent strategy that closes the innovation gap vis-à-vis its competitors, accelerates the green and digital transitions and strengthens its industrial base.

- Completing the Banking Union and making progress towards a fully-fledged Savings and Investments Union can facilitate the cross-border allocation of capital and enhance the financing of large-scale investments.

- At the same time, a coherent strategy for a Fiscal Union and the development of common European financing instruments, such as the issuance of common European debt to finance shared needs in defence, green energy and new technologies, could strengthen the international role of the euro, improve the effectiveness of fiscal policy and reduce market fragmentation.

- Overall, accelerating European integration is crucial not only for supporting investment and strengthening the macroeconomic stability of the euro area, but also for enhancing the resilience, competitiveness, coherence and effectiveness of the single monetary policy.

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Let me conclude by stressing that, in times of heightened uncertainty, political stability is a key pillar of economic resilience.

- The experience of recent years has shown that political stability and a predictable institutional environment are essential for maintaining macroeconomic balance and for effectively managing exogenous crises.

In an international environment marked by mounting new uncertainties, the implementation of the necessary reforms is key for increasing prosperity.

- The benefits of reforms are now visible and measurable, in terms of both the performance of the economy and the clear improvement of the country's credibility.

- Maintaining the political commitment to implementing credible reform policies is key to turning crises into opportunities and delivering a modern, sustainable, extrovert and competitive economy.

Related link:

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