Moody’s expresses serious concerns about Greece’s future fiscal trajectory, as increasing expenditures in critical sectors are expected to significantly limit the country’s room for maneuver. Despite improvements following the pandemic thanks to the Recovery Fund, new challenges are creating a complex fiscal landscape.
The transformation of fiscal flexibility post-pandemic
Following the outbreak of the health crisis, Greece’s fiscal flexibility was significantly strengthened through the Recovery Fund. However, according to Moody’s, as cited by the newspaper “Kathimerini,” the current situation is changing rapidly. Defense spending is recording increases at the same time social expenditures are also rising due to demographic aging.
This dual pressure limits fiscal policy options and shrinks the margin for adjustment to potential economic shocks. The warning concerns many European Union countries, but states with high levels of debt like Greece face additional difficulties.
Rigid spending and its reduction
The international rating agency notes that increased capital expenditures in response to the pandemic created greater flexibility throughout the European Union. The share of rigid spending decreased from 74% to 72% of the total budget. Greece recorded a greater than average reduction in rigid spending by 7%, reaching 72% from the previous 79%. Meanwhile, significant increases in capital transfers strengthened the flexible portion of expenditures.
Approximately 80% of Recovery Fund grants to Greece were directed to the following sectors:
- Ensuring green and digital transformation
- Strengthening economic and social resilience
- Supporting structural reforms in education
- Improving infrastructure for economic potential development
New commitments and future challenges
New commitments for defense spending will reduce flexibility over the next ten years, reinforcing the negative impact of increased social expenditures. Moody’s emphasizes that commitments to increase fiscal spending on defense equipment procurement, research and development, and infrastructure will increase the rigidity of European budgets. The agency defines spending flexibility as the ratio between rigid expenditures (such as interest payments) and flexible expenditures (such as capital expenditures). Defense spending is now added to rigid expenditures due to increased geopolitical uncertainty.
Predictions for the future of European public finances
Moody’s expects the share of rigid spending to increase by 2% in the European Union by 2030. By 2035 the increase will reach 4%, reaching 76%, as governments sharply increase military spending and investments. Among the largest economies, Germany, France, and Italy will record increases of approximately 5%, reaching 78%, 79%, and 79% respectively. Malta and Sweden will maintain the greatest fiscal flexibility with rates of 62% and 65%. For Greece, a 1% increase is projected, reaching 73%.
The growing burden of defense spending
Defense spending will constitute a critical component of fiscal rigidity over the next decade. It is expected to increase by 15% annually throughout the European Union, significantly faster than the average annual increase in social spending of 3%. This development will worsen concerns about debt sustainability for certain countries, particularly those with high debt levels. Reduced budgetary flexibility may complicate fiscal consolidation efforts in case of economic shocks.
According to Moody’s, states where fiscal policy effectiveness is relatively weak and spending structure relatively rigid, including Belgium, Greece, Italy, and France, will face the challenge of managing fiscal priorities in view of unpredictable events.
