The Greek economy will shrink by at least 3.0 pct, real wages will fall by 5.0 pct, unemployment will rise further and inflation will decline this year, the Bank of Greece (BoG) announced on Tuesday, in presenting its monetary policy report.

The latter was tabled in Parliament by BoG governor George Provopoulos.

The central bank recommends the government to intensify efforts towards fiscal consolidation, warning that a total solution to deal with a debt problem -- currently under discussion in the European Union -- does not justify complacency and relaxation of efforts. The central bank predicts a further worsening of a domestic credit institutions’ loan portfolio quality and a zero or negative credit expansion growth rate for 2011. The report concludes that efforts made by the country could have a positive result.

However, the central bank warned of risks in implementing reforms, as they faced reactions. The report stressed that a part of the society persistently defends its vested interests based on a view that things could go on forever without any changes. The Bank of Greece underlined it was necessary to establish a view in the society that changes were not dictated by the memorandum but they were part of a great effort to reconstructing the Greek economy.

The central bank expects the economy to shrink by around 3.0 pct this year, without excluding a higher percentage of decline. The recession has hit consumption and particularly investments which fell 18 pct last year, significantly reducing the country’s productive potential. The recession also pushed the unemployment rate to 12.5 pct of the workforce last year, with more than 100,000 job positions lost in the year. The central bank expects the unemployment rate to continue rising in 2011. Real average wages in the economy fell 9.0 pct last year and were projected to fall further, by around 5.0 pct in 2011 although stabilization was expected in 2012. The report projects a significant decline in the inflation rate to 2.2 pct this year, from 4.7 pct in 2010.

The central bank recommended government interventions to halt a rising public debt.

The first envisages faster fiscal consolidation efforts, focusing on combating tax-evasion and cutting public overspending. The central bank noted that structural reforms in the state must move forward with determination, supported by a wide consensus of the society. The bank also recommended a faster fiscal consolidation than the projections included in a medium-term action plan to be presented by the government in March (it envisages cutting the fiscal deficit to 2.6 pct of GDP in 2014).

It also recommends spending cuts by general government agencies and restructuring of loss-making public sector enterprises along with the closure of unnecessary public agencies. The central bank also calls for the adoption of numerical fiscal rules and noted that accelerating privatisations and efforts for a more efficient management of real estate property was crucial to cutting the country’s public debt.

However, the central bank underlined that all the above would not be enough to hold a rising debt and stressed it was urgently needed to promote growth. The report recommends the implementation of wide-spread structural reforms such as flexibility in the labour market, upgrading education and creating competitive conditions in market through the opening up of closed professions.

The Bank of Greece said 2011 would be a year of "great and complex challenges" for the banking system, since banks were expected to face the consequences of rising non-performing loans and to gradually cut their dependence from European Central Bank’s funding operations.