No Quick Fix: The Recovery and Resilience Plan and External Position in Greece

Greece has coped with large current account deficits and negative net foreign assets for a long time. Now, the country has an opportunity to address this vulnerability through the European Union’s Recovery and Resilience Facility (RRF) and its associated Recovery and Resilience Plan (RRP). The plan involves large public investments and reforms, aimed at boosting Greece’s long-term potential. The crucial question is: can this ambitious plan fix Greece's external imbalances over the long run? Using a small open-economy model, we track how the RRP may affect savings, investment, and external balances. We find that: (i) a successful RRP/RRF can correct most of Greece’s external imbalances, through a large increase in public savings; (ii) the RRP/RRF is no magic bullet, as prudent macroeconomic policies will remain necessary to lock-in the positive effects over the long run.