Greece Politics August 2019

Greece

Greece: New Democracy clinches victory in general election; slow pace of economic recovery set to continue

July 23, 2019

In line with what opinion polls had anticipated, the conservative New Democracy (ND) party, headed by now Prime Minister Kyriakos Mitsotakis, comfortably won the 7 July snap general election. It received 39.9% of the popular vote compared to 31.5% by the left-wing Syriza party, led by Mitsotakis’ predecessor Alexis Tsipras. ND also attained an outright majority in Parliament with 158 out of 300 seats, as the winner receives a bonus of 50 seats. Mitsotakis’ victory was well received by investors: 10-year government bond yields touched record-lows, while the post-election sale of seven-year government bonds saw substantial demand, with orders received exceeding by more than five times the initial offer. That said, although the newly elected government has proposed a business-friendly economic program, which could boost sorely-needed investment, the recovery is expected to remain sluggish due to the economy’s structural vulnerabilities and authorities’ post-bailout commitment to strict fiscal targets agreed with Eurozone creditors.




The government’s policy agenda includes cutting corporate, income and property taxes; removing bureaucratic red tape; and continuing with the implementation of privatization deals and structural reforms. Although these measures have the potential to enhance growth, they imply a rebalancing of the fiscal policy mix, particularly through the lowering of taxes, that could place the ambitious fiscal objectives overseen by lenders at risk of being met, namely of running a primary budget surplus of 3.5% of GDP until 2022 and 2.2% of GDP thereafter. Indeed, soon after the election results, creditors warned the incoming administration to stick to the agreed fiscal commitments and advised broadening the tax base to offset the proposed tax cuts, highlighting the challenge faced by the government to enact meaningful fiscal stimulus. Although officials stated they will respect the commitments, Mitsotakis has pledged to achieve stronger-than-expected growth in order to negotiate a reduction of the targets from 2020 onwards. Whether this will be achieved or talks prove successful, however, remains highly uncertain.

Aside from the narrow space for fiscal maneuver faced by the new authorities, the economic backdrop is also fragile. Years of recession, along with wage and pension cuts, hammered household incomes, which are only starting to recover today, albeit at a glacial pace. And despite falling steadily from its near 28% peak in 2013, the unemployment rate remains by far the highest in the EU, at around 17.5% today. Investment also collapsed in the aftermath of the crisis and now sits at historically low levels, while credit to the private sector remains in the doldrums. Moreover, the government is burdened by an enormous stock of debt, while the financial system remains fragile due to the high volume of non-performing loans on banks’ balance sheets.

All in all, Mitsotakis’ victory spells good news for improving the business climate and thus enhancing growth. Nevertheless, the economy’s structural vulnerabilities and government’s adherence to strict fiscal rules dampen the short-run outlook, and will heavily weigh on the pace of recovery. FocusEconomics analysts consequently see the economy growing only a modest 1.7% this year, which is unchanged from last month’s forecast, and 1.9% in 2020.


Author:, Economist

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