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Greece Politics July 2019

Greece: New Democracy expected to win general election but economic recovery set to remain sluggish

After suffering a resounding defeat to the conservative opposition New Democracy (ND) party in the European and local elections last month, Prime Minister Alexis Tsipras, head of the ruling left-wing Syriza party, called snap general elections for 7 July, nearly four months before the end of his term. Polls show that ND, led by Kyriakos Mitsotakis, maintains a sizeable lead over Syriza, signaling that not only will it win the national vote but could even secure an absolute majority in the 300-seat Parliament as well. Although Mitsotakis’ victory would imply a shift to a more market-friendly policy mix that may provide a boost to business confidence, the economy’s slow pace of recovery is set to persist in the near-term owing to structural fragilities and authorities’ adherence to strict fiscal targets agreed with Eurozone lenders.

Mitsotakis is running on a platform of lowering taxes for businesses and households, removing bureaucratic obstacles to investment and continue implementing structural reforms. However, he announced his administration would not slash pensions or lay off public sector workers, and could even increase hiring, albeit in a targeted manner, in the social, health and security areas. However, the fiscal space to undertake these expansionary policies is limited given that the government remains under close surveillance by creditors to ensure it meets ambitious fiscal objectives, namely of running a primary budget surplus of 3.5% of GDP until 2022 and 2.2% of GDP thereafter. This indicates that Mitsotakis’ economic program largely hinges on his ability to convince lenders to lower the fiscal targets so that some spending is redirected towards domestic purposes rather than paying off debt or to find savings elsewhere. However, it is uncertain whether these negotiations will prove successful. In addition, creditors already expressed concerns that the tax breaks and pension bonuses introduced by Tsipras’ government in May puts this year’s fiscal target at risk, further complicating matters for an eventual Mitsotakis administration when it meets with lenders in September to review spending plans.

Aside from the detrimental impact of maintaining exceedingly high primarily surpluses on growth and the limited scope for implementing significant stimulus measures, Greece’s economic situation also remains fragile. The financial crisis led to a collapse in investment and currently remains at historically low levels. Furthermore, years of deep recession and painful austerity measures took a heavy toll on household incomes, which are only slowly starting to recover today. And although the unemployment rate has gradually declined from its near 28% peak in 2013 to around 18% currently, it remains the highest in the Eurozone by far. The job market for young people is even worse, where around two out of five are currently unemployed. The government is also burdened by the enormous pile of debt it has accumulated over the years, which now stands at a whopping 181% of GDP, the highest ratio in the currency area. Meanwhile, the country’s banks still hold the largest stock of non-performing loans than any other Eurozone member, posing a key risk to financial stability and constraining the availability of credit—as well as overall economic activity.

In short, although Mitsotakis’ likely rise to power spells good news for improving the business climate and may provide a boost to confidence and growth, strict fiscal requirements faced by the government and the economy’s structural vulnerabilities weigh heavily on the near-term outlook. And despite the country returning to growth in 2017, the expansion has been relatively weak thus far and the road to recovery will be long and arduous. 

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