Key Challenges

Successful exit from bailout period
In August 2018, Greece was finally able to complete the Third Economic Adjustment Program (2015-2018) and (technically) exit a long period of austerity based on three successive Memoranda of Understanding signed between the government and the country’s lenders (2010-2018). Over the next 12 months, the government must steer Greece’s economy without the support of external funding, although external surveillance will continue. Greece cannot yet borrow on the international markets, while reforms of the pension, taxation, banking and public administration systems, among others, remain incomplete.
Private investors
remain wary
Prospects for the Greek economy remain uncertain, as interest rates faced on the international markets remain prohibitively high. Economic growth has been meager, with large foreign private investments not forthcoming – a consequence of mixed signals given by the Syriza-ANEL coalition to foreign entrepreneurs. Real investment dropped by 60% over the course of the crisis and remains depressed.
Tax policy has
inhibited growth
Increased taxation has negatively impacted economic growth; a healthier balance between tax rates and business incentives must be attained. There has been improvement in the fight against unemployment, but the continuing brain drain exemplifies Greece’s persisting failure to reconcile economic growth with trends in the labor market and education.
Preventing renewed crisis is core challenge
Overall, the most central challenge for Greece will be to avoid a sudden new crisis resulting from government instability, economic mismanagement, or a repetition of the uncontrollable refugee and migration inflows experienced in 2015 and 2016.
There are numerous open challenges waiting to be addressed before the next parliamentary election (which, barring a sudden decision by the prime minister, are expected to take place in mid-2019). The election will consequently take place in the same 12-month period in which regional and local government as well as European Parliament elections occur (the latter in May 2019).
Pension system, banks present difficulties
Two pressing challenges are the health of the banking system and the future of pensions. At the end of 2017, Greek banks carried €95.7 billion in non-performing loans – 43.1% of all loans, the heaviest burden in Europe. Greek banks plan to reduce this by €30 billon by the end of 2019. Shrinking non-performing loans will become a major political issue carrying a cost that the current or next government will find difficult to bear. Meanwhile, the Third Economic Adjustment Program requires the government to proceed with pension cuts. These cuts are scheduled to take place in January 2019, but it is doubtful that the government will impose them given the upcoming elections. Instead, it will negotiate with the country’s creditors to delay implementation. Nonetheless, spending for the pension system continues to be the highest in Europe (more than 18% of GDP) and despite several interventions (e.g., cuts, reorganization and fund mergers) the need for further reforms remains unavoidable.
Need to restore stability
in education
Even if the aforementioned economic challenges do not worsen and political stability is maintained, any future Greek government will have to face several long-standing challenges. These include restoring stability to the education system, public safety and the administration of justice; sectors in which the Syriza-ANEL coalition has experimented with rolling back reforms commenced by previous governments (i.e., before January 2015). Since 2015, successive education reforms have been announced, while the government has been unable to impose law and order in the centers of several major cities (e.g., Athens and Thessaloniki) and the judicial system has been characterized by long delays in the dispensing of justice.
Patronage politics
remain in place
The Syriza-ANEL government can be expected to continue its policies of the past three years (2015-2018). This includes imitating the patronage practices of past governments (i.e., those typical pre-crisis, before 2010). It can also be expected that the government will distribute cash transfers to favored interest groups, such as employees of state-owned enterprises and select low-income groups – as it had in 2016 and 2017. This unbalanced combination of patronage politics and social policy transfers must be reassessed if Greece is to avoid falling back into the patterns which contributed to the country’s near collapse only eight years ago.
In summary, over the next 12 months, policy challenges and debates will center on issues of economic growth, policy stability, and redistribution.

Party Polarization

Election winners receive extra legislative seats
Owing to Greece’s peculiar electoral system of reinforced proportional representation, the winner of elections obtains a disproportionate share of parliamentary seats. In addition to the parliamentary seats allocated to it through proportional representation, the party first-past-the-post obtains a bonus of 50 seats. The outcome of the distribution of the 300 parliamentary seats usually leads to the formation of single-party governments or (since 2012) coalition governments in which only two parties partake. Governments enjoy freedom to control the public administration, state-owned enterprises and state-owned media. Few, if any, other institutions can counterbalance the government’s competences and freedom to allocate resources (i.e., funds, personnel and infrastructure). There is no tangible system of checks and balances in the Greek variety of parliamentary democracy. Consequently, the prize for the election winner is exceptionally valuable. Political party competition is thus extremely contentious.
High stakes, left-right divisions fuel polarization
Polarization is also fueled by long-standing divisions between the left and the right, dating back to the Greek Civil War (1946-1949), which continue to permeate a highly acrimonious political atmosphere. Although the country’s high party polarization hinders reaching compromises and cross-party agreements as well as policy continuity, the electoral system has prevented obstacles to policymaking at the institutional level. (Score: 5)
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