Key economic reforms remain incomplete
Greece experienced the success of exiting the Third Economic Adjustment Program in August 2018 as a mixed blessing. While the Greek government was finally allowed by international creditors to steer Greece’s economy without the support of external funding, the country was still unable to borrow on the international markets until 2019. Meanwhile, owing to the government’s indecisiveness and fear of paying a heavy price in the 2019 elections, reforms of the pension, taxation, banking and public-administration systems, among others, remained incomplete.
Economic growth persistently slow
In the period under review, economic growth remained meager (between 1% and 2%), with large-ticket foreign private investment continuing to stay away. The new government, which won the elections of July 2019, faces the challenge of boosting real investment, which has not taken place as rapidly as hoped by the new power-holders.
Barriers to faster
The incoming New Democracy government has already reduced tax levels with the aim of stimulating economic growth. However, ministers cannot count on the Greek bureaucracy, which has proven unable to keep up with the requirements of faster growth, adaptation to new technologies and competition from other countries. Moreover, the continuing brain drain expresses Greece’s persistent failure to reconcile economic growth with labor market and education trends.
Another challenge faced by the new government is an increase in refugee and migration inflows. Greece already experienced this in 2015 and 2016, and will not be able to manage the new flows on its own if they become uncontrollable.
Banking, pension systems pose challenges
The banking system and the pension system also pose pressing challenges. Gross non-performing loans have fallen by a quarter since 2016, but still amount to €80 billion or 45% of exposures. In October 2019, the EU approved a Greek government scheme called “Hercules” designed to help its banks rid themselves of toxic debts, with the plan modeled closely on a bank guarantee used in Italy. However, its effectiveness remains to be seen.
Pension reforms unavoidable
Pension legislation passed under the Third Economic Adjustment Program required the government to proceed with pension cuts, as spending for the pension system continues to be the highest in Europe (totaling more than 18% of GDP). However, despite several interventions (e.g., cuts in spending, reorganization and fund mergers), further reforms remain unavoidable.
Broad range of structural weaknesses
The judicial system continues to function in a slow manner, provoking long delays in the dispensing of justice. Government revenue streams are undermined by widespread tax evasion and a narrow tax base. These are both major challenges that need to be tackled if the country’s economic growth is to become sustainable. Education reform also represents a long-term challenge, while public safety – especially in Athens and Thessaloniki – is a more immediate concern.
Fresh start with pro-European government
The recent transfer of power from the populist, patronage-minded and ultimately worn-out coalition government that ruled Greece from 2015 to 2019 to a more cohesive, reform-minded, more pro-European government is a positive development. In view of the numerous challenges listed above, a fresh start was necessary.
Election winners receive extra legislative seats; high stakes, left-right divisions fuel polarization
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 involving only two parties. Governments have the 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. 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.
Acute rivalry intensifies during election season
The elections of July 2019 reproduced this pattern of acute party polarization, as the leading party, New Democracy, obtained close to 40% of the total vote, while the previously governing Syriza party obtained almost 32%. The third party, KINAL (a conglomeration of the former PASOK party and several smaller center-left parties), with only 8% of the vote, lagged far behind the two large parties. Only three other small parties of the radical and communist left (MERA25 and KKE) and the far right (the new Greek Solution party), managed pass the threshold of 3% of the total vote needed to win entry into parliament. The rivalry between New Democracy and Syriza intensified during Syriza’s term in power (2015 – 2019), and became much more acute in the period under review, as the parliamentary elections of 2019 were approaching. (Score: 5)