Alexis Tsipras and his leftist Syriza party have another chance to steer Greece out of a five-year-long economic recession, following his re-election as Greece’s prime minister on September 20.
The question that has kept the international community awake at night for the last three months — will a new Greek government receive enough voter support to implement the last bailout package? — has an answer. Although Syriza campaigned on a pledge to implement the €86 billion bailout, the party secured nearly as many seats in parliament as it did when it took power in January, with a pledge to put an end to years of austerity.
The political environment is now more conducive to reform than at any time in the recent past as the Greek electorate has indeed provided the newly elected government with the mandate it needs to drag Greece out of its economic plight.
Dun & Bradstreet regards Syriza’s victory as welcome news in terms of policy continuity. However, we expect political risk to remain high in the short- to medium-term: The challenges for the ruling coalition are daunting and the new government has little time to waste.
In October creditors are expected to review Greece’s progress on the reforms agreed to under the August bailout, bringing changes to a memorandum of understanding signed with Athens and paving the way for debt rescheduling talks.
Furthermore, the government will have to draft the 2016 budget, reform the pension system, recapitalize the ailing banking sector, raise taxes, and implement a long-awaited privatization program.
Ongoing political uncertainty will inevitably impact Greece’s short-term outlook as well as its economic performance. As such, D&B forecasts average real GDP growth to remain stagnant over the next five years, with real GDP experiencing only a marginal increase at best.
Will a third bailout work? As we observed only few days after Greece and its creditors agreed on a new aid package in July, the medicine prescribed for Greece by the ex-Troika of lenders (the IMF, the ECB, and the EU) did not work well in the past.
Five years of austerity and more than €240 billion in bailout cash have done little to steer Greece’s economy out of a deep recession and on a sustainable economic recovery.
Real GDP is some 25% below its precrisis levels, and one out of four Greeks are unemployed. The standard of living in the country continues to deteriorate. Almost one-third of Greece’s population is without health insurance now — something unthinkable in Europe.
There’s no reason to believe that things will be different this time around in Greece. The structural weaknesses of the Greek economy have not been addressed.
At 11.6%, the share of GDP accorded to industry is the third lowest in the EU (where the average share is around 25%), while four major sectors (out of 10) account for almost 80% of the economy: domestic trade, transport, and food services; public administration; real estate activities; and industry. By this measure, Greece has the least diversified economy among all EU countries. Furthermore, low competition, scarce efficiency, and transparency in public administration, as well as widespread corruption, continue to constrain longer-term growth potential.
Greece will use most of the bailout funds to repay its creditors, with only a little money left to support the real economy. This and the inability of the Greek government to use its budget to pay for anything more than pensions, public wages, welfare, and the interest on its massive debt is reason enough to remain skeptical about the long-term benefits of the bailout agreement.
Daniele Fraietta has been a D&B economist for more than two years. He currently covers some Western European countries, notably Italy, Greece, Spain and Ireland. For D&B, Daniele has also developed the new econometric framework for commodity prices and exchange rates forecasting. He has an MSc in Economics from the University of Rome Tor Vergata, a Master in Business Administration from The Polytechnic University of Milan, and a Master in International Business from the Chapman College of Business.