Friday, 11 April 2014

Greece's recovery is still a Marathon

Greek bond risk has until now been associated with the state of the economy. By achieving a primary surplus last year, which has been broadly accepted by the country's creditors and Eurozone partners, Greece passed the first milestone of fiscal health - defeating its annual deficit. After Thursday's bond sale, markets, too, appear to have accepted that its public finances are on the mend.

There is still economic risk in Greece - the country's debt is unsustainable at around 175 percent of GDP; the European Commission believes it will face a shortfall in tax revenue next year, and Greece is not on track to achieve a target 4.5 percent budget surplus by 2016; its credit rating remains low, so its borrowing rates could rise again; and the process of economic reform is ongoing - in fact, success in markets could undermine it.

The risk now appears to be increasingly political, however. The ruling conservatives could face a setback in European parliament elections and local elections on May 25. They are running neck-and-neck with the radical left opposition. The conservatives' junior coalition partner, the socialist Pasok party, is facing a trouncing in those elections, and while its parliamentary presence won't be diminished, a poor performance will undermine its authority to rule.

Yannis Stournaras, the finance minister responsible for tight spending and more effective tax collection over the past two years, could opt to leave the government in June, when the governorship of the Bank of Greece opens up. That would deprive Samaras of the only technocrat in his cabinet, and introduce uncertainty in a key post to economic recovery.

Parliament will have to elect a new president next spring. That raises the prospect of a general election, because the government will need opposition support to muster the two-thirds majority needed.

Samaras' government has overcome enormous difficulties to balance the budget and legislate reforms, many of which still need to be implemented. But the challenges ahead are just as great as those that have been overcome. The celebratory mood the government has achieved, crowned with a visit to Athens today by Angela Merkel, must be seen as an intermission rather than a denouement. 

1 comment:

  1. "There is still an economic risk in Greece"? --- Let's leave the debt issue aside and only consider the real economy of Greece. That real economy doesn't even come close to generating sufficient economic value to justify the living standard which Greeks rightfully desire. That is the message which has to be driven through the hearts and brains of Greeks. Living standard is not something which lands on a cloud from heaven. Instead, it is generated by the economic agents of a country. If the living standard is there without there being the economic value creation, it is financed by debt and when that debt flow stops, the living standard is gone.

    I have been hoping for a long time that the discussion would move away from the financial sphere and focus on what the whole thing is about - the real economy of Greece!


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