Fate of gov’t and bailout under scrutiny
Favorable conditions could help new administration in program’s implementation, but that is not enough
ANALYSIS The Greek economyis sliding back into recession as the newly elected government prepares to legislate austerity measures and structural reforms under the watch of the country’s international lenders. At the same time, pundits are split on whether the third bailout program will be a success and the new coalition government will be able to carry it out and survive. It is not an easy call.
The economy grew by more than 1 percent year-on-year in the first half of the year despite the political uncertainty and rising tensions between the Greek Finance Ministry and the Eurogroup. This figure may be revised in the future but has certainly surprised many economists and others – especially the advance of economic activity by 1.6 percent year-on-year in the second quarter when the positive expectations and improved sentiment, following last January’s general elections, took a turn for the worse.
Recent data on retail sales from last July and readings from the Purchasing Managers Index (PMI), a composite indicator of the economic health of the manufacturing sector, point to recession in the second half of 2015. This is not surprising. One may argue that growth in the first half will help soften the drop for the whole year, meaning real GDP may do better than the projected 2.3 percent fall in the bailout program. However, the damage inflicted by capital controls is hard to estimate and the drop in output in the second half may surprise on the downside.
Assuming the smaller-than-projected contraction in economic activity is realized, the government will have more breathing space to meet this year’s primary budget deficit goal of 0.25 percent of GDP without taking additional fiscal measures, and may even beat the target. Of course the lenders have to consent to it. Don’t forget that the new program forecasts real output to drop 1.3 percent in 2016, when the general government budget surplus excluding interest payments is targeted at 0.5 percent of GDP.
The highly probable recession in the second half of the year may push the unemployment rate higher in coming months. Meanwhile, the government will have to bring the first batch of prior actions to Parliament that have to be voted by October 15 for the first subtranche of 2 billion euros in loans to be disbursed by the European Stability Mechanism (ESM), and a second list of prior actions later on. This is in addition to a series of ministerial decrees that will have to be issued to implement the bills. This combination is likely to increase social discontent as var- ious interest groups, such as farmers and professionals, are adversely affected and the economic climate is likely to worsen.
Although it is still early days in the coalition government’s new fouryear term, the fate of the third bailout program and the government is at the center of discussions, with pundits split into two main camps. The first group thinks the government has the mandate and plenty of time to implement the third bailout pro- gram and succeed. After all, they argue, it is the SYRIZA-Independent Greeks (ANEL) government which agreed and signed the deal with the EU in August. It is also the same government which took it to the people and got the mandate to implement the agreement.
Moreover, they note, this government does not have to worry about an interim event, such as local elections, a presidential election or a ballot for the European Parliament, that could be used by the opposition parties to cause early elections. Therefore, the current government can assume the social cost of the third bailout in the first two years and reap the fruit of predicted stronger economic growth in the last two years of its term to win the elections again.
The optimists add it will be more difficult for more radical SYRIZA deputies to desert the party after see- ing the failure of their former colleagues to enter the Parliament as a new, anti-bailout party. They say the coalition government can count on deputies from other smaller parties to boost its current 155-seat majority in the 300-seat Parliament to stay in power. The fact that the main opposition parties are pro-bailout may also work in favor of the new government.
However, the pessimists camp does not share the same view. Although they expect the SYRIZAANEL government to have the bills related to the bailout program be voted in Parliament in the next few weeks and months, they predict the implementation of the program will slow down considerably and may even reach a halt at some point next year. They say this will force the lenders to halt the disbursement of loans to Greece, aggravating the situation and making anti-bailout voices more vocal.
They justify their prediction by citing ideological opposition to many measures and bailout reforms by some ministers, party deputies and others as well as technical incompetence. They add that the anticipated economic slump ahead and the rising social discontent will help bring the objections and opposition to reforms to the surface faster, precipitating a political change that may take various forms. The pessimists say the EU is making a serious mistake in thinking the SYRIZA-led government will implement the program because it will face the least resistance.
Undoubtedly, it is still too early to make a judgment about the fate of the third bailout program and the newly elected government. However, one has to admit that both camps, optimists and pessimists, have some good arguments to support their views. The next few months will show which camp is likely to be correct. At this point, we would say it’s fifty-fifty.