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Greek electorate ousts Tsipras, conservatives secure outright majority

Economic Report

  • Conservative party New Democracy (ND) beats ruling populist party Syriza in Greek legislative elections
  • Kyriakos Mitsotakis replaces Tsipras as Greece’s prime-minister
  • Greek public debt is still staggeringly high at 181%,, but there are some positive signs that could improve debt metrics
  • Fiscal handouts made by the exiting government could still cause concern for Greece’s creditors as since the new government is likely to miss fiscal targets which were a condition of debt relief
  • Markets are welcoming Mitsotakis’ election win and his vows to improve Greece’s business climate, attract foreign investment and address red tape

Ruling populists beaten by conservatives

The Greece legislative elections held on July 7 have brought about a major change to the political landscape. After having won the last two Parliamentary elections in 2012 and 2015, the ruling left-wing party Syriza of prime-minister Alexios Tsipras was beaten by the right-wing conservatives New Democracy (ND), which are led by Kyriakos Mitsotakis. Despite some recent fiscal handouts, Syriza suffered from a more splintered left wing and was punished by Greek voters for failing to deliver many of their populist promises made in 2015. Most importantly, it vowed to defy the EU by refusing stringent bailout conditions. Instead, Tsipras made a U-turn and embraced EU-imposed austerity by signing a bailout deal with substantial strings attached. This put output growth in 2015 and 2016 back into negative territory and prevented a swift recovery of GDP and employment growth (Figure 1). As a consequence, Greek output is still almost 25% below its pre-crisis level (Figure 2). Prime-Minister-to-be Mitsotakis capitalized on this and appealed to voters by running his campaign on the promise of sparking output growth through tax cuts and attracting private investments, which enabled him to secure an outright majority in Parliament.

Figure 1: Output growth dropped after Tsipras signed bailout deal in June 2015
Figure 1: Output growth dropped after Tsipras signed bailout deal in June 2015Source: Macrobond
Figure 2: Greek real GDP is almost 24% below is pre-crisis level
Figure 2: Greek real GDP is almost 24% below is pre-crisis levelSource: Macrobond

Greek political system favours largest party

New Democracy won 39.6% percent of the votes, but secured 52.7% percent of the seats in Hellenic Parliament which is made possible by several features of the Greek political system (Figure 3 & 4). Most importantly, the party securing the most votes receives an additional 50 seats in a Parliament that counts 300 seats. Moreover, a 3% electoral threshold favours ND, since votes won by parties failing to meet this threshold will be redistributed proportionally to parties that do. This does not hold for MeRA25, a small left-wing party led by the outspoken former finance minister Yanis Varoufakis, as it secured its spot in Parliament by beating the threshold by a narrow margin. Although Syriza still secured 31.6% of the votes, it was insufficient to prevent ND from reaching an outright majority, which provides future Prime-Minister Mitsotakis with a strong mandate to implement reforms and initiate a kick-start of Greece’s economic activity.

Figure 3: Preliminary election results
Figure 3: Preliminary election resultsNote: At the moment of writing, approximately 90% of the votes were counted. 
Source: Politico
Figure 4: Expected seat distribution
Figure 4: Expected seat distributionNote: At the moment of writing, approximately 90% of the votes were counted.
Source: Politico

Decent economic growth expected in coming years

The next Greek government will inherit an economy which is expected to grow by 2.0% this year and by 1.7% next year. Growth is underpinned by improvements in domestic demand, as minimum wage increases and pension bonuses are expected to support private consumption going forward while Mitsotakis’ pro-business policy-making should boost foreign investments. However, plenty of challenges lay ahead for the new Prime-Minister as he has to follow up on his election promises with what looks like little budgetary space. Moreover, at 18.1%, the unemployment rate remains staggeringly high, while enormous youth unemployment triggers mass emigration of talented Greeks.

Positive signs but public debt concerns remain

In any case, the biggest challenge for the next Greek government will lie in addressing the enormous Greek debt pile. Public debt skyrocketed from 105% of GDP in 2008 to 172% in 2011 due to gigantic primary deficits and exploding bond yields (Figure 5 & 6). At a staggering 181% of GDP in 2018, Greece’s debt ratio is still by far the highest in the Eurozone and has not come down in recent years. However, we do observe some positive signs. Greece has recorded a primary surplus for three years in a row, exited the bailout program last August, secured a debt relief deal and was able in March to successfully issue a 10-year bond for the first time since the start of the debt crisis.

Figure 5: Enormous primary deficits and exploding yields lead to rapid increase in public debt
Figure 5: Enormous primary deficits and exploding yields lead to rapid increase in public debtSource: Macrobond
Figure 6: Greek debt still highest in Eurozone
Figure 6: Greek debt still highest in EurozoneNote: In 2012 Eurozone countries and Greece reached a deal which sliced off more than 30% of the debt ratio. Source: Macrobond

Handouts Tsipras risk upsetting creditors

More positive news was supposed to be on its way as the European Commission forecasted debt to come down on the back of Greece’s return to growth and substantial future primary surpluses. However, this was before Tsipras introduced a fiscal handout to boost his election chances. Amongst other measures, pension bonuses risk startling Greece’s creditors since debt relief was made conditional on sustaining a 3.5% primary surplus until 2022. The Greek central bank forecasts that Greece will fail to meet its fiscal targets under a no-policy change assumption as Tsipras’ measures are expected to cost around 1.3% of GDP annually. This leaves Mitsotakis with less fiscal headroom to follow up on his election promises, which are, amongst other things, property, value-added and corporate tax cuts. In the short run, these tax reforms are likely to reduce the primary surplus further, raising the probability that Greece will miss fiscal targets. This, in turn, risks the withdrawal of some debt relief.

Figure 7: Banking sector suffers from NPLs
Figure 7: Banking sector suffers from NPLsSource: European Banking Authority

At longer horizons, however, tax cuts can fuel growth when, for example, a reduction in corporate tax rates induces productive investments. These tax cuts are part from Mitsotakis’ overall plans to improve Greece's poor business climate, which is expected to gain from the removal of bureaucratic obstacles through a planned restructuring of the government. Making Greece more attractive to both foreign and domestic investors would give growth another boost as there is a lot of potential for pent-up demand to be unlocked following years of austerity. Much will depend on whether the ND frontman can fulfil his promise to accelerate the clean-up of Greece’s banking sector, which struggles to support domestic investments as a consequence of the huge amount of non-performing loans (NPL) on its balance sheets (Figure 7). All in all, Mitsotakis’ plans to foster foreign and private investments are a clear change from Syriza policy, which focused more on expanding social welfare programs.

Markets are pleased with pro-business attitude Mitsotakis

Figure 8: 10-year bond yields have declined rapidly
Figure 8: 10-year bond yields have declined rapidlySource: Macrobond

The expected change in policy is clearly welcomed by financial markets, as government bonds have rallied in the past weeks, with Greek 5-year yields even briefly dipping below Italian ones at some point (Figure 8). However, part of the decline in bond yields can be attributed to fresh stimulus signals from the ECB. That being said, we could also envisage Greek yields edging up again should renewed tensions between Athens and its creditors arise. Particularly concerns about Greece’s ability to meet fiscal targets could be a trigger for that. Moreover, Mitsotakis has expressed his desire to open up talks to bring down the required primary surplus targets. On the other hand, he has also stressed his commitment to bringing down Greek financing costs to the same level as those of other European countries. This statement combines well with his desire to boost private investments and make Greece more business-friendly. At the same time, however, such policies may raise concerns about the medium-term risks of a decline in the primary surplus.

Michiel van der Veen
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 8313 4616

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