After winning a majority in the Greek elections on 7 July, Kyriakos Mitsotakis and New Democracy must now turn their attention to managing the country’s economic recovery. Yet as Paris Aslanidis explains, the scope for plotting a new economic course is heavily restricted by the terms of the 2015 bailout agreement, ensuring that government turnover is highly unlikely to produce real economic change. Under the terms of the 2015 bailout agreement, Greece must adhere to an annual primary surplus (balance excluding interest payments) of 3.5% of GDP until 2022 and 2% of GDP thereafter. A fiscal pledge of such magnitude – unprecedented in the history of global political economy – not only takes a stranglehold on the nation’s prospects of sustainable economic recovery, it also undermines the
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After winning a majority in the Greek elections on 7 July, Kyriakos Mitsotakis and New Democracy must now turn their attention to managing the country’s economic recovery. Yet as Paris Aslanidis explains, the scope for plotting a new economic course is heavily restricted by the terms of the 2015 bailout agreement, ensuring that government turnover is highly unlikely to produce real economic change.
Under the terms of the 2015 bailout agreement, Greece must adhere to an annual primary surplus (balance excluding interest payments) of 3.5% of GDP until 2022 and 2% of GDP thereafter. A fiscal pledge of such magnitude – unprecedented in the history of global political economy – not only takes a stranglehold on the nation’s prospects of sustainable economic recovery, it also undermines the representative function of the Greek party system by disfiguring political contestation on the socioeconomic axis.
Since the beginning of the decade, politicians have been hamstrung by their inability to devise an ideologically coherent economic platform that would credibly signal medium- and long-term economic benefits to their voting constituencies. Left-wing parties are prohibited from suggesting a fiscal stimulus to revive the economy or from committing to a stronger social safety net; right-wing parties are unable to lower taxes to stimulate investment and achieve a positive supply-side shock. To grasp the narrowing of programmatic contestation, try passing your party manifesto of choice (conservative, liberal, progressive, green, or otherwise) through the tight filter of a 3.5% primary surplus and then look for traces of ideological substance on whatever has made it to the other side. You will hardly find any.
In a desperate attempt to escape the fiscal stranglehold and repoliticise the socioeconomic axis, Alexis Tsipras made the systematic overshooting of the 3.5% target a central plank of his economic policy during his post-bailout term in office. The strategic aim was two-fold: posing as plus royaliste que le Roi, Syriza would establish an international reputation as a responsible party of the left that delivers on its fiscal obligations; at the same time, the added fiscal space – secure beyond the creditors’ reach – could be redistributed to the party’s lower-class electoral base. The belt-tightening exercise worked surprisingly well (a 3.6% primary surplus in 2016, 3.9% in 2017, 4.4% in 2018), all while unemployment decreased from 28% to 18%. Nevertheless, the general political objective, Tsipras’s re-election, failed miserably. Overtaxing the population to achieve these targets, sensible critics charged, drained valuable resources from the private sector thus curtailing overall growth.
During the last campaign, Alexis Tsipras, conscious of this criticism, pledged to immediately reduce the surplus target to 2.5% by offering creditors a 5.5-billion-euro cash buffer as a form of collateral without, however, producing evidence that his interlocutors would accept the scheme. His victorious adversary, Kyriakos Mitsotakis, traced an alternative escape route that he now has to follow. The leader of the conservative New Democracy wants to turn Greece into every investor’s poster child, swiftly deregulating the economy and lowering the private tax burden, thus attracting FDI to achieve accelerated growth rates of at least 4% of GDP. Mitsotakis will then take his success story to Brussels to request a lower surplus threshold as a reward for his “real reforms”.
Kyriakos Mitsotakis, Credit: European People’s Party (CC BY 2.0)
Even if we disregard the inherent flaw in the argument (if you can score a formidable 4% growth rate as it is, why would anyone grant you relief?), New Democracy’s plan is bound to face strong headwinds. First, the political balance of powers within the EU is even worse for Greece today than it was back in 2015. In Berlin, the new leader of the CDU, Annegret Kramp-Karrenbauer, is taking a hawkish stance by openly challenging the ECB’s low interest rate policies; Germany’s finance minister, Olaf Scholz, who is also playing the “responsible left” card, warns Greeks that trying to alter the adjustment programme is “a big mistake”. The Dutch PM, Mark Rutte, is resolutely against any attempt to modify the current fiscal framework in the Eurozone.
Ursula von der Leyen’s appointment as the new President of the European Commission is another negative development, given her ideological roots and her stance in 2011 when she demanded that Greeks put up collateral in the form of gold or public company stock before they can be granted a bailout. With the AfD, the PVV, and other Eurosceptic right-wing parties poised to reap the political fallout of any further concessions to “lazy Greeks”, Mitsotakis will have a hard time selling his success story to the European North.
And in the South, the Commission’s ongoing row with Italy over fiscal responsibility only makes things worse, as signs of leniency toward another heavily indebted Eurozone member will undermine the already weak credibility of the Stability and Growth Pact. If this was not clear enough, the Eurogroup, which convened the day after the Greek election, made sure to warn Mitsotakis that the 3.5% target is not to be tampered with, since, as Managing Director of the European Stability Mechanism, Klaus Regling, put it, the figure constitutes the bailout programme’s “cornerstone”.
Having said that, the worsening political climate in the EU is not the main reason one should be reluctant to sympathise with the new government’s optimism. Besides, if the charm offensive fails, Mitsotakis – like Tsipras in 2015 – can always claim that he did his best against superior forces and then carry on with business as usual. The primary risk factor for every Greek government has to do with the fact that domestic economic policy does not operate in a vacuum: the whole project of Greek debt sustainability is predicated on consistently moderate-to-high rates of growth in a country hugely vulnerable to global economic swings.
With the world economy slowing down and hedge fund managers anticipating a 45 per cent chance of a recession in the coming year, it is very likely that New Democracy’s four-year tenure will overlap with a severe economic downturn that will affect domestic fiscal targets and interfere with efforts to attract foreign investment. The tourism industry, an important source of revenue for many families, may also suffer losses. Therefore, if, or when, the downturn hits Greece, the elephant in the room – the huge pile of public debt, now above 180% of GDP – will again emerge from the shadows. And if creditors refuse to grant Greeks considerable breathing space, then strict adherence to the 3.5% rule will require further consolidation, plunging the Greek economy into another recession and sending debt sustainability analysts back to the drawing table.
Overall, the narrative of the defiant Prime Minister who will “go to Brussels” to “renegotiate the terms of the agreement” has been a staple of every opposition party since 2010. The story invariably ends with the leader returning bruised from his short trip to the Belgian or German capital with a “pacta sunt servanda” slapped on the forehead. To scuttle these humiliating images Mitsotakis has alluded that his personal connections and New Democracy’s weight within the European People’s Party will make the difference this time around. To be sure, everyone would like to believe that this is indeed the case, but Greek voters will not exactly fall off their chairs if it doesn’t happen. They have made their peace with the elusive nature of “renegotiation” and the stark reality of pain management.
The external constraints imposed on the economic aspect of political contestation inevitably pushed Greek parties to mobilise voters on issues of personal integrity and moral rectitude over strictly programmatic arguments. Tsipras repeatedly tried to paint Mitsotakis as the nepotistic scion of a corrupt political family, emphasising his murky relationships with Greek business and media oligarchs and his party’s history of clientelism. On the other side, New Democracy triumphed upon a vehement, four-year long campaign of inciting anger against Syriza as a party of liars, traitors, and incompetent political imposters. Moreover, its nationalistic stance on the issue of Macedonia and a law-and-order discourse on matters of criminality, immigration, and penal reform, brought hundreds of thousands of right-wing voters back to the fold, pushing New Democracy up from 28.1% of the vote in 2015 to 39.85% in 2019.
In Greece, economic arguments play second fiddle: politicians pretend to offer innovative ways to bypass the 3.5% rule and voters pretend to believe them. As long as the politics of exorbitant primary surpluses continue to dominate, government turnover will fail to produce real economic change and the credibility of programmatic commitments will continue on its downward trend, in a vicious cycle that can only prove deleterious for Greek democracy.
Note: This article gives the views of the author, not the position of EUROPP – European Politics and Policy or the London School of Economics.
Paris Aslanidis – Yale University
Paris Aslanidis is a Lecturer of Political Science at Yale University. His main research focus is on populism and its nexus with social mobilisation. He has published articles in Political Studies, Mobilization, Democratization, Sociological Forum and other peer-reviewed journals and he is now working on a book manuscript titled Populist Mobilization.