Greece Is Ready to Turn the Page on Tsipras

(Bloomberg Opinion) -- Greece goes to the polls on Sunday in the first election since the country exited its international bailout.

Voters face a choice: Giving a second term to left-wing Prime Minister Alexis Tsipras, or backing Kyriakos Mitsotakis, leader of the center-right New Democracy party.

The polls suggest Mitsotakis is on course to win and could even secure an absolute majority. The Harvard-educated former management consultant has won the trust of investors thanks to his manifesto promises to lower taxes and improve the business environment. If he can put it all into practice, Greece stands a good chance of getting back on its feet at last.

The incumbent Tsipras has returned the country to growth – but only after breaking his initial promises and plunging the economy into a painful and unnecessary recession from which it has only just recovered.

Gross domestic product expanded by 1.9% last year, and the European Commission expects it to grow by a further 2.2% in the next two years. Greece is still saddled with an enormous public debt, exceeding 180% of GDP.

But the public finances are slowly on the mend: Athens is on track to run a primary surplus, net of interest payments, of 2.9% of GDP this year, according to the Bank of Greece. This is just below the 3.5% target set by the country’s international creditors and comes after the government made sizable savings in recent years.

Tsipras can take some credit for this improvement. In 2015, after making wild promises that he would be able to change the terms of the bailout, he chose to keep Greece in the euro after signing up to a package of austerity and structural reforms. Had he opted to leave the single currency, an economic collapse would have likely followed. Instead, Tsipras ousted his more radical allies, including finance minister Yanis Varoufakis, who had secretly looked into ways to develop a parallel payment system.

Yet the price for Tsipras’s volte-face was more suffering. The government had to impose capital controls to stop money from flowing out of the banking system because of the risk of redenomination into new drachmas. The economy, which was on course for a rebound, shrank for two consecutive years.

Tsipras is now running on a platform of redistribution, which he believes stands in stark contrast to the pro-business agenda of the center-right. In the run-up to May’s European election, he used some of the fiscal surplus to give pensioners a bonus and fund tax cuts. But the electorate seems to have had enough: Mitsotakis won a resounding success, forcing Tsipras to call an early general election. Syriza is now polling 24.3% of the vote, according to the latest poll by Alco, well behind New Democracy, which is at 34%. Other polls also give Mitsotakis’s grouping a clear lead.

Mitsotakis could win an absolute majority or else try to form a coalition with Kinal, a centrist party. Either way, his priority should be to capitalize on the support which he enjoys both at home and on the markets.

Yields on Greece’s sovereign bonds have plummeted to just above 2%, down from about 3.5% just two months ago. Mario Draghi’s announcement that the European Central Bank stands ready to ease monetary policy again and the expectation that his successor-in-waiting, Christine Lagarde, will continue on the same path have clearly helped. But the risk premium between Greece and other countries has also narrowed, a sign that investors expect the country to turn a corner after the vote. The benchmark Athens Stock Exchange General Index has climbed more than 45% this year.

Mitsokakis should seek to open up Greece’s protected oligopolies to competition – something which Tsipras has failed to do – and make it easier for foreign investors to put their money into Greece.

With his fresh political mandate, he might be able to obtain better conditions from the country’s international creditors, including further debt relief. With luck, he could also obtain a concession to lower the expected primary surplus from 3.5% each year until 2022 and an average of 2.2% afterwards.

Of course, there is a risk that Mitsokakis, too, will disappoint both the electorate and investors. The scion of one of Greece’s most important political families is perceived as a modernizer – but many in his party are not. Vested interests may prove too much to overcome, something that could undermine his efforts to boost growth and to seek better terms from the EU. Another downturn in the euro zone or a crisis in Italy could also hit the economy.

But after four years of broken promises, voters stand ready to turn a page.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

©2019 Bloomberg L.P.

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