Greece's Next Government to Face Warning of Reform Backtracking
Greece's Next Government to Face Warning of Reform Backtracking
(Bloomberg) -- As Greece prepares for its first post-bailout national election next month, whoever emerges as the country’s next prime minister will face an immediate challenge: how to deal with the European Commission’s warnings of backtracking on reforms.
A package of relief measures adopted by Greek Prime Minister Alexis Tsipras’s government in May will incur a cost of more than 1% of gross domestic product in 2019 and beyond, the Commission said in its post-bailout review for Greece on Wednesday.
“The adopted measures on pensions and VAT are targeted at consumption and will absorb a considerable amount of fiscal space that was envisaged in legislation adopted in 2017 for growth-enhancing reductions in labor and corporate tax rates,” the Commission said.
Any change to primary surplus targets agreed in June 2018 would need to be discussed at a meeting of euro-area finance ministers in the context of an updated debt sustainability analysis, it said.
Tsipras introduced ahead of European elections last month a series of measures designed to appeal to voters, including a cut in the sales tax rate and the handout of a bonus to pensioners. He also decreased the country’s surplus targets to 2.5% of GDP, from the 3.5% target agreed with creditors.
The premier, who lost the European ballot on May 26 to the New Democracy party of opposition leader Kyriakos Mitsotakis, with a surprise margin of more than 9 percentage points, was forced to call snap elections that will be held on July 7, a few months prior to the official end of his term in October.
Tsipras, in a last-ditch effort to gather support for his Syriza party, announced on Tuesday that his government will submit to parliament an amendment to overturn a scheduled lowering of the tax-free threshold for income. The original measure, also part of the agreement with creditors, was due to take effect in 2020. Greece will be able to achieve its fiscal targets without implementing the measure, he said.
Markets Rally
Mitsotakis, who was also a minister of administrative reform in the government of former Prime Minister Antonis Samaras and oversaw the first layoffs of state employees, has vowed to pursue a vigorous reform program, including the restructuring of the country’s social security system. The win of investor-friendly Mitsotakis in the European elections was viewed positively by the markets, with the yield on the government’s 10-year bond dropping to a record low, while the Athens Stock Exchange marked its best run since 2015.
However, Greece is not yet out of the woods. The Commission report spots vulnerabilities in the country’s banking sector and further challenges for the recovery of domestic demand and in particular investments. Despite progress in reducing non-performing loans, further major efforts are required to achieve faster NPL reduction.
If elected, Mitsotakis will face a difficult juggling act: satisfying the demands of creditors who are warning of backtracking and risks to the country’s debt sustainability and easing the pain for the bailout-worn Greeks, who have suffered almost ten years of belt-tightening policies and a deterioration of their living standards.
“It is a delicate exercise for Greece to return to markets. With public debt at around 180% of GDP, there is very little room for mistakes,” European Commission Vice President Valdis Dombrovskis told reporters in Brussels Wednesday.
--With assistance from Sotiris Nikas and Viktoria Dendrinou.
To contact the reporter on this story: Eleni Chrepa in Athens at echrepa@bloomberg.net
To contact the editors responsible for this story: Sotiris Nikas at snikas@bloomberg.net, Paul Tugwell, Jerrold Colten
©2019 Bloomberg L.P.