A Foregone Conclusion
Alexis Tsipras would have liked to be the first Greek prime minister since the crisis to complete his term of office. He only needed to hold on for six months, until the October elections. But faced with his party’s electoral defeat in the European elections, he was forced to call early elections in Greece. Significantly trailing in the polls, he had set the objective of reducing the gap between his party and the New Democracy (ND) party, his main opponent, to five points. The multiple social measures enacted several weeks before the European election did not have the desired effect, however; they only reawakened European concerns about Greece. Neither did Syriza’s transformation from a radical left coalition into a Social Democratic wing. New Democracy, led by Kyriakos Mitsotakis, came out on top in the European elections, with 33% of the votes and far ahead of Syriza, which received only 23.7%, or a difference of nearly 10 points. The local and regional elections, which occurred at the same time, confirmed this trend, with a clear victory by regional candidates supported by the centre right.
While the elections have been announced for 7 July, the polls continue to put New Democracy ahead, with a stable lead of nine points. The ND party remains favoured in the polls with voter intentions averaging 37.7%, followed by Syriza with 28.2%. The Kinal social democratic party is expected to be the country’s third largest with 7.7% of voter intentions, followed by the KKE communist party with 5.7% and Golden Dawn (extreme right) with 5.2%. MeRA25, the political party of former Finance Minister Yanis Varoufakis, and Greek Solution, the right-wing party, are both hovering around the 3% electoral threshold, with 3.6% and 3.5%, respectively.
The early election results seem to be a foregone conclusion. New Democracy is expected to win the majority, but the number of seats that the party will be able to win depends on the performance of the small parties. If the MeRA25 and Greek Solution parties exceed the 3% eligibility threshold, Parliament will comprise a total of seven parties. In this scenario, ND would probably win a narrow majority with 152 seats, while Syriza would go from 145 to 77 seats. Kinal would take 21 seats, the communist party 16, Golden Dawn 15 and MeRA25 and Greek Solution would share the remaining 20 seats. In a five-party configuration, ND would have a large majority of 162 seats. But the most probable scenario remains a six-party Parliament, which would also include MeRA25, Yanis Varoufakis’ party. In that case, ND would be able to win a comfortable majority with 156 seats, while Syriza would see its Parliamentary group reduced to 80.
Normalisation and demons of the past
The victory announced by New Democracy is not bad news for the markets and companies. The recent measures implemented by the Tsipras government aroused a number of concerns both inside and outside the country's borders. As the European elections approached, the government presented a package of social measures to Parliament, with a budgetary cost estimated at €1.1 billion in 2019 and €3.2 billion in 2020. Approved by the deputies at the beginning of May, these measures included a reduction in the value-added tax on food and restaurants (from 24% to 13%) and on energy (from 13% to 6%), a one-time bonus for retirees equal to a thirteenth month and assistance for large families. In addition, Tsipras voiced his desire to reduce the primary surplus to 2.5% for the 2020-2022 period. In order to reassure lenders, the Greek authorities offered to hold €5.5 billion in an escrow account as a guarantee.
With this shift in the budget policy, Greece could be unable to meet the primary surplus objective of 3.5% until 2022 to which it committed under the bailout plan last August. The Governor of the Greek Central Bank, who strongly criticised the government’s measures, believes that the primary deficit objectives could be met for this year, but that the measures voted on by Parliament limit any future flexibility. European creditors also spoke up more aggressively, reminding the country that it could face potential sanctions if it did not honour its commitments.
Change of Direction
Tsipras is not the only one to oppose the high primary surplus policy to which Greece is committed. Kyriakos Mitsotakis, the New Democracy leader, also opposes this policy and has committed to asking for more flexibility from European creditors to implement an economic policy that favours companies and the middle class. He wants to lighten companies’ tax burden by reducing the corporate tax rate from 28% to 20% and taxes on shares. He has, in addition, committed to introducing measures aimed at reducing borrowing costs for companies and increasing the attractiveness of Greece for foreign investment. As for households, he wants to lower income taxes on annual income of less than €10,000 from 22% to 9% and gradually reduce the solidarity tax from 20% to 15%.
It is unlikely that the New Democracy party will negate all of the commitments made by the previous government, but it should have more leeway to negotiate adjustments to its objectives with the European Commission. The fact remains that it will be a complicated task. Greece still has to discuss potential debt relief with its creditors, but that remains conditional on meeting its commitments. The downturn in growth forecasts complicates the consolidation of public finances. What’s more, the country has not been spared from the slowdown in activity that is affecting Europe. The tepid recovery that followed the bailout is expected to lead to weaker growth in 2019 and an estimated 1.4% to 1.5% in 2020. The challenge for the future Prime Minister will be to make a convincing case that his supply-side policy will be able to re-energise growth, but that the definitive exit from the crisis cannot happen without a reduction of the debt load.