The Greek economy and the elections

The next elections are the first in many years that will be held outside the context of the direct fiscal supervision of the Greek economy. It has been almost 15 years that our economy has been swinging between risks and big restrictions. While there has been clear progress, putting the economy on a steady path of strong growth that will generate high real incomes in a systematic way remains a challenge. In this sense, the elections are a crucial milestone.

It is normal in a pre-election period that the emphasis is on the distribution of the economic pie and less on how it will grow in the future. The issue of how to distribute money through wages, pensions, benefits or regulations is of immediate effect, while how incomes are to be raised is a question of medium-term importance. It is also expected that in a pre-election period the most profound and systemic problems of the economy will be considered less urgent and the most current ones will take center stage.

However, how our economy will really develop is a matter of national importance and at the same time a deeply political issue. Its course depends on the next election in more ways than one. It is crucial what expectations are cultivated with pre-election measures and promises made by political parties, and equally crucial what cooperations will shape economic policy after the election.

Throughout the period since the start of the bailouts there has been significant fiscal and macroeconomic balancing. More recently, there has been strong progress in attracting investment, strengthening the extroversion of many businesses and intensifying reform efforts in part of the public sector which, combined, have contributed to a positive dynamic. But to ignore the weaknesses of our economy and the fact that they will not correct themselves would mean compromising with a low level of growth.

A first issue is the trend toward distributing handouts and other benefits. These have recently multiplied, and to a large extent they are justified by the problems created by the pandemic and the energy crisis. However, if these are placed at the center of a party’s economic policy, they will come at a large cost. The impression that incomes that are not produced can be systematically distributed distorts the incentives of businesses and households, among others, fueling the shadow economy. It also reduces support in the future for decisions that will actually help grow the economy. Therefore, it is crucial to set clear limits on benefit policies after the elections with appropriate social targeting.

To ignore the weaknesses of our economy and the fact that they will not correct themselves would mean compromising with a low level of growth

A second dimension is the fiscal one. In the recent past, there was a suspension of the application of European fiscal rules and easy access to cheap money. Now that financing is becoming more expensive, rules might change and there is an urgent need for the country to run primary surpluses – small but systematic. A stable fiscal path is a necessary basis for economic growth, with an intermediate target being the achievement of investment grade, the utilization of European resources and attracting investments. In a country that has recently defaulted, one would have expected political parties to have reached a broad agreement that its treasury will never again come close to dropping into the red.

A third dimension concerns the real economy. We have even less integration of innovation in production, greater dependence of business on the state, more and less effective rules, and a larger shadow economy than countries we want to compare ourselves to. Progress in these areas requires difficult changes and a balancing act between reforms and concessions.

The economic turmoil today is global, but the challenges for Greece are greater. After almost 15 years of economic crisis and dangerous turns, it would be a particularly beneficial development to have clarity during the pre-election phase about the main necessary directions of the economy in the future.

Nikos Vettas is the general director of the Foundation for Economic and Industrial Research (IOBE) and a professor at the Athens University of Economics and Business.