Mitsotakis’ four-point plan for Greece
10 July 2019
The election results in Greece show that people, or at least the 56% that voted, have had enough of the populist experiment led by Alexis Tsipras. With the Greek economy bleeding and its people disenchanted, the centre-right party New Democracy elected Kyriakos Mitsotakis as its new leader and won an outright parliamentary majority (39.85%, 158 seats). This offers Mitsotakis the opportunity to pursue the policies he promised during his campaign, many of which will be opposed by the rest of the parliament. The core of it consists of four action points:
The need to slash tax rates
The corporate tax rate stands at 29% and is posed to decrease to 20%. Similar rate cuts are expected for personal income tax, VAT, and property taxes. The expected effects of lower tax rates are the encouragement of entrepreneurial activity and an increase in consumer spending, anticipated to lead to a virtuous circle of new jobs and further increases in consumption. Surprisingly, Greek workers do not currently bear the highest tax rate in the Eurozone. The Greek real tax rate is at about 51.5%, while, for instance, France is 57.5%. Mitsotakis’ aim is not only to make operating and living in Greece cheaper, but also to signal that he aims to steer Greek society away from state support to more sustainable sources of sustenance and growth.
Reforming the public sector
The bailout programme signed by previous governments demanded uprooting privatisations of various state corporations, government functions, and public assets. The goals of achieving revenue of €2bn in 2018 and €1bn in 2019 by privatising utility, transportation, and telecommunication companies were not met by Tsipras. Mitsotakis has recognised the need to keep agreement with the creditors on this issue. The release of underutilised assets is expected to increase productivity and provide relief to public finances. On a similar vein, he has advocated for the effective evaluation of public servants and the appropriate reforms regarding the interaction of citizens with the state services, all in order to decrease bureaucracy.
Revamping the banking sector
The debt crisis that began in 2007 and resumed in 2009 left the Greek economy smaller by more than a quarter and the banks holding €81.8bn of non-performing loans (NPLs), almost 50% of the total loans in their balance sheet. This figure is the highest among the Eurozone countries. The high proportion of NPLs and the en-masse flight of deposits from Greek to foreign banks have forced international creditors to recapitalise the Greek banking sector with €43bn, with major participation of the bank shareholders in the process. The capital restrictions and the NPLs prevent Greek banks from providing capital to borrowers regardless of their credit score. Mitsotakis needs to bring the NPL crisis to a sustainable level, if not to an end, so that the capital intensive sectors in Greece can be financed, bringing more jobs and consumption along the way. The government has downplayed rumours and allegations that the €37bn held by the Greek government as a fiscal safety net may be partially utilised in jump-starting the banking sector.
Attracting more private investments
The new government is openly market-friendly and has claimed there are projects valued at more than €50bn that could be funded by private investors when the economic conditions in Greece are auspicious. The capital markets seem to have confidence in Mitsotakis’ plans. The 10-year Greek government bonds trade at an all-time low yield of just above 2%, showing virtually no market concern for the state finances. The Greek stock market has been rallying for more than 35% since the beginning of the year, partially discounting the recent election outcome, as it has been reflected in the polls for a long time. The investments foreshadowed by both Mitsotakis and the market can create hundreds of thousands of jobs, which will expedite the recovery of the Greek economy after tumbling for 10 years in recession.
The new government faces several challenges in implementing these four actions points. The major obstacle is posed by the international agreements in place. The departing Greek government agreed with its creditors on a budgetary surplus of 3.5% until 2022. Mitsotakis’ intended decreases in taxation cannot be achieved under such high surplus targets and a renegotiation with the creditors will be necessary before implementing any tax reforms. In light of the election outcome, European officials stated explicitly that they expect Greece to honour the agreement of the previous government, despite the arguments provided by Mitsotakis and the support by the International Monetary Fund, which sees the magnitude and the duration of the surplus as impediments to growth. Prospective renegotiation with the creditors is not helped by the €1.6bn handout offered to key constituencies by the departing Tsipras. A delegation of the international creditors will visit Athens soon in order to monitor the progress of achieving said surplus.
Mitsotakis has a long and challenging road ahead. He has the opportunity of a lifetime to prove to the next generations of Greeks and our contemporary fellow Europeans that there is a successful way out of even a 10-year status quo of recession. His legacy may be not only the salvation of an old and proud nation, but a nail in the coffin of the detrimental populism ailing both sides of the Atlantic.