The Greek economy is continuing to rebalance and seems to be in the process of bottoming out, increasing the chances of a recovery next year. However, high taxes and unemployment continue to feed discontent among large segments of the population, rendering political risk the biggest threat to recovery.
Output contracted to a revised 3.8 percent year-on-year in the second quarter, easing from 5.6 percent in Q1 and 5.7 percent in the last quarter of 2012. The numbers are not pretty but they do point to a deceleration in contraction after 20 quarterly declines since the third quarter of 2008. Moreover, government officials and others agree the economy grew in the second quarter compared to the preceding one for the first time in years if the numbers are adjusted to take into account seasonal factors.
But the deceleration of recession provides little solace to the unemployed, the hard-hit employees in the private sector and low-income pensioners who are finding it tough to make ends meet. Public sector workers have also been complaining about pay cuts in the last couple of years but at least they get paid on time thanks to the adjustment program and usually enjoy higher salaries and fringe benefits while holding less tiring and demanding jobs than their counterparts in the private sector.
Readers are reminded that unemployment rose to 27.9 percent in June from 27.6 percent in May and 24.6 percent a year earlier, according to seasonally adjusted figures. It compares to less than 10 percent in the same month in 2007 and an unchanged jobless rate of 12.1 percent in June in the eurozone. The high unemployment rate reflects the bad conditions in the labor market and the private sector in particular.
The latter fuels the ranks of the jobless while more than half of employees in private companies are paid their salaries with a few months’ delay but are obliged to pay their taxes and social security contributions on time. Layoffs in the public sector are scarce and conditional on proven criminal activities, at least so far.
The protracted six-year recession, bordering depression, accompanied by compressed disposable incomes, high unemployment and unpaid workers in the private sector, has definitely squeezed the middle class and made life miserable for the lower social strata. Of course the pain is not shared equally since a number of people have sizable bank deposits while others, such as farmers, are not generally speaking taxed or disproportionately much lighter than the others. But those with no job or low, infrequently paying jobs, real estate and no or small savings are worse off.
Some foreigners may say this is the price to pay for past sins, but the vast majority of the population does not see it in the same way. They feel they have been betrayed by the country’s political elite and are angry. Since they are law-abiding citizens, they will choose to express their anger against the system at the ballot box. For an increasing number of them, especially those with conservative leanings, the extreme right-wing party of Golden Dawn appears to be the most anti-systemic. This explains why it did very well, getting between 15 and 20 percent of the vote in “secret” polls lately, according to a knowledgeable person and has a good chance of electing the next mayor of Athens in the municipal elections next year.
The assassination of a leftist musician by a Golden Dawn sympathizer last week may help reverse this trend if the authorities manage to portray the party as a criminal gang. Nevertheless, the economic conditions will not be on their side. The expected progress in addressing the imbalances will not be accompanied by a noticeable improvement in the living standards of the vast majority of the population till next May or June, when elections for the European Parliament and local authorities, and possibly general elections, take place.
This will be more likely if the government agrees to new austerity measures with the troika to close the projected fiscal gap in 2015-16 in the next couple of months and keep the bailout funds flowing in. So, political risk will remain elevated and is likely to rise further as we approach next June if the authorities fail to dent Golden Dawn’s support and the leftist SYRIZA party manages to take a clear lead in the polls against conservative New Democracy.
Having said that, one should also take into account two other factors in gauging the political risk ahead. First, Greece’s EU presidency in the first half of 2014 and the positive impact it may have on the image of Premier Antonis Samaras. Second, the effect on the popularity of the two ruling parties, namely New Democracy and center-left PASOK, of the economy’s possible exit from the recession tunnel along with the possible distribution of part of the 2013 primary surplus, assuming there is one. The eurozone’s rebound should also help the Greek economy.
The political risk is likely to remain elevated and may rise further in the months ahead as the two ruling parties face stiff opposition from SYRIZA, other political parties and trade unions in their efforts to streamline the public sector.
The government may face a tough test in Parliament if it has to pass new austerity measures by year-end, following the negotiations with the troika. However, even if it passes that test, it will have undermined its credibility in the eyes of the public and its electoral chances next year. Whatever the case, the political risk is the biggest hurdle in Greece’s economic story and cannot be ignored.