The Greek coalition government will have to take advantage of a window of opportunity that will last until mid-April at the latest to push ahead with the reform agenda and reach an agreement with the lender representatives on other issues to keep up the economic momentum for the rest of this year. This is important because politics may dominate the domestic scene after the May elections for the European Parliament, limiting policy options for the rest of 2014. Undoubtedly, Greece cannot afford to lose another year due to inertia.
A senior banker, who voted for the conservative New Democracy (ND) party in the repeat elections back in June 2012 after having cast his ballot for another smaller party a month earlier, told us something interesting the other day. “They [the government] should be concerned about swing votes like mine but they don’t seem to. I see the government has lost its reformist vigor and the conservatives catering more to the demands of vested interest groups and [center-left coalition partner] PASOK since last fall. If the continue, they will lose the swing vote and suffer a defeat in May.“ It is noted the conservatives got about 19 percent of the popular vote in May 2012 and close to 30 percent a month later.
This banker, like others from various social strata, links the conservatives’ election fortunes to their ability to push for structural reforms rather than the other way around. They argue there is a traditional core support for ND which, along with the swing liberal, pro-euro vote, could propel it to the top or at least close to the other favorite to win, the leftist SYRIZA party, in May. For this to happen, the government will have to board the reformist bandwagon again and legislate all the reform proposals in the OECD toolkit even if it means clashing with the pharmacists and other professions who oppose some of them at the minimum.
Moreover, it will have to clinch a deal with the troika, and particularly the ECB, on stress tests and bank recapitalizations even if it leads to higher-than-projected capital deficits and potentially agree on measures to close all or at least a good deal of the estimated 2014 fiscal gap. This way the government will send a strong signal to society that it puts the welfare of Greek consumers ahead of private interests and ensure the markets the country is on track to meeting economic goals despite the political bickering. One may add the government would have scored high marks among ordinary Greeks if it also took the initiative to take away the tax privileges of members of Parliament. However, others disagree with the pro-reform approach, arguing the government will have to avoid decisions which maximize the political cost in the runup to the May elections and become more assertive vis-a-vis the creditors to improve ND’s election chances.
This debate may be constructive from a domestic point of view, but a lot depends on the stance of the troika since Greece has lost national sovereignty and there are few matters on which the government can decide alone. It is therefore worrisome to hear the lenders keep moving the goalposts on some matters and sometimes bring up more issues. Some outsiders think this is part of the negotiation process as they try to exert more pressure on the government to honor its previous commitments or/and delay some important decisions, i.e. debt relief, until after the May elections. Whatever the case, it would have helped if the troika insisted on the necessary reforms in the private sector and the recapitalization of Greek banks but displayed more realism on fiscal measures given its responsibility in imposing excessive austerity in the past.
There is no doubt there are a number of positive developments in the Greek economy, starting with the conversion of the twin (primary and current account) deficits into twin surpluses, the slowdown of the GDP contraction and the pickup in retail sales (volume) last November. Still, the situation remains fragile and the economy needs another thrust to keep the positive momentum going and keep market sentiment upbeat in a volatile political year.
In this respect, the government has a window of opportunity till mid-April at the latest to advance its reform agenda, show it is in control and improve its election chances by winning a good deal of the swing vote in May. To do this, it has to show courage and have the understanding of the creditors.