ANALYSIS

Winner may be set for a Pyrrhic victory

winner-may-be-set-for-a-pyrrhic-victory

The latest opinion polls point to an uncertain election outcome on September 20, with SYRIZA and New Democracy being virtually tied in the first place at this point. Whether this leads to the kind of grand coalition many in Greece and abroad would like to see remains to be seen. If not, the political and socioeconomic costs stemming from the implementation of the third program will likely convert the winner of the snap polls into the real loser in the medium-term. This will likely undermine the third bailout program, making this decade the worst for Greece from an economic growth perspective since World War II.

Former Prime Minister Alexis Tsipras obviously thought he would win the elections when his government resigned last month. Most observers agree he sought the snap elections in a bid to consolidate his power in SYRIZA and capitalize on his popularity, dominating the political scene before the painful measures associated with the third bailout program he negotiated and signed came into effect later this year.

But recent trends in opinion polls show the conservative New Democracy party catching up with SYRIZA, making the election outcome a toss-up. Of course, there is plenty of political time for the landscape to change anew, especially following anticipated televised debates between the party leaders. However, even if SYRIZA or New Democracy manages to win outright, the margin of victory will likely be small.

This would make any new coalition government headed by the winner vulnerable since it will have to implement the third program and assume the related costs while its main opponent sits out, criticizing and reaping the political benefits. This reality will put pressure on the parties making up the new coalition government to try water down the third bailout program. The likely slowdown in the implementation is bound to create friction with the lenders, delaying disbursements and contributing to economic uncertainty.

The economic, social and political ramifications of the situation described above are hard to predict. Already, the economy has lost about 26 percent of its output between the second quarter of 2015 and the corresponding quarter in 2007, and is back to where it was in 2000, according to a recent research note by Eurobank. It is reminded the gross domestic product (GDP) increased by 0.9 percent from April through June compared with the first quarter of 2015, according to seasonally-adjusted data. It was up 1.6 percent compared to the second quarter of 2014. The pick-up in GDP was due mainly to an increase in consumption expenditure. Investment spending decreased sharply and net exports, that is, exports minus imports, fell less so in yearly terms.

Economists and others expect the economy to contract in the second half of the year as tax hikes such as the rise of VAT (value-added tax) on many items, indirect pension cuts via increased health contributions and other measures come into effect. Moreover, the impact from credit controls will become more visible despite some easing as months go by. Political uncertainty will not help consumption or investments either.

The signs are already there since the seasonally adjusted turnover index in retail trade recorded a decrease of 0.8 percent in June compared to the same month in 2014. The relatively large weight of private consumption in the GDP, about 70 percent, makes the retail sales figure important for the course of the economy. The sharp drop in PMI (Purchasing Managers Index) in the last two months, well below the 50 break-even threshold, supports the negative picture.

With the unemployment rate seen holding above 25 percent or even rising again, the heat will be on the new government. Moreover, it is uncertain whether the fiscal targets will be met so as to avoid taking additional restrictive measures. On the other hand, an increase in the inflows of EU structural funds should help. But experts warn against forming high expectations given the bureaucracy and the chronic shortcomings of the Greek structures involved in absorbing EU funds, pointing to fraud in some cases. The recapitalization of the Greek banks should also contribute to the gradual normalization of economic activity but it has to be completed as soon as possible.

All in all, the third bailout program is demanding and bound to inflict a good deal of political damage to the winner of the snap elections and its governing coalition partners. This will create disincentives for the implementation of the program, potentially leading to a vicious cycle with unforeseen consequences. In this regard, the winner of the polls may turn out to be the big loser, in political terms. Perhaps, the only way out is the formation of a grand, broad coalition by the two major parties with the participation of smaller ones to share the political and economic costs. With the economy continuing to underperform and likely to experience the worst decade since World War II, any other political solution will likely be less than optimal.