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On Sunday, July 7, Kyriakos Mitsotakis led his conservative Nea Demokratia (New Democracy) party to a convincing win in the Greek parliamentary elections, gaining 158 out of 300 seats.
The following day, the yield on the Greek 10-year government bond at one point touched 2.01%, the lowest since Greece joined the Eurozone on January 1, 2001, and slightly lower than that of the 10-year US Treasury note.
The bond market, considered the savviest of financial markets, had delivered a resounding vote of confidence in the new Greek prime minister. It was also the result of an overall comeback from the European debt crisis which plagued the Greek economy for much of the past decade.
Will Mitsotakis be able to justify such advance accolades and make good on his electoral promise of “less state, fewer taxes and more investments”?
A Harvard graduate (BA, MBA), ex-banker (Chase, London; Alpha Bank; National Bank of Greece), and former minister of administrative reform, he is Greek political royalty. His father, Konstantinos, was prime minister 1990-93, and Kyriakos was first elected to parliament a decade later. In January 2016, he became president of Nea Demokratia, the party cofounded by his father, which he led to victory earlier this month.
Nearly 50% of the popular vote went to left-wing parties, with former ruling party Syriza taking the lion’s share. Four years of misrule by the Syriza coalition and its leader Alexis Tsipras notwithstanding, the political left has survived the election. This leaves the door open for Syriza to slow down any reform drive of the new administration by launching an anti-austerity front, laced with nationalist rhetoric if need be.
The irony is that Syriza, after his election on a far-left platform four years ago, actually caved in to European Union austerity demands. Tsipras swiveled 180 degrees from his radical election rhetoric, inking a controversial bailout deal that saw Greece accept austerity through 2060 and surrender control of its public assets for the next century.
The cost has been huge, with major cuts to education, healthcare and pensions. And the deal split Syriza, according to George Souvlis of the European University Institute. “The party was dissolved: half left, and what remained was an empty shell.”
With the radical left having abandoned its principles in favor of a neoliberal bailout, Greece was ripe for change.
Race to center
Vassilis Karatzas, an Athens fund manager and CIO at Levant Partners, says the election result was part of a “race to the center.”
“Call it a return to reality. Greeks had come to realize that there’s no easy way out, that there are no magical solutions,” he said, pointing out that Nea Demokratia has polled ahead of Syriza since 2016, the year Mitsotakis took over as party president.
The results are in. Greece is politically stabilizing: 72% of the popular vote is shared between center-right (40%) and the now center-left Syriza (32%).
When it came to populism, left or right, “Greece was the first in and now is the first out,” Karatzas said.
Such newfound political stability – the precondition for investment in the country – is the single largest indispensable ingredient for in-depth economic recovery.
The Mitsotakis government is targeting private investment, foreign and domestic, in the amount of 100 billion Euros over the coming five to ten years and knows that it needs to get on with it if stability is to be maintained.
A competent finance and economic policy team appears to have been put in place. The prime minister himself will lead administrative reform and streamlining of the executive.
Finance Minister Christos Staikouras, an Imperial College London MBA and former Bank of England analyst, is described as an experienced technocrat and polar opposite of his flamboyant motorcycling predecessor, Yanis Varoufakis – who, Mitsotakis once memorably remarked, undermined Greece’s negotiating position with Brussels “every time he opens his mouth.”
The logical outcome of Varoufakis’s policies was the closure of Greek banks in June and July of 2015 and the imposition of capital controls.
Bank of Greece Governor Yannis Stournaras will likely be relieved that he now deals with a government that’s competent in finance. He has announced that his first priority is the immediate lifting of all remaining capital controls imposed by the previous government.
While he’s at it, he may want to consider cutting Bank of Greece staff from a bloated 15,000 to at most the German Bundesbank’s 9,900.
Investment over austerity
Mitsotakis, it appears, is looking to take a different tack than his predecessor: pushing investment and structural reform as opposed to relying on austerity to stabilize Greece’s financial position.
Brussels does not appear willing to give him much leeway for supply-side structural reforms. No surprise, then, that he’s a man in a hurry. But the attitude seems right: “Greece is not poor,” he has said, “just badly run.”
Under Syriza and its predecessor governments, from 2008 to 2018, the effective Greek corporate income tax rate grew by 5.8 percentage points, according to a study by the Tax Foundation a Washington think tank, while the average rate for the 31 countries surveyed decline by 1.5 percentage points.
With its current corporate tax rate of 29%, Greece ranks 25th out of 35 OECD countries on the International Tax Competitiveness Index.
These are massive disincentives to investment. No Greek national who, at the height of the Greek debt crisis of 2010-2012, took his capital out of the country is going to bring it back in, merely to be robbed by the tax collector.
A close second to extortionate taxes on the list of disincentives to invest is lack of investment projects of significant size.
Several large projects have been systematically torpedoed by the Syriza government. Most notable among them: Plans by Chinese logistics giant COSCO to expand the port of Piraeus, which is regarded as a key element in the Chinese Belt and Road Initiative; a goldmine project by Canadian mining company Eldorado Gold in northern Greece; and a massive €8 billion urban development project to transform the terrain that once was the Athens Ellinikon international airport.
Cutting of corporate taxes from 29% to 20% in two stages between now and 2021 is one of the first stated economic and financial legislative priorities of the new government.
Equally urgent, according to the Central Bank governor, will be passing legislation to reform antiquated insolvency laws and to allow banks to more effectively resolve masses of bad credit in the banking system so as to extend new credits for investment projects.
Why is that reform legislation so urgent? As of the end of 2018, a shocking 48% of loans at Greek banks were non-performing, amounting to €88.6 billion. By comparison, across the EU, the average non-performing loan ratio currently is 4%.
Emphasis on cutting taxes and resolving non-performing loans to stimulate new investment is the right recipe and what has been missing in Greece, according to Holger Schmieding, chief economist at Berenberg Bank London and previously at Bank of America.
“In the Greek debt crisis,” Schmieding told Asia Times, “Greece and its official creditors put far too much emphasis on austerity to suppress demand instead of structural reforms to raise supply.”
Alexander Kritikos, economist at the German Institute for Economic Research in Berlin, similarly underlines the critical significance of structural reform: Greece “needs an improvement of regulatory boundary conditions, an improvement in the quality of state institutions, above all … reform of the justice system to speed up civil proceedings in the enforcement of contractual claims,” he said.
In eight of the past ten years, the Greek economy has contracted. In 2011, it shrank by 9.2%. Unemployment reached 27.5% in 2013.
Economic and job growth is the Mitsotakis government’s make or break political task.
Like the character Rod Tidwell in the film Jerry Maguire, “Greeks will say ‘Show me the money’ when it comes to judging Mitsotakis,” said fund manager Karatzas.
A first success came this past Tuesday: Greece tapped markets to raise €2.5 billion from the sale of 7-year bonds at a low yield of 1.9%. Bids topped €12.5 billion.
Mitsotakis said, “This is a vote of confidence in Greece’s growth prospects.” He is right, and he showed them the money.
Middle East editor Alison Tahmizian Meuse contributed reporting from Beirut